đââď¸ Guide to Compounding Dividends
Hi Friend đ
I put my whole heart and soul into Compounding Dividends for you.
The concept is simple: I research stocks for more than 60 hours per week and I try to provide you with as much value as I possibly can.
This guide will help you to get the most out of Compounding Dividends.
Guide to Compounding Dividends
1. Who is Compounding Dividends?
My first name is TJ and I started writing Compounding Dividends in August of 2024 to provide quality content to dividend investors.
As a self-taught investor, I think Jim Rohn was right when he said that âformal education will make you a living; self-education will make you a fortuneâ.
I have a true passion for investing and helping other investors.
I think investing for income is about more than just looking at dividend yields and payout ratios.
I aim to invest in stocks the same way Iâd invest in a local business.
Buying the stock makes you part owner of the company, and your goal should be to maximize the return on that ownership.
2. How do I log into Compounding Dividends?
Compounding Dividends uses Substack to host the newsletter.
After you have taken a subscription, you can log in using the following steps:
On the upper right, click on âSign inâ (or âSubscribeâ when you havenât subscribed yet)
Login with the email address under which you have a subscription
Still having problems? Take a look here.
3. How do I update my account information?
You can update your account information by following these steps:
4. Can I get a monthly subscription or a trial?
As investors, we think in the long term.
The same goes for Partners of Compounding Dividends. We donât think in quarters, we think in quarter decades.
As Tom Murphy said: âThe goal is not to have the longest train but to arrive at the station first using the least fuel.â
Thatâs why we donât offer monthly subscriptions or a free trial.
You can always reach out to me via pieter@compoundingquality.net.
5. What is the investment philosophy of Compounding Dividends?
At Compounding Dividends, we aim to do the same thing Warren Buffett described in his 2022 letter:
âTo make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers.â
The emphasis on businesses in the quote above is Buffettâs, not ours.
We believe the best way to buy a stock is the same way youâd buy a local business.
Choose a business thatâs been successful and grown in the past
Make sure itâs going to continue growing long into the future
Hire a good manager to handle daily operations
Pay a price based on the cash that youâll be able to take out of the business over time
After that, we can relax and enjoy our cash flow, without worrying about todayâs market price or what others might pay for it in 5 or 10 years
You can read more about the Compounding Dividends investment philosophy here.
6. Whatâs the difference between Compounding Quality and Compounding Dividends?
Compounding Quality focuses on companies that reinvest a lot of their earnings into the business.
Compounding Dividends focuses on companies that distribute a lot of money to shareholders.
Both approaches can generate attractive returns over time.
7. Why are all paid subscribers called Partners?
Thatâs simple. Because we are in this together.
Having mutual respect and being honest with ourselves is very important.
Another interesting thing to know? I have real assets invested in the Portfolio. I eat my own cooking.
If you do well, I do well, and the other way around.
8. What do you get as a Partner?
Partners of Compounding Dividends get the following:
đ Access to my Portfolio with 100% transparency
đ Access to my ETF Portfolio
đ Full investment cases about interesting companies
âď¸ And much more!
9. How often do you publish?
As a subscriber, youâll receive at least 8 articles per month.
A typical week will look like this:
Every Wednesday: Investment cases, investment concepts, and frameworks, âŚ
Every Saturday: Update on the portfolio
10. Is there an Ownerâs Manual?
Yes, there is.
11. What is the investable universe?
The investable universe of Compounding Dividends is split into 3 buckets:
Dividend Growth Companies
High-Yield Companies
Shareholder Yield Companies
Our Portfolio will be built from stocks in this universe.
12. Where can I find the Portfolio?
You can follow the Portfolio 24/7 with 100% transparency right here.
13. Do you cover international stocks or only domestic ones?
Compounding Dividends invests worldwide.
We are bottom-up stock pickers and we buy companies in all developed countries in the world.
14. Where can I find the ETF Portfolio?
You can find all the ETFs we own right here.
15. When to buy a company?
We want to buy strong, profitable companies that will be around for a long time.
We always look at the business first and the valuation second.
We calculate our fair value as the price an informed buyer would pay for the entire business and itâs future stream of cash.
We always want a Margin of Safety, so we prefer to pay less than fair value.
We can also get a margin of safety from:
Very strong financials - low debt, stable cash flows
Very durable competitive advantages - attractive returns over a long period are worth a lot
Secular tailwinds - surfing a secular wave can drive a lot of growth
16. When to sell a company?
We always think like owners, so our goal is always to hold our businesses and let them compound.
One of the biggest investing mistakes? Selling your winners too soon.
Do you know why? A stock can only lose 100% in value but it can increase by much more.
Everyone wishes theyâd bought Amazon at $0.25 on the first day of 1998, since itâs now up more than 700x.
But by 1999, it was already up 17x in less than 2 years. If youâd have sold, youâd have missed out on almost all of the gains since then!
Selling is often a much harder decision than buying.
In general, we think there are 4 possible reasons to sell:
The facts no longer support your thesis, or the initial thesis was just plain wrong
The position has grown to be so large that you canât sleep well at night.
A more attractive opportunity deserves the capital
The price gets so far ahead of the business results that future returns have been pulled forward already - this is by far the hardest to determine, and we try very hard not to sell based on price alone.
17. What if the stock (market) declines heavily?
We always watch the business, not the stock.
As long as the business is doing well, we ignore the stock price.
Declining stock prices are the best thing that can happen to you as a net buyer.
Always remember that stocks are like hamburgers:
18. How do you look at the valuation of a company?
We always use 3 methods to value a company:
A comparison of the dividend yield with its historical average
An Earnings Growth Model
Reverse Dividend Discount Model
A comparison of the dividend yield with its historical average:
A higher than average yield indicates that the company might be undervalued.
An Earnings Growth Model
This shows us the yearly return we can expect from a company.
It takes into account growth of earnings, the shareholder yield, and multiple contraction or expansion.
The formula looks like this:
Expected return = Earnings Growth + Shareholder Yield (dividends + buybacks) + Multiple Expansion (or contraction).
A reverse Dividend Discount Model:
As Charlie Munger says, âInvert, always invert!â
Solving complex problems is often easier backwards, so thatâs exactly what we do with the Reverse DDM.
We solve the regular DDM for growth to tell us the dividend growth priced in by the market.
The formula looks like this:
Expected growth = Required return â (DPS next year / Current share price)
19. How to think about FX Risks?
Some Partners are worried that Foreign exchange movements (FX movements) could hurt our returns.
When you would for example buy a company in Australian Dollars (AUD) and the stock price goes up by 8% but the AUD loses 10% in value compared to your domestic currency, you still lose 2%.
Is this something to worry about?
The short answer is no if you ask me.
Do you know why? Itâs impossible to predict FX movements.
Peter Lynch once said that if you spend 13 minutes a year on economics youâve wasted 10 minutes.
I completely agree with him.
When you buy several companies in different currencies like we do, sometimes you will win due to FX movements and sometimes youâll lose. In the end, the losers tend to be offset by the winners on average.
Thatâs exactly why we just try to find good companies.
When we find a great company led by excellent managers trading at fair valuation levels, we will buy the company regardless of where it trades.
"I am constantly amazed at the number of people who talk about investment and spend most or all of their time talking about asset allocation, regional allocation, sector weightings, economic forecasts, bonds vs equities, interest rates, currencies, risk controls and never mention any need to invest in something good." - Terry Smith
20. What do you think about Portfolio Allocation?
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The portfolio will invest worldwide (developed countries only)
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Weâll own 15-20 stocks
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The portfolio goal is to build a reliable income stream while growing your wealth
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We wonât trade a lot. Activity and costs harm our results
â
We wonât try to time the market (Weâre way too dumb for that)
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The characteristics of companies in the portfolio:
Sustainable competitive advantages
Quality management in place
Healthy balance sheet
An attractive history of growth in earnings and dividends
Good capital allocation
History of returning capital to shareholders
Ability to grow shareholder returns in the future
Trading at fair valuation levels
âIt's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.â - Warren Buffett.
21. Arenât dividends tax inefficient?
Readers of Compounding Dividends come from all around the world, and taxes on dividends can vary widely depending on where you live. Some places have high taxes on dividends, while others offer much lower rates.
To reduce taxes on dividend income, you might want to consider using tax-advantaged accounts when available. For example, in the U.S., accounts like IRAs or 401(k)s can help lower tax burdens. In France, the Plan d'Ăpargne en Actions (PEA) offers similar benefits.
The best investing approach for you depends on your country's tax rules and your investment goals.
22. Doesnât paying dividends limit a companyâs growth?
Just because a company is paying dividends doesnât mean it canât grow.
In 2003, Robert Arnott and Cliff Asness wrote a paper called "Surprise! Higher Dividends = Higher Earnings Growth" that showed how companies with higher dividend payout ratios tended to have faster earnings growth than those that retained more of their earnings.
This is the opposite of what you would expect.
One of their hypotheses was that firms that pay out a meaningful amount of capital each year have less "irresistible" surplus cash laying around. These capital constraints might lead management teams toward more productive and thoughtful capital allocation.
As empirical evidence, think about companies like Microsoft and Google - both pay dividends while continuing to grow rapidly due to strong business models.
23. Can I gift a subscription to someone else?
Yes, you can by following these steps.
24. How do I contact you?
You can always reach out to me via pieter@compoundingquality.net.
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One Dividend At A Time
TJ & Pieter
Used sources:
Interactive Brokers: Portfolio data and executing all transactions
Finchat: Financial data
Great article. I'm not clear on when our first dividend stock will be purchased.
Thanks
i am a subscriber to both portfolios. Please tell me how you can list all dividend kings and then narrow it down to your top 5. List them 1 through 5, but not pick number 1 for your first stock in the portfolio. If it is your number 1, why isn't it the first pick. In fact, the first pick is no where on the list