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8/18/2019 Invertir en valores que den dividendo

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How to invest

in high quality,dividend

paying shares A 10 Step plan for investing in shares for income and growth

UK Value Investor

2014 EditionVisit: www.ukvalueinvestor.comPublished by John Kingham

http://www.ukvalueinvestor.com/http://www.ukvalueinvestor.com/


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www.ukvalueinvestor.com 1

How to invest in high quality,

dividend paying shares

Dear Fellow Investor,

If you’re like me, then you are mostly interested in high yield, relatively low risk

shares. I prefer to put my money into companies like Tesco, Vodafone and SSE,

where I can get a good dividend from a proven, high quality business. Whether

those dividends are drawn down for income, or reinvested for growth – either way,

it’s a sound and sensible strategy that is popular with many famous investors.

I wrote this guide to help investors like you make the most of their investments. I’ve

heard it said that private investors underperform the market by up to 6% a year.

That’s a terrible waste, both of the investor’s time and their money – especially when

some of the most successful investors have beaten the market with a relatively

simple, common sense and low risk approach.

Each step in this guide is designed to help you build and maintain a diverse portfolio

of world-class businesses, with market-beating characteristics. Each step is simple,

and builds on investment ideas similar to those used by Warren Buffett, Neil

Woodford, and more recently, Terry Smith.

Together, these 10 steps form a complete end-to-end system for investing in the

shares of high quality businesses – buying their shares when valuations are low and

dividend yields are high, and selling when valuations are high and dividend yields

are low.

Feel free to use as many or as few of the ideas in this guide as you wish.

Yours sincerely,

John KinghamEditor, UK Value Investor

"The defens ive investor mu st con f ine h imsel f to the shares of imp ortant

companies wi th a long record of p ro f i tab le operat ions and in st rong

f inanc ia l c ond i t ion . " – Ben Graham, the father of value inv est ing

http://www.ukvalueinvestor.com/http://www.ukvalueinvestor.com/http://www.ukvalueinvestor.com/


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1. Take a long-term view

" In the short run the market is a vot ing machine, but in the long run i t is a

weigh ing machine." – Ben Graham, the father of value inv est ing

It’s important to take a long-term view of any investment that you make. Generally

long-term is taken to mean 5 years at least, and I think that ’s a reasonable minimum.

Why so long-term? Because of the way the stock market generates returns:

1. Dividend income - Shareholders get paid dividends. If you buy the right sort of

companies then those dividends can grow faster than inflation. The average return

from dividends is around 3% a year but you will only see a significant return from

dividends if you hold an investment for a number of years.

2. Dividend growth – The intrinsic value of a company will typically increase with its

ability to pay a higher dividend (as long as it ’s sustainable and supported by growing

revenues and profits). The average gain from dividend growth is around 5% a year

over the long-term. Again, you will typically need to hold an investment for years

before seeing a significant return from dividend growth (and remember, dividends

can be cut or suspended too).

3. Valuation changes (such as dividend yield) – The current share price of each

company is set by the supply and demand pressures of buyers and sellers. In the

long-run these investors generally do a reasonable job of valuing companies,

assigning them a fair value based on each company’s revenues, profits and

dividends. In the short-term though investors can be a fickle bunch, either nervous or

excitable depending on whether or not today’s news about a company is good orbad. This makes share prices highly volatile and unpredictable over the short-term.

If you focus on the short-term almost all of your gains (and losses) will come from

valuation changes. But these are by their nature unpredictable, and so short-term

investing is scarcely different from taking a trip to the casino. Focusing on the long-

term instead means dividend income and growth become much more important than

the day-to-day ups and downs of the market, and finding a company that can grow

its dividend is much easier than finding a share which will go up next week.



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2. Stay diversified

“ Our advice to th e defensiv e investor is that he let i t alone and emp hasize

diversi f icat ion mo re than indiv idual select ion ” – Ben Graham, the father

of value invest ing

No matter how much research you do into a company, you cannot know for certain

how it will perform, or what the share price will be in the future. The answer to this

uncertainty is to diversify and put your eggs into many different baskets.

Ben Graham suggested splitting equity investments across twenty to thirty

companies.

There are other factors which can be diversified too, beyond just the number of

investments; the main ones are industry and geography.

Companies within the same industry are often affected by the same kinds of issues,

so diversifying across many industries can reduce a portfolio’s risk. If a portfolio is

diversified across many industries, anything that affects a single industry will only

have a relatively small effect on the portfolio.

The same thinking can be applied to geography, where a local problem (a recession,

earthquake, epidemic, etc.) will have a smaller impact if the portfolio as a whole

generates its earnings from across the globe.

Risk reduction through diversification is important because investing is a long-term

game. If your portfolio is relatively low risk because it is well diversified, you stand a

better chance of sticking with equities for the long-haul.



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3. Look for high yield shares

“ A co w for h er mi lk . A hen for her eggs, And a stock, by heck, for h er

dividends.” - John B urr Wil l iams, autho r of The Theory o f Investm ent

Value

The 2011 Barclay’s Equity Gilt Study showed that £100 invested in equities in 1899

would have grown to £12,655 if dividends had been withdrawn. If dividends had

been reinvested then the investment would have grown to £1,697,204. Dividends

increased the gains tenfold, and in real terms the gains were an amazing three

hundred times better.

Dividend income is clearly a very important part of total stock market returns.

The obvious way to measure income is by the dividend yield. However, on its own

the yield is often misleading. It is just as important that the dividend be sustainable

in the longer-term, and that preferably it has a good chance of being increased.

That’s why yield shouldn’t be looked at in isolation, but should instead be considered

alongside a company’s ability to pay that dividend, consistently, for the long-term - Inother words, its quality.

There is another problem with a simple dividend yield. By looking at today’s yield

you could miss situations where a company has cut its dividend for a short period,

perhaps because of a one-time, survivable crisis.

A better approach may be to look at the share price relative to the company’s

dividend payments over the last decade. The more dividends that have been paid

relative to the current price, the better.



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4. Look for growing companies

“ Purchase, at a rational p rice, a part interest in an easi ly-understandab le

bu siness whos e earnings are virtually certa in to b e material ly high er f ive,

ten and twenty years from now” – Warren B uffet t , the world’s most

successfu l v a lue investor

Growth is the friend of the long-term investor. Without it the value of any business

and the income from it will be eroded by inflation.

The most important thing is a company’s ability to pay a growing stream of dividends

in the future, since ultimately the value of all investments is based on the cash that

will be paid out.

But we cannot know the future, so we have to look to the past for guidance.

In simple terms, a company that has produced consistent growth in the past is more

likely to continue to produce consistent growth in the future.

Growth over a handful of years is not reliable enough to be used as a guide to future

growth. The answer is to do what Ben Graham suggested, and look at growth rates

over a ten year period. This will pick out those companies that are growing over the

long-term.

Dividend growth is what we’re really after, so it makes sense to look for dividend

growth over the past 10 years. Dividends are supported by earnings, and earnings

come from sales, so it’s also a good idea to look at the growth of sales and earnings

over the last 10 years too.

All else being equal, a higher growth rate is better.



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5. Look for high quality companies

“ Time is the f r iend of the w onderfu l comp any, the enemy o f the mediocre ”

– Warren Buffet t , the world’s most successful value investor

The problem with looking back into the past in order to have a clearer view of the

future is that the past can be misleading.

Sometimes a company will have strong 10 year growth, but it all came in one or two

years. This is not reliable, defensive growth. What we want instead is consistent,

repeated, high quality growth.

Companies that have been consistently successful in the past are more likely to be

consistently successful in the future. This in turn means that the past growth rate is

likely to be a better guide to the future growth of the company. Companies that

consistently produce growing profits and dividends are usually considered high

quality companies.

To measure a company’s quality, look at how often it has been profitable in the last

decade, and how often it has paid a dividend; the more often the better. Then counthow many times it has increased sales, earnings and dividends in the last 10 years;

again, the more often the better.

By focusing on high quality, high yield companies that can consistently generate

market-beating growth, you will be well on the way to creating an outstanding

portfolio.

.



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6. Look for low prices relative to earnings

“Buy stocks like you buy everything else – when t hey are on sale” –

Christop her Brow ne, author o f The Lit t le Boo k of Value Invest ing

One of the main tools you can use to value shares is the PE ratio. This ratio is a

starting point when you begin to think about whether a particular share is ‘cheap’ or

‘expensive’.

Valuations cannot go to infinity, and they don’t go to zero unless the company goes

bust. So in the long-run PE ratios tend to hover around a medium value, typically

somewhere in the mid-teens, although of course they can go much higher or lower in

the short-term (creating buy-low and sell-high opportunities for sharp investors).

The standard PE ratio has its problems though. Earnings from one year to the next

can be quite volatile. With large and stable companies, the changes in earnings

from year to year are unlikely to reflect the changes to the intrinsic value of the

company. “Intrinsic value” simply means the price that an intelligent, informed and

rational investor would pay for the company.

A better approach is to compare the share price against an average of the

company’s earnings over a number of years, rather than just looking at a single year

in isolation. This is exactly what Ben Graham suggested.

The Graham and Dodd PE (more commonly called PE10) uses the ten year earnings

average, which gives a more stable number to compare share prices against.

This in turn provides a better guide to whether the shares are expensive or not,

relative to the value of the company.



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7. Avoid excessive financial obligations

“ I do not l ike debt and do not l ike to invest in com panies that have too

muc h d ebt , part icu lar ly long - term debt” – Warren Buffet t , the world’smos t successfu l va lue investor

No matter how prosperous a business may be, if it has too much debt it can be like a

time-bomb waiting to go off when something goes wrong.

Debt is one of the main corporate killers. Fortunately, many of the best companies

don’t need to use lots of debt to generate outstanding returns for shareholders.

It’s also true that some companies can handle more debt than others. Generally, the

more cyclical or volatile a company’s earnings are, the less debt it should have.

Stable companies, like supermarkets or utilities, can handle more debt. Although

this doesn’t mean that they should handle more.

There are various ways to measure debt in order to find out if a company has too

much.

You can look at interest payments, to see how well the interest on debt is covered by

the company’s profits. If interest is more than 10% of profits then it may be a good

idea to see if the company needs, or can handle, that much debt.

You can also look at the total amount of borrowings and compare it to profits. Some

investors look for borrowings to be no more than 5 times the average profit of the

past few years.

The goal is always to make sure that a company’s debts won’t become too much of

a burden if the company falls on hard times.

Another area of concern is pension deficits, and this risk can be reduced by

concentrating on companies where total pension obligations are less than the total

market value of the company (its market capitalisation).

By focusing on consistently profitable companies which are conservatively financed,

you will have done more than most investors to avoid debt related problems.



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8. Compare stocks against the market average

“A wildly fluctuating market means that irrationally low prices will

period ical ly be attached to sol id bus inesses. To beat the market yo u

have to acquire more value than you c an get from the market.” – Warren

Buffet t , the world’s most successful value investor

Most investors who pick their own stocks want to beat the market, either in terms of

income, growth or both.

To beat the market over the long-term a portfolio must generate more returns from

one or more of dividend income, company growth, and valuation changes.

It is therefore a good idea to check potential investments against the market. You

would generally want to see if a company has a higher dividend yield, lower

valuation ratio, and higher, more consistent long-term growth rates than the market.

It’s a simple case of comparing each of the four factors mentioned previously (high

growth, high quality, high yield, and low valuation) to the equivalent values for the

market (e.g. the FTSE 100), in order to see how a given investment measures up.

A share which has is better than the FTSE 100 in at least three of those four factors

will probably be worth taking a closer look at.

If it has better long-term growth and better quality than the market as a whole, then it

is probably a share from an above average company. But unless it has a better yield

or a lower valuation, it may be too expensive.

Alternatively, if it has a lower valuation and a better yield, then the shares are

probably cheap. But if the long-term growth rate is lower and less consistent than

the market’s, then the shares may be a cheap because the underlying company is

low quality, and therefore unattractive in the long-term.

To be a truly outstanding investment, a share should be both cheap and from a high

quality company.



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9. Follow a systematic investment plan

“When surgeons make sure to wash their hands or to talk to everyone on

the team, they improve their outcomes with no increase in skill. That’swhat we are doing when we use a checklist.” – Mohnis h Pabrai, foun der

of the Pabrai Investm ent Fund

So far we’ve looked at companies in terms of the ‘numbers’ they generate – their

earnings, dividends, debt levels and so on. But most people wouldn’t invest just

based on the numbers, and that’s sensible. Investors typically want to know

something about a company’s history, what it does to earn profits, and how the

company could develop in the future.

When conducting this research, it’s important to use a checklist so that no steps are

missed out or forgotten. A checklist is also useful so that new ideas and questions

can be jotted down, remembered, and included in analyses.

If checklists are good enough for surgeons and airline pilots, they should be good

enough for investors.

There are many things that can be included on a checklist, but the main areas to

cover are the company’s past, its present situation, and its future potential.

Here are some questions you may want to consider in your next investment analysis:

Has it been in the same industry, doing the same thing, for a long time?

Is the company in the market-leading group?

Does it have a highly successful and profitable past? Has it been free of major crises in the last decade (if so, were they

successfully resolved)?

Does it have any obvious current threats to its economic engine?

Does it have any durable competitive advantages?

Is there any chance that its economic engine could become obsolete in

the next decade, or that its industry could be massively disrupted?



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10. Continually improve your portfolio

“Our results more specifically attribute much of the advantage of value

strategies to the acts of reconst i tut ing and rebalancing and th eir side

ef fects on div idends .” – Denis Chaves & Rob ert Arnott , from Research

Assoc iates LLC

Once you’ve filled up a portfolio with twenty to thirty high yield shares from high

quality companies, you might think your job is done - but it isn’t. To get the best

returns you may want to actively manage the portfolio in the same way that a

gardener actively manages a garden.

When grass grows up too high, it gets cut back. In the same way, when a

company’s share price grows more quickly than the company, it may no longer have

a low valuation and a high yield. When this occurs it can be beneficial to sell, and re-

invest the money into another company where the share price is low, and the

dividend yield high.

This process of improving a portfolio can easily be achieved by selling the least

attractively valued investment in one month, and adding a better investment next

month. With 30 holdings this will replace six of them each year, giving a 20%

turnover ratio and an average holding period of 5 years. Over time this process of

continual improvement can add significantly to returns.

Bringing it all together

To create and maintain a high quality, dividend paying portfolio you ’ll need to have a

plan for each step, from finding and analysing companies, to sensibly diversifying

your portfolio and deciding which shares to hold onto and which ones to sell.

Hopefully this short introduction to defensive and income-focused value investing

has given you some good ideas. If you want to know more you ’ll find detailed

worksheets and spreadsheets on the web site, and if you ’re really serious about

getting a good return on your investments then take a look at my newsletter, which I

publish each month for a select group of investors.



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UK Value Investor

The investment newsletter for defensive and

income-focused value investors

UK Value Investor can help you with each step of

the investment process:

Find high yield, high quality stocks – Each

issue contains a stock screen which ranks over

200 FTSE All-Share stocks based on a combination of growth, quality, yield, and

value for money. The online version of the screen allows you to sort, select anddownload data into your own spreadsheets for further analysis.

Follow along with a £50,000 model portfolio – Stock screens are clinical and

mathematical, but investing in the real world is not. It can be messy, exciting and

occasionally frightening. That’s why each issue shows you how I use the UKVI stock

screen and investment strategy to build and maintain this high quality, high yield

portfolio. Each month the portfolio is reviewed in detail, including a full review of

every buy or sell decision (just one holding is bought or sold each month). I have the

vast majority of my own personal wealth invested in exactly the same stocks as the

model portfolio, so I take the management of this portfolio very seriously.

Get help and support by email or phone – As a member you’ll have priority

support from me by email or phone. As one member put it, “The fact that you always

respond in such a timely and considered manner is a very attractive feature of your

service”.

Visit UKValueInvestor.com for more information about becoming a member, or

subscribe to the blog for free.

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IMPORTANT DISCLAIMER: The author is not registered as an investment advisor oras an independent financial advisor and does not provide individual investmentadvice. Neither the author nor this document are regulated by the Financial Conduct Authority. No information provided in this document should ever be construed asinvestment advice. It is prepared for education and information only. The specific

needs, investment objectives and financial situation of any particular reader have notbeen taken into consideration and the investments mentioned may not be suitablefor any individual. The information contained in this document is not intended to bean offer to buy or sell or a solicitation of an offer to buy or sell any securities.Readers must not base any investment decision solely on the basis of thisdocument; instead they should seek independent financial advice. The information inthis document and any expression of opinion by the author have been obtained fromor are based on sources believed to be reliable but the accuracy or completeness ofany such sources or the author’s interpretation of them cannot be guaranteedalthough the author believes the document to be clear, fair and not misleading. Theauthor receives no compensation from and is not affiliated with any company

mentioned in this document other than possibly receiving advertising revenue via athird party. The views reflected in this document may be wrong and may changewithout notice. To the maximum extent possible at law, the author does not acceptany liability whatsoever arising from the use of the material or information containedherein.

INVESTMENT RISK: The value of shares can fall as well as rise. Dividend paymentscan fall as well as rise. Any information relating to past performance of an investmentor investment service is not necessarily a guide to future performance. There is anadditional risk of making a loss when you buy shares in certain smaller companies.There is a big difference between the buying price and the selling price of someshares and if you have to sell quickly you may get back much less than you paid.Share prices may go down as well as up and you may not get back the originalamount invested. It may be difficult to sell or realize an investment. You should notbuy shares with money you cannot afford to lose.

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