Over the past ten years, Coca-Cola has increased its profits from $5.0 billion to $9.2 billion. The profits per share have increased by a little more than that (from $1.03 to $2.10) due to a stock repurchase program that has reduced the number of ownership units you have to share the profits with from 4.8 billion to 4.3 billion. The company has increased its cash on hand over the past two years from $13 billion to $18 billion. The soda giant’s sales have gone up from $21 billion to over $46 billion during the 2004-2014 stretch. And plus, you collected a rising cash payment during each of those years we’re examining (and it’s a streak that now goes back more than half-a-century in total).
Generally speaking, it is wise to hold investments that pay out high streams of dividend income inside the confines of an IRA, so you can avoid those frictional taxes that take a tax bite out of each dividend payment and limits your compounding engine (though there is also wisdom in owning something like Starbucks in an IRA because IRAs have contribution limits and getting large capital gains inside the account can be useful, too).
Usually, the blue-chip stocks that are candidates for consideration are things like tobacco (Philip Morris International), telecom (AT&T), and oil (Royal Dutch Shell, BP, and sometimes Conoco). You don’t get an opportunity to diversify into the health-care field all that often, if you’re looking strictly for high income candidates: Johnson & Johnson has a present dividend yield of 2.77%, Abbvie yields 2.97%, Abbott Labs yields 2.08%, and Pfizer is a bit better with a 3.66% yield. But GlaxoSmithKline is a notable exception.
One of the obstacles that prevents people from being successful investors is that buying stocks tends to lack the tangibility that owning a small business (like a storage unit or cash wash in your community) or real estate can provide for an investor.
When it comes to stocks, it’s an acquired taste to reach the point where you think in terms like these, “Each share of McDonald’s earned $3.67 in 2008, $3.98 in 2009, $4.60 in 2010, $5.27 in 2011, $5.36 in 2012, and $5.55 in 2013, while returning between 47% and 56% of those profits to shareholders in the form of cash dividends over that time frame.” Instead, the initial impulse is to think, “Oh no, the stock fell from the $60s to the $40s in 2008, better sell because this isn’t working.”