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Wall Street's Dirty Little Secret: Andrew Gordon says that "dividend stocks are the most misunderstood companies in the world and that's why I love them." Gordon's "Premium Income" portfolio, which you can find in your Sound Profits issue every month, features Gordon's hand-picked dividend recommendations. It's no coincidence that Gordon's companies get a lot of their revenue from outside the U.S. Gordon himself has done business in a dozen countries, and these days he likes what he sees. "Australia, Indonesia, Peru, Canada, and the obvious one, China, have tremendously vibrant economies," he says. "I tilt toward companies that are expanding their businesses aggressively in these and other high-growth places." Gordon also sees value in U.S. companies doing business in the U.S. In fact, the two most profitable companies in his portfolio right now both get all their revenues from inside U.S. borders. Share prices of Western Gas have grown 85%, and Annaly Capital's shares have increased 62%. "That's why they're misunderstood," Gordon says. "Quite a few of these companies are capable of impressive share price growth. And the dividends you get beat by miles the interest rate you'd be getting on government bonds. For example, my 62%-riser, Annaly, gives shareholders a dividend of 14.5%." PART I David and Scott grew up as best friends. Both were smart and went on to have successful careers. David became a professor, Scott a banker. Their generous salaries gave both spare income and the promise of future financial security. But that promise would be fulfilled for only one of them. The other's retirement years would be marked by constant financial worries. It didn't have to be that way... Beginning in the 1980s, both David and Scott put their savings into the stock market. But David, the more conservative of the two, invested in quality dividend stocks. Excited by the Internet "revolution," Scott put his money into high-tech dot-com stocks. Both did equally well during the 1980s and 90s. As you can see from the chart below, it was a good time to be in the market. Whether you were invested in high-tech (the blue line) or blue chip/dividend stocks (the red line), you were rewarded with gains of over 1,000%. A Great Time to Invest in Stocks of All Types
In the summer of 1998, Scott was bragging more than usual about his dot-com stocks, telling David that the sky was the limit... that the tech revolution had just begun... and that these companies were inventing new ways to conduct business and make money. It was a new dawn of endless possibilities – and seemingly endless wealth, Scott exclaimed. Scott loaded up even more on dot-coms. And he wasn't alone. Excited investors flocked to these stocks in huge numbers, and watched as their share prices separate from the pack toward the end of that summer... Dot-Com Stocks Take Off
When gains from high-tech stocks surged above 2,500%, Scott told David "You should have listened to me." David merely shrugged. He wasn't impressed with these dot-com stocks. But what could he say? In 1999, while high-tech stocks were zooming, a group of stocks known as the "Aristocrats" lost 5% of their value. The Aristocrats are the most reliable of the dividend stocks – companies that have hiked their dividend payments for at least 25 years in a row. Compared to the dot-coms, these companies were boring. So investors simply lost interest and stopped investing in them. But in 2000, the high-tech bubble burst. The high-tech stocks (including the dot-coms) fell 59% that year. The Aristocrats gained 10%. In 2001, high-tech lost another 30% in value. The Aristocrats gained 11%. In 2002, high-tech's value continued to plummet. Prices shrunk another 32%. And the spiraling market finally caught up to the Aristocrats. Their value, too, contracted... but by a third as much – 10%. The carnage was over. But Scott's savings NEVER recovered. Since bottoming, the high-tech market hasn't even climbed halfway back to where it peaked in early 2000. Today, Scott has less than 50% of what he had 10 years ago. He isn't bragging anymore. So how about David? Since 1998, David has earned 87% on his money by investing in the Aristocrats, the most reliable dividend stocks listed on U.S. exchanges. Notice that I didn't say "the fastest-growing dividend stocks." There are dividend-paying stocks that grew much faster than the Aristocrats, but they didn't have the long track record of hiking their dividends every year that the Aristocrats had.
If we've learned one thing from the dot-com bubble, it is the remarkable resilience of companies that pay dividends. While Scott saw enormous dollar signs floating in front of his eyes, dot-coms like WebVan.com and eToys.com burned through cash at an astronomical rate and eventually collapsed. In the meantime, safe and steady dividend stocks like Coca Cola and 3M survived and flourished. And they continued to pay their investors cash dividends, which fattened their savings even more. (Coca Cola has been paying dividends since 1893, 3M since 1916.) As I said, David has earned 87% on his money by investing in high-quality dividend stocks since 1998. But let's go back to the 1980s. How well could David have done by investing in some of the best-known dividend companies at the time? Take a look at these:
And if David had reinvested those dividends into the same ultra-reliable companies? He more than likely would have made over 2,000%. How is that possible? Reinvested dividends buy you more shares, which generate their own dividends, which buy more shares over time. The longer you let this scenario run, the more wealth you build. According to The Future for Investors by Jeremy Siegel, from 1871 to 2003, 97% of the total after-inflation accumulation from stocks was from reinvested dividends. Only 3% was from capital gains. Let's put that another way. For every thousand dollars the stock market has given investors through the years, they would have gotten only $30 without those dividends. Dividend payers may not seem like the most exciting investment companies around. But the more you learn about them, the more exciting they become. As our dividend specialist Andy Gordon has said many times, "Bore me all the way to the bank." Wall Street's Dirty Little Secret: Gordon is Sound Profit's dividend specialist. "I've always liked the idea of companies giving shareholders a substantial portion of their profits and still being able to expand production and grow markets. You have to know what you're doing." Gordon can't resist underpriced companies. "I'm a value investor. The first thing I check out is whether a company is going for a discount. If it's not, I'm simply not interested," he says. But other than that, Gordon is flexible. He goes big or small, domestic or global with his picks. "The most important thing," he says, "is dividend track record and a great management team that knows how to grow companies." Dividends aren't guaranteed. But the companies in Gordon's portfolio have been giving dividends for a decade or more. And some have not only been giving dividends but have been hiking them each and every year for several decades. "Steady income and capital growth, you can get the best of both worlds with the companies in my Sound Profits portfolio," Gordon says. PART II Dividend payers are the stepchildren of the stock market. They're constantly overlooked in favor of supposedly faster-growing stocks. So it is and forever will be. There's nothing we can do about the market's biggest and most foolish blind spot, and frankly we don't care... As long as we get YOU to look beyond the curb appeal of those "hot" stocks to a deeper truth: Dividend companies are the safest and most resilient in the world. So why are dividend payers so much safer than other companies? Here are the five biggest reasons...
Dividend-paying companies also have incredibly resilient business models that can withstand the test of time. Many dividend payers have raised dividends every year for several decades. Standard & Poor's published a list of 44 companies that have raised their dividends every year for the past 25 years – and some, including Coca Cola, Procter & Gamble, and Caterpillar, go back to the 19th century! That's quite an accomplishment considering everything we've gone through as a country and an economy...
Through it all, these companies keep hiking their dividend payments – year after year. We like companies with long track records of raising dividends. For example, a recent addition to the Premium Income Portfolio (featured in Sound Profits, our investment advisory that we recommend to all IDE readers) has been raising dividends for 47 years. This is much more than a reflection of the company's past. A history of regular dividend distributions means something. It's an indication of the present and a harbinger of the future. Past, present, and future... dividends give you important clues to a company's financial health. The Dash for Cash Since 1972, investors in dividend-paying companies quadrupled their annual returns compared to investors in non-dividend-paying companies. You can, of course, take that cash and pocket it. But if you can afford not to, don't. Instead, reinvest it. Over time, the amazing effects of compound interest kick in. Remember what you learned in Part I of this essay... Reinvesting your dividends is the key to building wealth. In Behavioral Investing, James Montier points out that "over the long run, dividend yield has provided over 50% of the total return to equities!" And that's just the yield. When you include the gains that come from reinvested dividends, the number gets even more staggeringly wonderful. Non-Dividend vs. Dividend Returns Since 1972
Here are three more examples of the wealth-building power of dividend stocks:
Shelter From the Storm The three dividend-paying companies above come from Andy Gordon's Sound Profits portfolio. Andy has been following dividend payers and growers for years – and he thinks we're in for a bumpy ride. "Dividend payers offer investors shelter from the storm and real protection from crazy market downturns," he says. "We think they should be part of everybody's portfolio."
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środa, 22 grudnia 2010
Wall Street's Dirty Little Secret: The Safest Stocks Pay Off the Biggest
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