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John Kingham: John Kingham’s tips to invest in high quality, dividend-paying

Legendary investor John Kingham says investors should build and maintain a diverse portfolio of world-class businesses with market-beating characteristics.

He says in order to build a world class portfolio investors should use their common sense and follow a relatively simple and low risk strategy as some of the most successful investors have beaten the market by using this approach.

John Kingham is the managing editor of UK Value Investor, an investment newsletter for defensive value investors which he began publishing in 2011 after leaving the computer software industry.

With a professional background in insurance software analysis, Kingham’s approach to high yield, low risk investing is based on Benjamin Graham’s philosophy of being systematic and fact based, rather than speculative. Kingham is also the author of a popular investing book,
The Defensive Value Investor: A Complete Step-By-Step Guide to Building a High Yield, Low Risk Share Portfolio.”

In his book, Kingham explains how to shortlist shares for investment with the best combination of quality, value, income and growth. He also advises investors on how to conduct a thorough qualitative analysis, timing of buying and selling of shares, and how to combine investments into an easily manageable portfolio to reduce risk and increase returns.

Kingham suggests 10 steps that investors can follow for investing in the shares of high quality businesses. Let’s take a look at these steps.

1. Take a long-term view

Kingham says investors should take a long-term view of any investment that they make.

“Generally long-term is taken to mean five years at least, and I think that’s a reasonable minimum. Why so long-term? Because of the way the stock market generates return,” he writes in his book.

Kingham says if investors focus on the short-term almost all of their gains and losses will come from valuation changes which are by their nature unpredictable.

He says focusing on the long-term instead means dividend income and growth become much more important than the day-to-day ups and downs of the market, and finding a company that can grow its dividend is much easier than finding a share which will go up next week.

2. Stay diversified

Kingham says no matter how much research investors do into a company, they cannot know for certain how it will perform, or what the share price will be in the future. Hence investors should diversify and put their eggs into many different baskets.

Kingham says beyond just the number of investments there are other factors which can be diversified too like industry and geography.

“Companies within the same industry are often affected by the same kinds of issues, so diversifying across many industries can reduce a portfolio’s risk. If a portfolio is diversified across many industries, anything that affects a single industry will only have a relatively small effect on the portfolio. The same thinking can be applied to geography, where a local problem (a recession, earthquake, epidemic, etc.) will have a smaller impact if the portfolio as a whole generates its earnings from across the globe,” he says.

Kingham says risk reduction is also important through diversification because investing is a long-term game.

“If your portfolio is relatively low risk because it is well diversified, you stand a better chance of sticking with equities for the long-haul,” he says.

3. Look for high yield shares

Kingham says dividend income is clearly a very important part of total stock market returns and the obvious way to measure income is by the dividend yield.

According to Kingham on its own the yield is often misleading and it is just as important that the dividend be sustainable in the longer-term, and that preferably it has a good chance of being increased.

“That’s why yield shouldn’t be looked at in isolation, but should instead be considered alongside a company’s ability to pay that dividend, consistently, for the long-term -In other words, its quality,” he says.

Kingham says there is another problem with a simple dividend yield as by looking at today’s yield investors could miss situations where a company has cut its dividend for a short period, perhaps because of a one-time crisis.

“A better approach may be to look at the share price relative to the company’s dividend payments over the last decade. The more dividends that have been paid relative to the current price, the better,” he says.

4. Look for growing companies

Kingham says growth is a friend of the long-term investor and without it the value of any business and the income from it will be eroded by inflation.

“The most important thing is a company’s ability to pay a growing stream of dividends in the future, since ultimately the value of all investments is based on the…

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