Lately, I have been studying periods in stock market history typically known for “poor performance” to see if it were possible to craft an intelligent dividend strategy during that time period. In particular, I was looking at the 1966 to 1981 bear market period. If you read commentary during that period in stock market history, you will often come across comments such as this: “The price of the S&P 500 components only rise 1.8% annually over that sixteen year time frame.”
The first problem with a data point like that is the fact that it does not include dividends. Because the 1966-1981 represented “the good old days” before stock buybacks rose to compete with dividends, the S&P 500 had a 4.1% average dividend yield over the 1966 to 1981 period. Right off the bat, that time period was not so bad because investors actually earned 5.9% (as opposed to 1.8%) annually once you include the dividends.
Secondly, I plugged into a calculator some of the “no-brainer” stocks among blue-chip investors, and found that a large chunk of these stocks performed quite well during the 1966 to 1981 time period. To make the examples concrete, check out the historical performance of these companies:
Altria returned 22.3% annually, with full dividend reinvestment, from January 1st, 1966 through December 31st, 1981.
Colgate-Palmolive returned 10.9% annually from January 1st, 1966 through December 31st, 1981.
Wells Fargo returned 8.9% annually from January 1st, 1966 through December 31st, 1981.
Johnson & Johnson returned 8.0% annually from January 1st, 1966 through December 31st, 1981.
American Express returned 8.9% annually from January 1st, 1966 through December 31st, 1981.
Pepsi returned 13.7% annually from January 1st, 1966 through December 31st, 1981.
Exxon returned 14.0% annually from January 1st, 1966 through December 31st, 1981.
Chevron returned 15.4% annually from January 1st, 1966 through December 31st, 1981.
Clorox would have returned 13.5% annually from January 1st, 1966 through December 31st, 1981.
This is why I encourage you to move past the headlines and do your own due diligence. A lot of times, a close look at the “terrible times” for blue-chip dividend investors never turn out to be as bad as you think. In 2008 and 2009, Colgate, Procter & Gamble, Johnson & Johnson, and Coca-Cola was either increasings its cash flow per share or experiencing a decline of less than 3%. Seriously, the worst economy since the Great Depression, and the operational results of these companies barely budged. That is why it is easy to hold on through 30-40% stock price declines. If the profitability of firm does not get whacked, it is easy to hold on and even buy more.
The poor performance during the 1966-1981 period was largely shaped by severe overvaluation in the market place. For instance, Coca-Cola traded in the 40-50x earnings range in the early 1970s. Should it come as any shock that it is not on the list of stellar performers during that period? The P/E compression from 40-50x earnings down to 20x earnings is so strong that it takes years of 8-12% growth to overpower that kind of valuation change.
That is why I am a fan of diversification. When you own healthcare, consumer staple, utility, oil, certain tech, certain conglomerate, and perhaps a few tobacco and retailer stocks, you can be reasonably assured that something in your portfolio will always be chugging along. The 1966-1981 period was a “glory days” moment for Big Oil and Big Tobacco. Owning Chevron, Exxon, or the Old Philip Morris in your portfolio could have offset a lot of the stagnation that occurred during that period.
And, of course, the average yield of the S&P 500 during the 1966-1981 period was 4.1%. It is likely that a well selected portfolio of dividend growth companies could have done even better than that. During that fifteen year stretch, you still received over 1% of your initial investment back in the form of cash profits every ninety days. If you held a basket of stocks, you still received $41 each year for every $1,000 that you chose to invest. Sure, the stock prices may have stagnated, but the dividends kept rolling in.
You can avoid a lot of stock market misery by simply diligently acquiring the top two or three companies in every industry, taking the cash dividends to reinvest or meet living expenses, and build your own little mini-empire of the best cash generating assets that span the globe. None of this is an exaggeration. Find the Coca-Colas and Johnson& Johnsons that raise their dividends every year, and raise their cash flow per share in nine years out of every ten. It’s a much easier way to live when you can see more and more profits streaming into your account every ninety days. And if you own the most dominant companies in each industry, it is likely that something will be dominating at a given point in time. The 1966-1981 period was a good time to own toothpaste (Colgate), soda and chips (Pepsi), oil (Exxon and Chevron), and tobacco (the old Philip Morris). When you own thirty of the most dominant firms across six or seven industries, you cannot help but own something that is performing quite well during a given period of time.