By: Dividend Sensei
At the end of the day owning stock is just owning a piece of a company. Owning shares of dividend growth stocks means you are getting a quarterly, sometimes monthly, return on your investment. A cut of the cash flows that helps to keep management disciplined, and focused on the long-term.
The simplicity of this idea is what often trips up retail investors, that and the mistake of tuning into the daily noise that is much of the financial media. Remember that the talking heads on Bloomberg, CNBC, and Fox Business are highly paid, and like most of us, like being employed. That means they need to fill 24 hours with content, even though most of the time the data coming in is contradictory, or even meaningless.
Add to this the professional fund managers, and hedge fund “gurus” who make a fortune from convincing people that investing is hard, and it’s no wonder that most people are confused, and end up overtrading and underperforming the general market.
Even those who stick to low cost index funds such as Vanguard’s S&P 500 ETF, VOO, usually can’t match the market’s long-term returns because of market timing.
So let’s make it very simple. The goal of investing is to grow your wealth, and or income, to meet a specific goal, such as sending your kid to college, buying a home, or funding retirement.
You select companies that you think will continue to grow sales, EPS, and cash flow over time, hold those shares as long as the thesis remains intact, add on dips, reinvest the dividends, and that’s it.
It’s so simple it’s almost complicated. Yet this KISS (keep it simple stupid) approach has been shown time and again to be the best way for regular people to get rich over time, and become financially independent. In other words, to achieve freedom from uncertainty in a troubled world where making ends meet seems harder, and harder.
A few months back I spent 2 months researching socially responsible investing. Specifically whether or not companies that made Corporate Responsibility Magazines “Best 100 Corporate Citizens” list would beat the market in the long-term. I also threw in a test of just how effective “buy on dips” would be applied to this quality screen.
So, starting in 2000, the first year the list came out, I cross referenced it with my master list of the 200 best dividend companies in America (now up to 300), and simulated a $1,000 position bought on the day the list came out. Then if the price fell 10% I added $250 more, and $500 more if it fell 10% more, then $750 for another 10%, and so on. At the end of the year I reset the buy more price, to account for the fact that stocks rise 70% of the time. In other words, winners usually keep on winning, and you want to keep adding over time.
After painstakingly going through the daily financial data, literally day by day, for 37 companies, over 16+ years, here were the results:
347.2% profit (adjusted for dividend reinvestment, and splits).
Not a bad result, but compared to the market?
2000-Mid 2016 S&P 500: 4.3% annual total return (CAGR)
This portfolio? 19.75%
Almost 400% better than the market, for 16.5 years. This is the kind of performance that makes professional Wall Street money managers drool, and is what Hedge Fund managers dream of.
In fact, this portfolio beat the S&P 500 in 9 of the last 11 years, and beat 97% of mutual funds over this time period.
What magic combination of super companies allowed this kind of Warren Buffett like returns over nearly 2 decades? Performance that almost no “professional” on Wall Street can match?
Not any special at all.
Yes there were some superstars such as Apple.
BUT the majority of the portfolio? Filled with well known blue chip names that hardly anyone thinks of as high-flying superstar growth stories: 3M, Nike, Target, Medtronic, Hormel, Kroger.
In other words, boring blue chip dividend payers, that have decades long track records of making investors rich over time. The biggest secret to investing riches is no secret at all. Buy good companies at a fair price, hold on, preferably forever, and reinvest the dividends. Buying on dips, specifically the massive market crashes of 2000-2003 and 2008-2009 boosted performance by 1.3% a year.
So what’s the moral of the story? Investing isn’t hard, its simple, and easy in fact. SUCCESSFUL investing IS hard, but not complicated. The key is: consistency, discipline, and patience.
Don’t let market gyrations throw you. Don’t track your portfolio everyday. Don’t partake of financial media for anything but entertainment. Remember these people have different time frames, and goals than you.
Just buy good, dividend paying companies, only sell if the underlying business falls apart, and keep adding to your positions over time.
Focus on the dividend income, your cash flow stream. Run your portfolio like a business, for the long-term, and to heck with what happens in any given month, quarter, or year.
YOU are building an empire of cash that you will hopefully pass on to your descendents. A dynasty of wealth to span the course of history, and cement your family’s future.
In the grand scope of decade, and centuries, even a single bad year doesn’t matter. Remember that, and you’re halfway to reaching your financial dreams.