The Difference Between Gambling And Investing

Posted On March 7, 2018 2:10 pm

But here’s the good news. No matter how crazy overvalued the market gets, (Coca-Cola’s PE ratio hit 71 during the tech bubble), something is always on sale. For example Realty Income on the same day that Cisco hit its all time high, was trading at $11 or a price/AFFO of 7.6. The yield was 10.1%. That meant that its expected long-term total return was about 14.6%. In other words because everyone was so focused on growth stocks like Cisco (and apparently Coke), quality dividend stocks were left trading at fire sale prices.

Because of that Realty Income’s total returns over the last 17 years has been 16.8%, compared to 5.6% for the S&P 500. And here’s something to keep in mind. During those 17 years Realty Income grew its dividend every year, at a compounded rate of 5.2%. In other words using our rule of thumb valuation model that total return = yield + dividend growth you would have predicted 15.3% total returns. That’s very close to what Realty Income actually generated, thanks to its insanely low valuation.

The bottom line is that the difference between gambling and investing is that investments are long-term ownership of income producing assets, bought at good (or great) valuations, and then held for the long-term . Gambling means making short-term bets on assets that generate no income, (and thus have little or no intrinsic value), with the hopes that you can find a greater fool to buy at a higher price. Stock gambling is also possible if you adopt a speculative mindset and willingly overpay hoping to find a sucker to pay an even more outrageous price than you.

I’m firmly a long-term investor. My high-yield value focused retirement portfolio is 100% devoted to building a diverse collection of quality income growth stocks. Most bought at 52 week lows, but all at highly attractive valuations that are likely to generate total portfolio returns of 12+% annually over the long-term. That means that in the short-term I miss out on the speculative bubble gains of something like Amazon (up 31% YTD), or Netflix (up 61% YTD). By the way, the PE ratios for Amazon and Netflix are at a tech bubble like 249, and 253, respectively. However by sticking with this time-tested methodology, I’m also avoiding the worst of the inevitable crash. All while getting paid about half of my market beating total returns in cash dividends, which don’t vanish when the bubble bursts.

Photo: “Hard Rock Casino” by tedmurphy is licensed under CC BY

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I currently write for both Seeking Alpha, Simply Safe Dividends, and DividendSensei.com My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams, and enrich their lives. With 22 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams. I'm currently on an epic quest to build a broadly diversified, high-quality, high-yield dividend growth portfolio that: 1. Pays a 5% yield 2. Offers 7% annual dividend growth 3. Pays dividends AT LEAST on a weekly, but preferably, daily basis

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