When I first started writing finance articles, I noticed that my author peers would often include income investing rules like “I only consider a security if it is yielding at least 3%.” That is a rule that has some rationality if you are near retirement or have some plans to collect the cash produced by your investments and do something with it in the near term. But still, I had some type of intuition that this rule was suboptimal, as I noticed that many of the firms with the highest earnings and dividend growth rates tended to have market prices that would only give you an initial yield of 1% or 2%.
In February 2000, Consolidated Edison (ED) traded at $26 per share. If I told you that per share revenues would only grow by 2.5% over the next fifteen years, and over 70 million new shares of stock would be created through executive options and additional stock issuances to avoid piling on more debt to the balance sheet, would you be interested in buying the stock? At the time, the stock was making $2.74 per share and trading at a valuation of 12x earnings.
I would guess that the stock price might expand its P/E ratio a bit, and the utility dividend would be nice, but I’d ultimately pass on the opportunity on the theory that 2.5% revenue growth over the long term just doesn’t seem like the path to building sizable wealth.