The author recommends buying low-yielding stocks with a long history of rapidly increasing dividend amounts. The reason for starting out at low yields is to reduce taxes during accumulation. Fast dividend growth translates to a high-income stream at retirement when it is needed. Another reason for focusing on dividends and dividend growth is to keep investors in the market as prices vary wildly. Thinking in terms of streams of income relative to one's initial cost is not only soothing psychologically, but it is also in the proper form for retirement planning.
The book is very good for those just starting out although I strongly prefer strategies that depend less on growth. The book itself takes only the first 120 pages. I would recommend that readers of these boards jump immediately to Appendix 1 and go on from there. It has the details of the strategy along with the author's recommended stocks (and some other stocks that are not recommended but included for contrast).
The book has a 2001 copyright. Its examples are from 1983 though 2000. That was a great time for growth stocks and it extends right to the bubble's peak.
Here is the distribution of the price to earnings ratios P/E of the thirty highly recommended stocks.
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P/E = 0 to 10, none.
P/E = 11 to 15, 1 out of 30.
P/E = 16 to 20, 6 out of 30.
P/E = 21 to 25, 3 out of 30.
P/E = 26 to 30, 4 out of 30.
P/E = 31 to 35, 4 out of 30.
P/E = 36 to 40, 5 out of 30.
P/E above 40, 7 out of 30.
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Yield = 0.0 to 0.5%, 8 out of 30.
Yield = 0.6 to 1.0%, 5 out of 30.
Yield = 1.1 to 1.5%, 8 out of 30.
Yield = 1.6 to 2.0%, 3 out of 30.
Yield = 2.1 to 2.5%, 0 out of 30.
Yield = 2.6 to 3.0%, 2 out of 30.
Yield = 3.1 to 3.5%, 3 out of 30.
Yield = 3.6 to 4.0%, 0 out of 30.
Yield above 4.0%, 1 out of 30.
Here is the distribution of the price to earnings ratios P/E of the sixteen additional stocks.
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P/E = 0 to 10, 1 out of 16.
P/E = 11 to 15, 5 out of 16.
P/E = 16 to 20, 3 out of 16.
P/E = 21 to 25, 1 out of 16.
P/E = 26 to 30, 3 out of 16.
P/E above 30, 3 out of 16.
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Yield = 0.0 to 0.5%, 1 out of 16.
Yield = 0.6 to 1.0%, 2 out of 16.
Yield = 1.1 to 1.5%, 2 out of 16.
Yield = 1.6 to 2.0%, 3 out of 16.
Yield = 2.1 to 2.5%, 2 out of 16.
Yield = 2.6 to 3.0%, 1 out of 16.
Yield = 3.1 to 3.5%, 2 out of 16.
Yield = 3.6 to 4.0%, 2 out of 16.
Yield above 4.0%, 1 out of 16.
Lowell Miller goes on to mention that growth usually slows down as companies mature. He recommends starting with dividend yields of twice (and never less than 1.5 times) that of the market overall.Let's say that you have a Single Best Investment pick that yields 4% today and shows a projected growth in yield at 10%. Compare that to a growth company with a 1% current yield and a projected growth of yield of 20%. In three and a half years, the second stock will have a yield on original investment of 2%. In seven years, it will be 4%. In a little more than 10 years, it will be 8%. But our SBI [Single Best Investment] turtle, with income growing at half the rate, will be at 8% in seven years, and at 12% in about ten years.
Readers of these boards will recognize the Gordon Equation in its most basic form:
Growth Rate = Dividend Yield + Dividend Growth Rate. In alternative forms, the Dividend Growth Rate is replaced with the Earnings Growth Rate and a Speculative term is added as Price to Earnings multiples expand and contract.
You can get growth in the investment value of a security (as distinguished from the speculative value) with any combination of dividend yield and dividend growth. For those who are interested in generating a perpetual income stream (or, at least, long enough to last their lifetimes), a dividend based strategy makes a lot of sense. It is based upon the same theoretical foundation, the Gordon Model, as stocks in general.
RoxAnn Klugman emphasizes growth for an immediate tax deferral. Lowell Miller emphasizes having the assurance of reaching one's goals. In his example, the 20% rabbit would have been a better choice if you really could depend upon its growth lasting more than a decade into the future.
Have fun.
John R.