It only happens three or four times in your life, making it a Haley’s Comet sort of thing, but you do receive the once in a generation opportunity to both (1) buy a high-quality company and (2) do so at a period when the company is severely, deeply, truly on sale. Although the opportunities when you get to take advantage of both conditions simultaneously are rare, the good news this: the happy consequences of taking advantage of such an opportunity can last a lifetime.
One such reader, Kevin, wrote in to me and shares his story with taking advantage of General Electric, and gave me permission to share his story as long as I kept the details loose. It was in 2009, and General Electric had cut its legendary dividend from $0.31 to $0.10 per share. But Kevin had an important insight—even in 2009, General Electric made $11.4 billion in net profit. No one talks about that; the focus is always on the collapse of GE Capital, the dividend cut from $0.31 to $0.10 per share, and the collapsing share price from $38.50 per share in 2008 to $5.70 per share in 2009. For retirees, those results were terrible—a violation of General Electric’s informal covenant with mom and pop American investors as the bluest of the blue chips dating back to the 1890s. But for long-term investors with a value bent, it was a once in a lifetime opportunity to ready, aim, fire. Kevin struck, and purchased 2,000 shares of General Electric at the very depressed price of $12.30 per share.
At the time he made his decision in 2009, General Electric was paying out $0.10 per share for a dividend total of $200 getting sent his way every ninety days. Very nice, but the story was just beginning.
The beat was just getting started. First, he collected $0.46 per share in total dividends (2010), $0.61 per share in total dividends (2011), $0.70 per share in total dividends (2012), and then $0.79 per share in total dividends (2013). Over the course of 2014, he should collect $0.88 in total GE dividends.
Someone who looks at Kevin’s $24,600 investment might just think, “Okay, cool, you doubled your money or so in about five years. Well done.” First of all, it’s a little bit more than that. Not only did he benefit from a share price shift from $12.30 to somewhere around the $26-$27 mark, but he also benefited from $3.44 in total cash dividends that got paid out from 2010 through the end of 2014. That’s $6,880 in total dividend payouts, which compared to the $24,600 invested, is a little like getting 28% of your money back. If GE were to repeat its financial crisis experience (something I find unlikely given it discarded its nasty real estate loans, bolstered its Tier 1 Capital Ratio by about 80%, and is preparing to spin off Synchrony Financial in the next year or so), Kevin wouldn’t be nearly as affected as the headlines would lead you to believe, as he has already extracted a quarter of his total investment back in the form of cash profits returned to him by GE.
But let’s look at things going forward. General Electric is now paying out $0.22 quarterly, and that’s probably going to be growing by at least 8% annually for the next few years as that matches the growth rate of its large industrial businesses. That yield-on-cost figure is already 7.15%, and that is without any dividends getting reinvested, and stands to improve substantially with time. If you figure that the GE dividend will double every seven years, those $1,760 annual checks could turn into $3,520 checks in 2021, and then $7,040 per year in 2028, and then per year in $14,080 in 2035.
And it’s not just a waiting game; right now, in the present moment, he is getting $146 per month to spend as he wishes. Investing is not a game of always doing without. Once you get a nice pool of capital into a well-selected security pumping out dividends, you get to receive a nice little check every ninety days while you are also participating in the wealth-building process at the same time. That’s why this site is here; it’s tremendously important lesson to pick up to make your life easier and free of financial stress if this comes to mean something to you in a deep, very real, and substantial way.
I love reader stories. It’s great to set aside some cash from what you worked hard to earn. It’s great to study an excellent business, and then combine your knowledge with action so that you buy one when the time is right. It’s great to prepare and engage in long-term planning that is achieved through the often forgotten art of delayed gratification.
Contrary to what some people think, the quest for passive income is not about being a lazy bum. It’s about freeing yourself from the notion that the only way to make money is to sell your time in the form of labor so that “some other guy” gets rich. This site exists so that you can be that “some other guy”, or gal, as it may be.
Originally posted 2014-10-06 08:00:49.