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Dividend Growth Investing Meets Monte Carlo

Published Tue, 11 Jun 2019 08:57:27 -0400 on Seeking Alpha

Dividend Growth Investing (DGI) has become very popular on Seeking Alpha. Its appeal is easy to understand. Invest in companies that always grow the cash value of their dividend. Anticipate that, in the long run, the stock price will keep up with the dividend growth. Eventually, at some point, stop reinvesting the dividends and live on them instead. Anticipate that subsequent dividend increases will keep up with inflation.
What’s more, in the fairy tale investment universe of the past decade, almost any DGI strategy has worked wonderfully. It is difficult to know how much credence to lend this, though, as almost any investment strategy has worked wonderfully. Ironically, the exception seems to be value-stock investing, and even that has suffered only by comparison.
Far too many advocates of various investing approaches, including DGI, have taken to showing only ten, or even five (!) years of results as an illustration of their value. I suggest you keep your hand on your wallet when considering such illustrations. Anybody not showing a 20 year history is at best being over-optimistic. Better would be 40 or 60 years.
One way to assess the implications of history, for various investment approaches, is to use Monte Carlo simulations based on historical statistics. I introduced and discussed this approach here. If you have let any investment advisor work up an evaluation for you, or used the web tools that are widely available, then you have almost certainly been shown... Read more