18 key ideas from “The Little Book of Big Dividends”

Find stocks with above-average appreciation potential and safe and growing dividends, and buy them at attractive prices.- Charles Carlson

The following are key ideas I gleaned while reading the book, “The Little Book of Big Dividends” by Charles Carlson.

1.The returns we get from investing are by two ways: capital gains( change in the price of the stock) and dividends. The total return=capital gain+ dividends. Historically 40% of the stock market’s long-term total return comes from dividends.

2. Capital gains are nice but not dependable always in the short run. Dividends are more dependable. Larger, more established companies pay dividends. They can pay dividends regularly only if they have profits. If the pay-out ratio( dividends/earnings) is high then there is a chance that the company might cut or drop the dividend.

3. Yield( dividends/price) is important but should not be the primary reason for stock choice. Unusually high yield can mean a lot of risk.

4.Dividends are generally taxed at a lower rate. Stock prices adjust down for dividend payments. If you want to get the dividend, buy the stock before the ex-dividend date.

5. Dividend yield is a pretty good proxy for investment risk. Remember these red flags:

  • If a stock’s yield is considerably higher than the yield of the typical stock in its sector-perhaps 3% or more higher, it is risky.
  • If a stock’s yield is much higher than the overall market( as measured by say Dow 30 or S&P 500) by 4 or 5 times the market yield, it is risky.
  • If a stock’s yield is considerably higher than its long run average yield-perhaps 2 or 3 times the historical yield, it is risky.

6. To find big, safe dividends consider the following, and pick dividend paying stocks on their merits, not your needs:

  • Safety and dependability of the dividend
  • Capital gains potential of the stock
  • The yield on alternate investments
  • The yield on comparable investments
  • Pre-tax versus after tax yields of different investments
  • Dividend growth potential

7. The big safe dividend formula(BSD) has two inputs:

Payout ratio: Payout ratio should be less than 60%.This is because the payout ratio is perhaps the most powerful tool for getting a quick snapshot of whether a company will keep up and grow its dividend.

Quadrix score: This is a proprietary measure that addresses the stock’s total return potential and the quantitative judgment of the investment merit of the company. You can use any other measure as well. Choose stocks that are in the top quartile(top 25% of stocks)

8. Don’t look at yield until you’ve analysed the safety of the dividend, the ability of the dividend to grow, and the overall investment merit of the stock.

9. Purchase stocks directly if you can. You can buy smaller amounts with no or very little fees.

10. One way to hedge against inflation is to focus on stocks that are likely to boost their dividends on a regular basis. Buying dividend growers is not just a good idea as an inflation hedge; it’s a good idea because, dividend growers, as a group, outperform the market.

11. The dividend payback matrix helps you decide pay back times based on dividend yields and dividend growth assumptions

12. To find dividend growers you should use the advanced BSD formula.

13. The 10/10 club consists of stocks that have

  • Higher dividends every year for at least 10 years
  • Annual dividend growth averaging at least 10% over the last 10 years

14.Consider an initial 3%-4% withdrawal rate, especially if you expect to live 20 years or more.

15.By owning stocks with different dividend payment dates, you can receive a dividend check every month of the year.

16. If you want to build wealth over time, cashing your dividends is not the way to go. Reinvesting them is.

17. Proper diversification has four different components: Diversification across assets, within assets, across time and across investment strategies.

18. 110-age=% that should be in equities. Hold around 35-45 stocks. Equal weight your portfolio so that your portfolio does not get overweighted in just a few stocks. Invest in non taxable accounts as much as you can and place your low turnover and low yielding investments in taxable accounts. Rebalance if your asset allocations are out of whack by 10% or more.


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