Rodney Hobson Talks Dividends

Rodney Hobson is an experienced financial journalist who has held senior editorial positions with publications as prestigious as the Times and Shares magazine in the UK. He has also contributed to the Daily Mail and the Independent. His is the author of numerous books and his latest, The Dividend Investor: How to Maximize Your Income by Investing in Shares is out now via British financial publishers Harriman House. Benzinga spoke to Hobson and asked, why dividend investments? First of all, can you give us a little background on yourself?
I've been a financial journalist for more years than I care to remember, both in the UK and also in Asia. One of the things that I've found in particular is that small investors were ringing up the city desks, or the financial desks, and ask the most basic questions. People had bought shares without any idea of what it was they'd got, what to do with them, what rights they had, how to sell them, and so I felt that there should be someone out there batting for them. I set out to write my first book five years ago, which is "Shares Made Simple", a beginners guide to the stock market. I've gone on from there to carry on writing mainly for less experienced investors to explain what is going on so they had a fair crack of the whip and they can compete with the professionals. What led you to write a book about dividend investments?
It's been a natural progression. I've written about smaller companies. I've also written a book on how to build a portfolio. This time, what was particularly interesting is that, during the turmoil of the past four or five years, people have been talking about gold as the safe haven. To me, this is complete nonsense. Gold gives you no income. The great beauty of shares is that, if you buy companies with dividends, you have an income, or you can reinvest that income. You have that choice. If share prices fall, the income gives you compensation. If share prices stay level, you at least have some gain from the income. If share prices go up, then you win twice over. It seems to me that shares paying dividends is the real safe haven. Is the book aimed exclusively at beginners?
Experienced guys can get something out of it, but I make sure I express thing in language that ordinary people can understand. The difficulty for specialists in any field is to explain things in a language that people understand, and that I do feel I have a knack of doing so beginners can understand it. But even people that have been investing for some time will learn a great deal from this book. Ordinary people seem to be losing faith with banks and investing more these days…
The thing about banks, apart from people not trusting them, is that in the States, in the UK and Europe, interest rates have been pushed down to a very low level in order to stimulate the economy and get us out of the recession. That's great if you're borrowing money, but it's awful if you're lending money. So people who have got money in savings accounts are just getting a pitiful rate of return. It just isn't worth it. Inflation is wiping out all the gains. Why on earth would you put your money into a savings account? This is why I think a lot of people tried to buy gold, because the price will go up so they'll get something better. But far better in fact than that is to buy shares and collect the dividends, and this will give you a decent rate of return. In the UK and I'm sure America too, it's not difficult to find solid companies giving you a yield of 4%. Maybe even 5% or 6%. If you can get that sort of return on your money, why on earth put it in a savings account that gives you 0.5%? The devil's advocate answer would be "no risk", right?
But that's not true. Quite a lot of people discovered when the banking crisis broke that there was a serious danger that banks, and dare one mention Lehman Brothers among others, can go bust. Governments had to step in. I think the Irish government was the first. Governments stepped in and said that they're guarantee bank deposits. Money deposited in banks in Iceland was lost. The Icelandic banks defaulted. So you can lose money. It's not entirely safe. The one thing you're certain of is that, if you put your money in a bank account and get a pitiful rate of interest that falls way short of inflation, the one thing you're sure of is your money is losing value. How is that risk-free? How do you simplify subjects that are, by their nature, complex?
I try to explain how to invest, I explain what to look for in company announcements, pick out the key points. You see, you get a company statement showing you the profit & loss and the balance sheet, and there are a lot of figures there but only about half a dozen are really important. Clearly, you want to know that sales are rising, you want to know that profits are rising, you want to know what the dividend is. Beyond that, the rest of it isn't too vital, provided things look reasonably ok. The same way with share market ratios. People talk about price ratio and yield - these are probably the two things you most need to understand. If you can explain the simple basics, then people can invest without understanding the complicated stuff. People tend to invent all kinds of ideas that are complex. Just stick to the simple things, and that's all you need to invest. How does one set about investing in dividends?
Look in the newspaper. Most financial newspapers, or those that cover finance, will carry a list of stocks, and the yield. You can see what sort of yield you're getting. If you're getting 4% or 5% and it's a good, solid company, that's great. Admittedly, you'll sometimes see companies offering massive yields, and you do have to be careful there clearly, because you rush in and find that the dividend is withdrawn. You should be suspicious if you see a company with a massive yield. But those with just solid yields, where you know the company and see nothing wrong with it, it's a reasonably safe investment. The figures are there in the newspapers, or alternatively, look on the company website. Everyone has a website these days. They'll have their financial statements and you can see if the company is increasing the dividend year by year, if it's increasing sales and so forth. Those figures are all out there, easily found. You say in the book that dividends can grow, even in hard times. Is that why you wrote it now, in the current financial crisis?
The financial crisis did provide an important point for this book, but nonetheless, the book will apply even when we're past this crisis, as one day we shall be. The book's lessons will apply irrespective of whether we're in turbulent times or not. The book is in a sense more relevant, and this seemed like a good time to do it, while there is so much turmoil, to bring home the lesson - good solid shares paying good solid dividends, that's the place to invest.