2018 has so far been a dreadful year for the UK market with prices dropping 7.2% year to date. This UK has been the worst performing developed market in 2018. Whist they have been several profit warnings for London listed companies, part of the fall in UK shares has been due to a market de-rating. Many companies in the UK market are trading at discounts when compared to global peers of similar quality. Just look at Royal Dutch Shell trading at a discount to Exxon Mobil, BAT trading at a discount to Altria and RB trading at a discount to Church and Dwight. This is why it is an important to keep an eye on a company’s earning power and cash flow generation as opposed to a company’s share price today. Market prices can be irrational and stocks may drop for no reason.
As I invest in UK listed equities during my monthly stock purchase programme, share prices in companies I have been investing in have been falling. But I am not worried about this. We are in a market stage where there is a lot of volatility. It can be distressing to sit and watch the shares you own drop 2, 3 or 4 percentage points over short periods of time. It’s all noise. Market reactions have nothing to do with company performance and their ability to earn a profit, and it’s those profits that I want the companies I own to share with me.
When you see quality companies miss by a few cents on a quarterly earnings report, and then see that company drop 10% on the news, if you have cash available, most of the time that’s a buying opportunity. By buying whilst prices are down, you can get more shares and dividends for your money.
When the market has had a run like this current market has, people have a tendency to overreact to everything. If they don’t have something to worry about, they will invent something. You have to ignore that noise and stay the course.
The events we are experiencing now will be long forgotten years from now, but what won’t be forgotten are those shares I add to my portfolio with every passing month. I’ll let others moan and groan about portfolio values dropping, I’ll let others whine and cry about about short term earnings reports, I’ll ignore their fears and insecurities and stick with the process. The process calls for me to build sizeable positions in quality companies for the long term. As such I added to my positions in Imperial Brands, RB and Shire over the past month and added a new position in BAT and RELX. Here are the number of shares I bought and price paid for each of my purchases.
- Imperial Brands – Bought 17 shares at £25.3 each. Dividend Income: £29.07
- Shire – Bought 5 shares at £31 each. Dividend Income: £1.30
- RB – Bought 8 share at £57.7 each. Dividend Income: £12.24
- BAT – Bought 5 shares at £42.6 each. Dividend Income: £9.76
- Relx – Bought 18 shares at £14.90 each. Dividend Income : £7.09
These purchases have added an annual dividend of £60 to my portfolio. My total annual income from all the stocks I own is now over £2,000. I find this to be amazing considering that just 3 years ago it was nothing. The first £1,000 was certainly harder to achieve as you’re starting from the bottom. As my portfolio size was built and I kept persevering with my investments, my dividend income grew at a much faster rate due to my dividends making even more dividends. So if you currently have a relatively low annual dividend income, do not give up. Perseverance is the key and the small dividend received today will become a gigantic some not too far in the future.
Anything we do in life, if we wish to be successful over the long term requires discipline. John Henry, current owner of the Boston Red Sox made a lot of his money as a trader and he had this to say about discipline.
”Well, you create discipline by having a strategy you really believe in. If you really believe in your strategy, that brings about discipline. If you don’t believe in it, in other words, if you haven’t done your homework properly, and haven’t made assumptions that you can really live with when you’re faced with difficult periods, then it won’t work. It really doesn’t take much discipline, if you have tremendous confidence in what you’re doing.”
I know from studying the markets over the years, and from personal experience, that buying high quality companies, reinvesting the dividends, and buying more as you go along is a successful way of securing financial security and attaining financial freedom. I am not suggesting that dividend growth investing is the only way because it isn’t. It is the easiest way though for a young person to start while they they don’t have a lot of cash to invest.
Nobody will step up and say that pound cost averaging over time won’t work or prevent you from succeeding – nobody will say that. So, why are some so afraid of applying it? They haven’t studied the market, they haven’t done their homework, that’s why.
In the vast majority of situations simple strategies are usually the best and that is why I persevere by buying into high quality dividend paying companies every month. Most older people I talk to with they could go back and start over doing exactly what it is today I am doing. Start young, invest in quality companies and invest regularly. That is all you need to achieve financial freedom.