The author of this book advocates buying dividend growth stocks as long-term investments and automatically reinvesting the dividends. After 10 years, he argues that this strategy can produce 11% yields (on cost) and 12% average annual total returns, which he calls his "10-11-12 system." This sounds great on the surface, but there are several problems with the book that make it a poor guide to dividend growth investing:
- His "10-11-12 system" is overly simplistic and represents more of a goal than a systematic approach to dividend growth investing. He suggests that investors need to focus on just three things: initial yield, dividend growth rate, and payout ratio. Almost nothing is said about assessing the quality of the underlying business. The topic of valuation is completely ignored, which I consider to be a major fault.
- He presents several tables showing projections of dividend income and total return over 20-year periods under various circumstances, many of which are unrealistic. For example, there is a bear market projection in which stocks slowly lose value year after year, yet the dividend growth rate is a stable 10% over the 20 years. While this results in phenomenal growth of the dividend income stream, it also results in stocks having current yields by Year 20 of 20% or higher, which is simply not going to happen for the blue-chip stocks under consideration, especially if their operating results allow them to maintain 10% dividend growth rates. Thus, I think some of his projections are wishful thinking that ignore the nuances of reality.
- He basically advocates a buy-and-forget approach to investing. He gives little to no advice on how to monitor companies or manage a portfolio (aside from recommending that a stock be sold if its dividend is cut). He does the reader a disservice by conveying the impression that a company that has raised its dividend for 25 years is pretty much guaranteed to raise it for another 25 years; he even calls dividend growth stocks "Perpetual Dividend Raisers," as though their dividend growth will never end, which is unrealistic.
- The secondary title of the book is "A Proven System for Earning Double-Digit Returns" but the author never actually proves it. That is, he presents some historical data showing how well dividend stocks have done in the past and projections of how his system might perform in the future, but he provides no proof that his system can produce the results he claims in actual practice. There is a chapter in which he discusses the "Perpetual Income Portfolio" that he manages, but he reports neither its long-term returns nor the stocks in it. (He provides a completely useless table showing just the dividend yields of the stocks in the portfolio -- without indicating the stocks!) If he has truly been able to prove his system works in practice, then his credibility would have been strengthened by reporting the results of his portfolio in the book.
- There are also some errors in the text that undermine the author's credibility. For example, "yield" is often used for yield on cost, muddling the distinction between current yield and yield on cost. In a section that addresses inflation, he argues that one should seek a current yield that beats inflation, which is erroneous thinking because what matters is whether the dividend growth rate -- not the yield -- beats the inflation rate. At one point he also provides a definition of standard deviation that is just plain wrong.
- More generally, the writing style is too verbose. For example, there is an 11-page chapter with the sole purpose of describing a few lists/indices of dividend growth stocks, such as the S&P Dividend Aristocrats. That information could have been summarized in less than two pages. Despite the book being 180 pages, I think a good editor could have easily shortened it to less than 150 pages.
Note: I read this book in September 2012.
Any book with "Get Rich" in the title usually scares me away. Thanks for the review though, I enjoy these. Reading the Dividend Toolkit now based on the review by you and Dividend Mantra. I'm really enjoying it.ReplyDelete
Stoic: Thanks for your comment -- I'm glad you are enjoying the reviews and the Dividend Toolkit.Delete
I have the book on my "shelf" ready to be read. I bought it recently for my Kindle and now I am in doubt whether it was a mistake (buying it). I'll read it and let you know and give a shot to the Dividend Toolkit. Thanks for sharing.ReplyDelete
Martin: Thanks for your comment. From a comparative perspective, I think the Dividend Toolkit is a much better book than this one, but some readers might prefer the latter.Delete
Most people would like to see a list of the stocks in a portfolio, that's for certain. But, that would be a disservice to his subscribers. As a person who subscribes to the Oxford Club products, as well as all but one of Stansberry Associates Research, as well as much of what the Palm Beach Letter produces, I can tell you that Marc delivers.in his Oxford Income Letter. To me, the book is a gem because, while having his full analysis of each recommendation, understanding the working parts of the 10-11-12 allows me to evaluate based on my own four decades of investing and trading. Understanding what other analysts use as their metrics helps me cherry pick his recommendations. Dan Ferris at S & A has made his subscribers a lot of money as well, They all have a bit of a different take on various things. Other than the specific errors that were mentioned, the disconnect is really not being subscribers to several top analysts including Marc.ReplyDelete
After reading Marc Lichtenfeld's recommendation to buy Genuine Parts Co (GPC) in August 2011, I invested $10,718. Including dividends (as of November 2014) the the stock is now worth $23,395, a 118% gain in just over three years!ReplyDelete
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