Low/Slow Investment Strategy: Dividend Stocks

Islamic Discussion
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Salams y’all,

So, I was asked to share my strategy for investing in stocks. Please excuse this ramble; there’s a lot of background research that went into this.

Always remember the golden rule of investing: don’t invest a single dollar you can’t afford to lose. I.e. this comes out of “disposable” income, not your rent/groceries/etc.

Goals:

  • Invest in something that is 100% halal, not in any sort of grey area.
  • Invest in something low-risk but low-return.
  • Invest in a way that I can contribute, say, $100-200 a month – I don’t need to be a multi-bajillionaire to invest.
  • Market conditions should be irrelevant.
  • Investment horizon is 10-20 years; I’m not looking to make a quick buck.

The investment vehicle that meets all these goals is dividend-bearing stocks. These are stocks that give, on average, 2-5% return on investment. So if you hold $100 worth of shares, you can expect to make $2-$5 in dividends that year.

As a side note, the stocks themselves tend to go up in price, because the companies are consistently delivering value to customers and growing their business; that’s how they can afford to keep giving (often, increasing) dividends each year.

This works because of compounding – if you invest $1200 a year ($100/month), that $1200 makes $25-$60/year, which you can use to buy more stocks. Over time, it adds up.

Finally, over the long-term, you take advantage of price. Diversity is important; every month, look at the stock that’s down the most, and buy that one. That will lower your average price paid, so it’s easier to make money.

From the Islamic perspective, there are just a couple of requirements:

  1. The stock itself is halal – no tobacco companies, entertainment (sorry – movies, games, etc.) or anything unethical
  2. The company has no more than 33% debt-to-equity (usually translates to assets-vs-debt). This is a middle opinion (25% most conservative, 50% most liberal) and I can take care of this for you.

Some non-Islamic conditions I would put on top:

  1. The company is worth at least $10B market cap. This minimizes the chance that people can manipulate the price.
  2. The EPS (Earnings Per Share) is more than the DPS (Dividends per Share). This means the company is earning more than it’s giving shareholders.

Please let me know any questions/comments/concerns you have. InshaAllah if you guys are seriously in, I can recommend a broker and divulge my list of stocks. (I researched over 100 and have a list of about 20-30 that I invested in.)

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Here’s the final list. I can’t share my spreadsheet, because it would reveal my super sekrit email address and/or identity. But ya’ne, here you go. The list is tickers and names.

All of these conform to the following requirements:

  • Market cap is at least $10B
  • Debt-to-equity ratio is at most 33% (last two calendar years)
  • Less than 5% income from interest
  • Dividends are either constant or growing (%-wise) each year
  • Eearnings per share is more than dividends per share (last two calendar years)
  • Industry is halal. No tobacco, alcohol, entertainment, etc.

Enjoy! And remember, invest small monthly; that’s better than big cash investments.

AAPL Apple
ARMH ARM Holdings PLC
CNI Canadian National Rail
CAH Cardinal Health Inc.
NYSE: CVE Cenovus
CVX Chevron
CHD Church and Dwight
CSCO Cisco
CL Colgate Palmolive
XOM Exxon Mobil
FDX Fedex
GG Goldcorp
GWW Grainger (W.W.) Inc.
INTC Intel
JNJ Johnson & Johnson
MCK Mckesson Corp
MDT Medtronic
MSFT Microsoft
NGG National Grid PLC (ADR)
NUE Nucor
ORCL Oracle
PEP PepsiCo
STX Seagate Technology PLC
UPS United Parcel Service
WDC Western Digital
POT Potash Corp
PH Parker-Hannifin
LOW Lowe’s
NYSE: KO Coca Cola Bottling
WMT Wal Mart Stores
OTEX OpenText Corp
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Ashes, first, jazakAllah khair for all this information. I don’t get exposed to this sort of stuff enough; however, I don’t understand at all! :confused:

I feel silly putting these points forward since I know next to nothing, but my logic would have me say:

If you go so far to diversify your investment and are going to see profit in the long term, how is that different than earning interest in a savings account? Now say you didn’t make a profit, and it turned out to be a loss over most of your stocks… you essentially gambled it all away. Basically, you put money into the slot machine stock market, pulled the lever, and got the results (albeit, it may be 10 years later).

I think I’m missing something here!

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Because Allah says: wa ahallalahu al-bay’, wa harrama ar-ribaa. Because Allah made commerce halal, and riba haraam.

The real answer is in your second point:

First, the critical point here: the risk of loss. One of the fundamental ahadith of Islamic finance is: there is no profit without risk of loss.

This is what separates riba loans (money on top of money in a loan) from a business deal; the former, the bank is guaranteed a profit, whether you thrive or struggle. It’s win-lose. In a business deal, it’s win-win.

Second, please read various fatawa around stocks. The scholars have described purchasing stocks as getting part ownership in a company; this is why you can’t invest in haram companies – you can’t buy stocks of a beer company any more than you can run a beer company or be a part owner of a beer company.

Also, the stock market is most certainly not gambling. What is gambling? Throw a stone, as far as it goes, that’s how much land you get (something from jahiliya). What are stocks? A company valued at $10B which provides products or services, a business value, makes or loses money depending on how the business runs. Two totally different animals.

If you’re not convinced, don’t invest. Avoiding doubtful/haram is a higher priority than trying to get benefit from something.

Wallahu a’lam.

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Obligatory statement: I am not an economist and any advice I would give should be trusted as much as post-it notes on a dart board.

Lately I have been considering investing in gold.
Like purchasing physical quantities of small minted gold and silver bars at $50 - $100 AUD each.

I was put onto the idea by a brother at my local mosque about a year ago but only recently started to consider it seriously. His rational was that if you are holding onto wealth for the future (And paying Zakaat of course) you might not want to do it with a currency that is backed by interest.

If nothing more, the metals themselves have heaps of industrial applications so it seems to be very reasonable to assume they will hold a good degree of their value. Better yet their value does not seem to be tied to any one market or currency so it looks like something of a calm port that you can park wealth in if you are unsure about how stable the economy is.

The historical data I have looked at so far showed gold growing at an average rate well ahead of inflation.

General rule of thumb I have read so far suggests that Gold is a reliable slow-growth investment that is well suited for 10-20 year investments. Silver on the overhand is prone to faster growth but is more volatile and is better suited for shorter term investments in the 1-5 year range.