Value Investing Vs. Dividend Growth Investing: How About Both? (2024)

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Every portfolio is different. There are many reasons for this, including age, goals, risk tolerance, experience, taxes and much more. However, despite this limitation, we all still want to see how others have built their portfolios. We also like knowing the results.

A few days ago, I took a look close at my primary taxable account. You can peek over my shoulder right here:

I've got the ticker symbol, the market price on December 5th, price that I paid (cost basis), gain/loss on the stock and the relative size (percent %) of that stock versus entire portfolio.

Now the fun starts. It's true; just 8 stocks make up 49% of my entire portfolio.

• IBM (IBM)
• Wells Fargo (WFC)
• Aflac (AFL)
• Kinder Morgan (KMI)
• Berkshire Hathaway (BRK.B)
• Chevron (CVX)
• Wal-Mart (WMT)
• Exxon Mobil (XOM)

Looks like we've got tech, banking, insurance, energy, conglomerate and retail right at the top. Financials are 15% of that top 49% and energy is another 15% of the top holdings, give or take.

These are investment-grade companies. They aren't too flashy. In fact, they are kind of ugly and I'll talk about that below. But the dividend coverage of most of my companies is excellent, although I still screw up on that. Yes, my dividends get cut from time to time but I usually just hold on. I lick my wounds and move on. Seems that when you're a partner in quality businesses time is kind enough to heal most of the short-term injuries we create for ourselves. I'll talk about that below too.

You might also notice that I have some very small investments in this portfolio. I mean, seriously, it's not until we hit Brown-Forman (BF.B) that stocks in the bottom reach 1% of the overall portfolio.

There are a couple of reasons for this. First, there's a fair amount of money in this account. So, even small percentages are reasonable given my goals. Second, I have opened some positions with smaller sums or via reinvestment for the sake of getting my attention. When you have real skin in the game, you pay more attention, no matter the investment size.

In this particular account, I only made one cash investment this year. That was in the middle of June. I've roughly adjusted my analysis below in light of that cash injection.

Also, while there was not much directly invested into this account in 2016, I treat it like Hotel California. Once money is invested, it never gets out. So every dividend, every single capital gain, is simply reinvested. I treat this account as a compounding machine.

Now on the topic of investment style, I generally consider myself a value investor. However, I am willing to lean into Growth At A Reasonable Price at the right time. Examples there include Nike (NKE) and Hershey (HSY). And, I will buy smaller companies, such as AmTrust Financial (AFSI) when I have done insane levels of research and there's a great story. Still, AFSI is a mere 0.59% of this portfolio; low impact but enough skin in the game to keep me watching and reading.

I've also been increasing my dividend income over the last several years. Yes, I am indeed something of a Dividend Growth Investor. I watch dividend streaks, dividend coverage, payout ratios, dividend growth, and the like. I have also dipped my toe into REITs over time; see Digital Realty (DLR) and W.P. Carey (WPC) as examples. I treated KMI as an MLP proxy. Ouch!

But mostly? I am a curmudgeon looking for a great deal. I want quality, growth of dividends, low buying prices, high selling prices, wide moats, weak competition, and other advantages. I will get a little "crazy" and dive into 10-Ks, 10-Qs, earnings calls, analyst presentations and all that. I love when bad news crushes a stock but the fundamentals are hardly dented, or even improve. Take my grumpy attitude and sprinkle in some patience and things tend to work out.

If you scroll back up and look at my portfolio, it's kind of ugly. Look at IBM as an example: revenues keep sliding. KMI got pounded last year from the dividend cut. AFL is tied to Japan and can be mysterious to some. WMT is under threat from Amazon (AMZN). We had a scandal with WFC. And, with XOM and CVX we've got global warming issues and more. The sky is falling, yeah?

But it's not, and the proof is in the pudding. I measure my net worth on the 15th of each month. I looked at January 15th and then November 15th, then I did some math. I won't bother with the reinvestment details or my small handful of trades, at least not in this article. Tell me if you'd like to see my trades in the comments.

In any event, the results kind of shocked me because even excluding the small injection of new cash... this concentrated "value and dividend growth" portfolio gained 21% so far in 2016.

If things hold up, I think we'll likely hit 25% or better for 2016. That's good for net worth and the ego but it's bad because it means deals are harder to find for this grumpy guy. But, I digress.

This isn't a portfolio loaded with AMZN, Tesla (TSLA), Facebook (FB), LinkedIn (LNKD) and stuff like that. It's not going to catch headlines. Sure, there's some growth in there, but mostly, this is about buying and holding for dividends. Being patient, getting a reasonable price and reinvesting dividends.

Oh, and the best part? Even though I was an idiot reaching for yield in 2014 and 2015, and I got killed with cuts by BHP Billiton (BBL), KMI, National Oilwell Varco (NOV) and Seadrill (SDRL), I am back to "even" with my dividend income. Some of that was from remixing to better dividend plays. And, some of that was from good old dividend increases.

There are some caveats here:

First, while I don't day trade, or even trade that much, this isn't a static portfolio. I do buy and sell. I try very, very hard to only sell long-term holdings. I don't let the tax tail wag the net worth dog but those dollars add up.

Second, I'm not afraid to dabble in options, warrants, ETFs, and the like. For example, I recently was holding AIG (AIG) TARP Warrants. I still hold some Bank of America (BAC) TARP Warrants and you can see above that I've got some money in the ProShares UltraShort 20+ Year Treasury ETF (TMV) in this account. But these are not meant to be true core holdings. I consider these buys to be brutally opportunistic, nothing more. I'm not "partners" with TARP Warrants or ETFs, although I do have some very long-term money with Vanguard and that's core to me.

Third, perhaps the greatest advantage isn't the "style" of investing but instead it's to know your goals and your personality. When the market melts and there's blood in the streets and there's chaos, I think about buying. I'm like a cold-blooded snake that way. And, when the market melts up or a stock goes vertical, I get a bit greedy. In fact, I just closed out a position in Deere (DE) recently because I was able to pull over 20% gains in a short period of time. I didn't burn the cash but instead redeployed it to out-of-favor stocks. Lather, rinse, repeat. The point? Know your goals and line up your personality to your investments, and vice versa.

How'd I get here? How'd I end up with this portfolio? Well, like most individual investors, I've learned and evolved my style over time. I began as an "index freak" knowing that it's very difficult to beat the market. But that wasn't enough and I kept investing my time in my education.

I got smarter by looking at who's been most successful and who's got a similar psychological disposition. The Superinvestors of Graham-and-Doddsville opened my eyes to value investing, as did The Intelligent Investor by Benjamin Graham and so did Buffett's Berkshire Hathaway Shareholder Letters. I also pored over historically aggregated data through such books as Stocks for the Long Run by Jeremy Siegel and What Works on Wall Street by James P. O'Shaughnessy. Some types of businesses and industries are better than others; there's mighty empirical evidence.

I also looked very closely at Charlie Munger's advice to Warren Buffett about cigar butt investing versus growth at a reasonable price, combined with Phil Fisher's Common Stocks and Uncommon Profits.

More recently, I came to realize that dividend growth stocks fit into my value investing approach. The Single Best Investment by Lowell Miller was very instructive in this regard (High Quality + High yield + Growth of Yield = High Total Returns).

When you combine this all together, I'm a value-oriented dividend growth investor. Therefore, I invest most of my money in fat old blue chip stocks that pay growing dividends but only when they go on sale or there's a sudden and wonderful positive upside catalyst.

I'll do my best to comment below. Also, if there are enough requests, I'll write up an article on my trades in 2016. Follow me if you like my weird and grumpy approach.

John Rhodes