Today I have an article from my friend Bryan the Income Surfer. Bryan is a dividend growth investor who shares his ideas in investing and life at his site. Learn from Bryan’s advice and you will become a better investor.
Hello! I am Bryan, the founder of IncomeSurfer.com. On Income Surfer you will read about techniques and strategies to live a fulfilling and balanced life, both financially and relationally. I offer a monthly newsletter that includes changes in our portfolio, assets we are looking at buying/selling, and interesting articles that give a historical perspective to the capital markets. You will also read articles about my family’s quest for balance, our travels, and how we have changed our lives to be more fulfilling. A business partner and I currently have three outstanding valuation tools under development. Income Surfer is also on Twitter, @IncomeSurf.
Develop this Trait for Successful Investing
To state the obvious, investors are people. Just like most of the people in our modern world, investors crave instant gratification. When they purchase a stock, or any other asset for that matter, they may begin to question their decision if the asset doesn’t immediately climb in value. Global markets aren’t usually so responsive, and the differences between the investor’s expectations and reality can cost them a lot of money. As you may have guessed, this article is about patience. If you would like to read about a few of the techniques I use to maintain the patience in my life, read the article I wrote about it last month.
“In the short term the stock market acts as a voting machine. In the long term it’s a weighing machine”
The fact of the matter is that no one can tell you, with certainty, where a given stock or index will trade a year or two in the future. An observant and mindful investor may make a guess, based on the differences between recent performance and historical performance, but they are still making a guess. Any given stock market or index can have long periods of flat or downward performance. Just look at a chart of the Nasdaq. In 2014 it is still significantly below its all time high (spring of 2000). The S&P 500 started 2013 more or less where it had begun the year 2000. These long stretches of flat or poor performance are not unusual historically either. The Dow Jones average did not exceed it’s 1929 high until the mid 1950s. More recently the Dow Jones Industrial Average started 1982 essentially where it had been in the late 1960s.
This is why patience comes into investing. There can be long periods of time where the value of your investments goes down….even year after year. If you know when every market top and bottom will be, by all means let me in on the secret. My crystal ball is broken! What I do know however, is that while I wait for stock prices to rise and profits to increase I certainly want to be getting paid. That, dear reader, is why I am a dividend growth investor. Some studies even show that dividend paying stocks perform better in bear markets than the broad S&P 500. Casting those studies aside, I know I feel better and more confident in my investments if the underlying companies are increasing their profits and paying me more (dividends) year after year. That is a hallmark of a great investment.
Below I have a couple examples of long term dividend growing stocks that I own. The first is Coca-Cola (KO). Coke’s share price actually peaked a couple years before the market topped out in 2000. On a split adjusted basis the company was trading at about the same price (~$38) in 1998, that it is today. In hind sight, shareholders were clearly too bullish on Coca-Cola in the late 1990s. The interesting thing is that even shareholders who bought near the 1998 high prices, provided they continued to hold their shares, are being paid a current dividend that is more than 5 times the dividend they received in 1998. I’m sure it would sting to have a stock price go nowhere for 16 years, but having your dividend payout increase 5 times in that time period should take some of that sting away.
Another great example of a long term dividend paying stock is Johnson & Johnson (JNJ). As you can see from the chart below, Johnson & Johnson’s stock appreciated very little from 1999 to 2012. More recently it’s price has rised, but for 13 years investors saw very little price appreciation. In fact, at some point during the following years (1998, 1999, 2000, 2001, 2002, 2003, 2004 and 2009) shares of the stock traded below $50 per share. Would you be patient enough to watch your Johnson & Johnson shares drift sideways for year after year? Long term shareholders were rewarded with a dividend whose annual payout has increased 800% in the last 15 years. That sounds like a wonderful reward to me. Year after year the annual dividend payout increased, while the stock price drifted sideways. If you still felt good about investing in Johnson & Johnson, you could even reinvest those dividends in more JNJ stock.
The dividend growth stocks in my portfolio make it easier for me to be patient and resist my human urge to sell my shares when the stock price doesn’t go straight up. Year after year I am paid to wait patiently by my investments. The rising dividend payments in my portfolio have even outpaced inflation over the past 10 years. I know the salary at my job can’t claim that. Investing for the long term is just my style, and I find it easier to do with dividend growth investing.