Retired Dividend Growth Investors: Sleep Soundly By Embracing Survivorship Bias

Before investing in any common stock I believe it’s imperative to know as much about the business behind the stock as you possibly can. However, there are only so many businesses that an individual investor can know anything about. On the US stock exchanges alone, there are approximately 20,000 individual companies to choose from. Therefore, logic would dictate that every individual investor needs a process or system for separating the wheat from the chaff.

The first logical step towards implementing a process that is appropriate for you is to clearly identify your investment goals and objectives. For example, if dividend income is your goal, it would logically follow that you would exclude all or any company that doesn’t pay a dividend. In other words, it would make no sense to spend time learning about a company that doesn’t support your primary goal. This principle would apply to any investment goal or objective that an investor could have. Of course, the opposite is also true. When searching for a common stock investment that meets your goal, you are best served by only searching among and/or screening the universe of companies that can potentially support your objectives.

This article is directed towards those investors primarily interested in achieving a growing income stream. Since the world seems to love to label things, this article is directed to the so-called “dividend growth investor.” Retired investors are one of the primary practitioners of this particular strategy because they are living off of the income their investment portfolios produce.

On the other hand, I am not yet retired and have no immediate plans of doing so, yet I also personally embrace investing in dividend growth stocks as the primary constituents of my portfolio. Even though I am not yet living off the income my portfolio produces, I like the idea of generating additional discretionary income that I can spend if I choose, or reinvest if I don’t need it currently. 

Therefore, when looking for suitable stocks to invest in, I appreciate the work of fellow Seeking Alpha Author David Fish and his CCC lists of Dividend Champions, Contenders and Challengers.I also appreciate the legwork provided by S&P Capital IQ with their Dividend Aristocrats list. The combination of these two suppliers of dividend growth stock opportunities provide an approximate listing of 750 dividend growth stocks from which I can choose. Consequently, I have already whittled the list of approximately 20,000 individual stocks down to a more manageable level. This is the true value that lists like these cited above offer.

However, and this is critical as it relates to the intent of this article, that doesn’t mean that I would be willing to invest in every company on those lists, nor does it mean that I would only invest in a dividend paying stock if it did. Furthermore, not every dividend paying stock is on those lists, but they certainly represent an elite grouping of dividend paying stocks with a history of increasing their dividend. Consequently, they provide a fertile field of stocks for me to investigate that almost by definition would support my primary goal of income growth.

Survivorship Bias Is Irrelevant To Me–And I Believe Should Be To You Also

This article was inspired by a recent article titled “These 26 Dividend Aristocrats Won’t Let You Sleep Well At Night” by fellow Seeking Alpha author Psycho Analyst that introduced his article by referencing a recent offering of mine. Apparently, his article was offered as a counterpoint to my article titled “Consider This Strategy To Reduce Stock Market Anxiety.” Unfortunately, in my opinion his article had little or nothing to do with what I wrote about, and even more unfortunately, he insinuated that I was taking a position about the S&P’s Dividend Aristocrats list that was simply not true. To clarify the record, here are two direct quotes from Psycho Analyst’s article (emphasis added is mine):

“DGI Investors have bought into the idea that most companies with long records of raising dividends will continue to raise them. This concept was illustrated compellingly in Chuck Carnevale’s recent article, Consider This Strategy To Reduce Stock Market Anxiety In that article, he suggested that investors need not worry about stock market volatility when invested in twenty stocks selected from the list of S&P Dividend Aristocrats.”

In truth, I suggested no such thing. My article was not about not worrying about stock market volatility simply because you are invested in Dividend Aristocrats.Instead, my article presented the views that stock price volatility is unpredictable, where in contrast dividend growth is more consistent and predictable. Therefore, I suggested that income investors would be better served to focus on the steady and rising dividend income they were receiving over being anxious about short-term price volatility. More to the point, a steadily rising dividend is a fundamental metric where short-term stock price is simply driven by the laws of supply and demand between buyers and sellers. Stock price is not a fundamental metric. I will elaborate more on this important point later.