The Twin Pillar Stocks of Dividend Investing

Between 2011 and 2015, Procter & Gamble raised its dividend from $1.97 per share to $2.65 per share. During these four years, each share of P&G that got purchased at $60 in 2011 paid out $11.50 in cumulative dividends if you forward count the September and December payments. At an average reinvestment price of $68.23 over the past four years, and assuming the final two payments get reinvested at the current market prices, an investor would have created 0.168 shares of Procter & Gamble over the past four years just by making a singular decision in 2011 and checking off the reinvest box.

I mention this because the past four years have been nothing great for Procter & Gamble. In fact, you could argue that it has been one of the worst relative stretches in the company’s history because it has only grown revenues by 2.5% annually over the past four years and had to dedicate some cash to building the brand back up rather than sending that money back out the door for dividends and buybacks (during Lafley’s first reign, the company underinvested into bottle quality, increased the water concentration in some cleaning supplies, and engaged in other product devaluations that started to show up in trade publications that reported market share gains by Kimberly-Clark, Colgate-Palmolive, and Reckitt-Benckiser).

But look at what happened during this “rough” period: Every share went from collecting $1.97 to $2.65, and the share count simultaneously increased from 100 to 116.8 with dividend reinvestment. The annual income grew from $197 for every 100 shares to $309 because the 100 shares picked up 16.8 friends. We are talking 56.8% total income growth since 2011.

Johnson & Johnson tells a similar story over the past four years. The $2.25 dividend in 2011 now sits at $3 per share. By the end of the year, Johnson & Johnson investors will have collected $12.92 in dividends that got reinvested at an average price of $82.43 per share. The net result is that each share of J&J picked up 0.156 additional shares from dividend reinvestment. Someone with 100 shares in 2011 would have grown $225 in initial annual income into 115.6 shares collecting $346 in annual income. The cumulative growth over the past four years has been 53.7%.

I mention this because some people put up mental blocks when they hear the same high-quality stocks repeated over and over again on every site. Everyone who has read ten or more investment articles has encountered these names. Everyone is familiar with the dividend histories going back 100+ with annual dividend raises for over the past fifty. This is my way of saying don’t forget about the basics.

Some people think that the rapid rise of the American multinational company in the years after WWII as Japan and Europe rebuilt provided a one-time bonus that came with an expiration date that has either fast approached or is rapidly approaching. It’s easy to talk yourself into selling great assets.

What people tend to miss is that: (1) these companies retain at least a third of their profits to invest in future growth, (2) they generate just as much wealth from dividends and share buybacks as overall profit growth. People think, “Oh, Procter & Gamble is a $200 billion company. No way it could be worth a trillion dollars.” That kind of logic ignores the portion of the total return that comes from the 3.3% yield that gets reinvested, and the other component of the total return that is the result of buybacks reducing the 2.7 billion shares outstanding. It is not just the market cap expanding that matters, but the number of claimants on the profits as well, and (3) inflation plus acquisitions constantly force us to re-evaluate our idea of big. Telling someone in the 1950s that Procter & Gamble would one day have two dozen brands selling $1 billion per year would have seemed absurd. It’s the “Back in my day, cheeseburgers cost a nickel” phenomenon. That story will continue to play out, and there will be a few dozen trillion-dollar companies twenty years from now.

This is also an important reminder on why I regard hold and buy as distinctly different things. I do not subscribe to the “If I shouldn’t buy it right now, why should I own it?” mindset that advocates higher portfolio churn resulting in sales fees and taxes. Just because Procter & Gamble traded at $94 last year doesn’t mean it was wise to sell it then. It’s on pace to make $6 per share in 2019, and will probably trade at $125 if it is rationally valued then. Plus, you will collect the dividends. If you sell, you pay the fees and reduce your capital pool and create a lifestyle where you never experience seeds growing 50% or more in a four year period.

I’ve mentioned before that ExxonMobil would be my preferred stock for DRIP investing because it regularly gets undervalued while growing its dividends so you typically get many opportunities to buy “free” shares of stock through dividend reinvestment that enhances the compounding process above what you’d deserve from positive changes in the business fundamentals alone. When you buy Procter & Gamble and Johnson & Johnson, you don’t get that benefit.

But still, I think they are a close second and third, and I doubt anyone would regret systematically buying shares of each company through a DRIP each month and reinvesting the dividend for twenty-five years. The results from $200 per month into each would be staggering. Even during a four year period when neither company appeared to be doing anything impressive compared to its usual history, the income  grew over 50% cumulatively for each company. It still surprises me how lucrative it can be to do the obvious.