As a long-term investor aiming to consistently beat the market, you might need to look at a combination of dividend and value investing based on how they stand out for their proven track records and distinctive approaches.

Dividend investing revolves around acquiring stocks that consistently pay dividends, while value investing relies on the art of finding undervalued stocks. When combining both, we get the so-called dividend value stocks.

Today we will delve into how investors can use a combination of these strategies to unlock great opportunities.

Dividend Value Investing is not only a source of regular income stream but also the opportunity for capital appreciation, while the latter focuses on acquiring companies below their intrinsic value, leading to significant returns in the long term for patient investors. 

Investors can couple together the income-generating focus of dividend investing with the undervalued market position emphasis of value investing, thereby identifying stocks that are not only priced below their true worth but also offer attractive dividend yields.

This dual approach can lead to the discovery of robust investments with the potential for both steady income and capital appreciation, especially for long-term investors. 

Blending Dividend Yields with Value Strategies

First, let's examine each of the individual approaches to better understand how they work together. 

Dividend investing is a strategy focused on selecting stocks that consistently distribute a portion of their earnings to shareholders in the form of dividends. This approach is particularly appealing to those seeking regular income from their investments and the opportunity for capital growth.

Dividend-paying stocks can be evaluated based on several key metrics, such as the dividend yield, which measures the dividend as a percentage of the stock price and offers insight into the income generated per investment dollar. Dividend growth indicates a company's ability to increase its dividend payout over time.

Finally, there’s the payout ratio, which analyses the proportion of earnings distributed as dividends, indicating the future sustainability of dividends. Dividend investing has long been at the forefront of investing strategies for its dual promise of generating steady income and mitigating portfolio volatility, making it particularly attractive during uncertain market conditions. 

Conversely, with Value Investing, investors look for stocks trading below their intrinsic value, assuming that the market does not always reflect a company’s fair value.

This discrepancy between the stock price and the actual fair value can happen due to several factors, including market overreactions, sectoral declines, and broader macroeconomic uncertainties.

To assess the fair value of a stock, investors can use various measures, including multiples such as the price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and price-to-sales (P/S) ratio, as well as other valuation models such as the Discounted Cash Flow model (DCF), to project the future cash flows and discounting them to present value.

Investors who employ value investing generally tend to delve deeper into financial analysis and are looking to capitalize on the market’s inefficiencies in pricing stocks cheaper relative to their fair value. 

Dividend Value Stocks Examples:

The picture below shows some examples of dividend-value stocks:

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Building Wealth Through Dividend-Paying Value Investments 

Investors looking to reap the dual benefits of undervalued stocks and steady dividend income can aim to invest in value stocks that pay dividends consistently. Essentially, the strategy targets undervalued companies displaying solid fundamentals and a commitment to returning value to shareholders through stable and growing dividends.

The rationale is the approach's ability to offer holistic investment criteria that focus on financial stability and intrinsic value alongside the ability to generate consistent income. For investors to identify stocks under both criteria, it is important to take a comprehensive approach that goes beyond surface-level metrics.

This includes assessing the company’s earnings quality, payout ratio, and growth to focus on dividend sustainability while also examining multiples and a DCF to pinpoint the stocks' fair value.

The cornerstone of this strategy is to monitor the financial health and sustainability of dividends. A company's ability to maintain or increase its payouts in varying market conditions speaks volumes about its operational efficiency, cash flow stability, and management's confidence in prospects.

Procter and Gamble Stock

A good example of a value stock that has previously been a dividend aristocrat is consumer durable firm Procter & Gamble. After the global financial crisis in 2008, P&G was trading at a P/E ratio of 9.5x, compared to the median ratio of 18x, while still having a dividend payout of 35% and, at the time, having consistently paid out dividends for 52 years.

Today, P&G is still a good stock to invest in.

Investors who would have bought the stock at that time at $40/share would have seen a capital appreciation of 400%, not to mention another $40/share in dividends paid over the 15 years.  

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Another attractive stock that I recently invested in is Chevron. You can read my review of it in my CVX Stock Analysis article.

Conversely, a clear sign that a company may be overextended maybe when it breaks its consistency in paying dividends. When a company slashes its dividends, it is a clear signal to the market that the company is facing financial stress or mismanagement.

Let's see an example.

NYCB Stock

A recent example is the banking company New York Community Bancorp, which announced a 70% cut in its dividends to provision for loan losses.

Since then, the company’s shares have plunged over 85% due to several challenges, including material weakness in internal controls, downgrades from three rating agencies on the company’s credit status, and restating losses in previous quarters. 

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Risk Management in Dividend and Value Investing

While the combination of value and dividend investing strategies can lead to both capital appreciation and steady income, both strategies are prone to common risks.

This includes broader market volatility, which can disproportionately affect undervalued stocks. Even the most resilient companies can cut dividends to preserve cash during a downturn.

General Electric Stock

An example of this is conglomerate General Electric, which was trading at a relatively cheap 10x P/E in 2010. However, liquidity issues and a mounting debt load at GE capital meant that the company had to cut its dividend in 119 years to just 1 penny, with the stock tumbling soon after.

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A good way to mitigate these risks is by diversifying the portfolio to include bonds and international stocks. A good example of this is balancing technology stocks like Apple with Utilities such as Duke Energy and Dominion Energy. 

Conclusion on Dividend Value Investing

Highlighting the approach of identifying undervalued stocks that pay dividends can lead to consistent income and capital appreciation over the long term. This can particularly be beneficial during volatile markets when undervalued stocks are trading at a bargain.

I hope this article was successful for you and will help you make better investment decisions. It is very important that you educate yourself and learn about investing before putting your hard-earned money at risk.

I wish you reach your Dividend Horizon,

Alex

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