Why Dividends Are Good for Every Value Investor

Now, if you have not heard of John Neff, here’s a brief intro: Neff is a bona fide investing legend who cemented his place in investing folklore while managing the U.S.-based Windsor fund from 1964 to 1995.

In those 31 years, each dollar invested in his fund would have become $56, handily outpacing the return of the S&P 500 (a U.S. market index) by two-to-one.

With a sterling track record like that, we may want to learn more from his investment approach. To do that, we can turn to Neff’s book John Neff on Investing, where he laid out seven principal elements of his investing style.

Prior to this article, I had written about Neff and his first two principles of investing; the first being fishing in the low price-to-earnings (PE) pond and the second being an insistence for only looking at companies with fundamental growth of more than seven percent.

Today, I’ll talk about his third principle: Yield protection.

Getting paid while you wait

As I see it, a superior yield at least lets you snack on the hors d’oeuvres while waiting for the main meal

— John Neff

As we saw in Neff’s first principle, he sees value investing as buying a stock for less than what it is worth and then waiting for the stock market to recognize its underlying value. The problem is, the wait can sometimes take longer than we had anticipated.

This is where the dividend yield comes in.

For Neff, the dividend from a share pays him to wait, so to speak. Furthermore, he gave credit to dividends as the key differentiator that provided the extra oomph for his Windsor Fund to beat the market.

Setting dividend hurdles

When he was running Windsor, Neff would look for stocks with dividend yields that are higher than that of the general market.

If we use the dividend yield for the SPDR STI ETF (SGX: ES3) as a proxy for the market, we will then be looking for shares with dividend yields that are larger than 2.8%. The SPDR STI ETF is an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI).

As an example, corporate marketing outfit Kingsmen Creatives Ltd (SGX: 5MZ) might be one share that fits the bill with its 4% dividend yield. That said, the firm’s current PE ratio of 11 may be a tad higher than what Neff might be looking for.

Foolish takeaway

As you may have guessed, there are another four principles to cover when it comes to Neff’s overall investing approach. They will be covered in subsequent articles, so stay tuned for more on John Neff.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.