Book Review > The Little Book of Big Dividends (A safe formula for guaranteed returns)

“The Little Book of Big Dividends” is the latest in the Little Book of Big Profits Series by Wiley. In this book, the author Charles Carlson’s main message is that you can make big money by investing for the long term in dividend paying stocks. In an era where many investors seek instant gratification by way of quick capital gains, Carlson reminds investors that roughly 40% of the stock market’s long-term total return comes from dividends. Furthermore, he says “make no mistake: there are dividend-paying stocks in today’s market that will make you rich”.

Carlson gets straight to the point in his introduction by providing the reader with his recipe for riches: “Find stocks with above-average appreciation potential and safe and growing dividends, and buy them at attractive prices”. However, it is not until chapter three that he elaborates by introducing his formula for finding Big Safe Dividends (BSDs). Carlson’s basic BSD formula (an advanced version is provided in Appendix A) consists of only two items – the Payout ratio and the Overall Quadrix score.

If you’re like me, at this stage you’d be curious as to what a Quadrix score is and how to obtain it. The Quadrix score is Carlson’s stock-rating system designed to “isolate stocks demonstrating broad and balanced strength”. Carlson’s firm has set up a free website (www.bigsafedividends.com) that provides payout ratios, Quadrix scores and BSD scores for dividend paying stocks listed in the S&P 1500 Index. For readers looking to invest in stocks outside the S&P 1500 Index, Carlson also provides alternatives to the Quadrix score, such as Morningstar’s stock rating system, but recommends sticking to four and five star rated stocks.

Other topics covered in the first few chapters include the basics of dividends, terminology and a discussion on risk. Carlson advises the reader that if you take only one thing from his book, it should be that: “Dividend yield is a pretty good proxy for investment risk.”

Carlson also discusses the merits of international investing and reminds the (American) reader that more than two out of every three dollars invested in stocks globally is invested in companies outside the United States. To this end, he argues that investors should look at overseas investments if for no other reason but simply to expand their opportunity set of potential winners – bearing in mind the unique risks of overseas investing such as currency risk, political risk and unstable economic policies. At this point in his book Carlson has basically provided the reader with the tools necessary to build a portfolio of dividend paying stocks.

The second half of the book works on the assumption that you have already built a portfolio of dividend paying stocks. With that in mind, topics covered include:

• Methods of buying stocks directly to save on transaction costs
• Record keeping and tax
• Hedging against inflation
• For retirees: How to make sure your money lasts as long as you do
• Taking disciplined risk to maximise returns – without striking out
• Other dividend paying vehicles such as managed funds, property trusts and exchange-traded funds
• And finally, a discussion on arbitrage, rebalancing your portfolio and diversification

Overall I found the book to be very informative. Carlson covers a variety of topics related to dividends and by the end makes a pretty compelling case for building a portfolio of dividend paying stocks and the merits of dividend reinvestment. I liked the fact that tips are highlighted throughout his book and the use of bullet points and numbering makes for easy reading. Although the book is clearly written for the American reader, the Australian reader could equally apply most concepts to create their own portfolio of dividend-paying stocks. Carlson’s book is an excellent starting point for readers wishing to find their own BSDs and create a dividend-paying portfolio, but as always, investors should conduct their own research and seek guidance from trusted advisers.

Vimal Mehta is a member of the AIA.