Part of the appeal of investing is that delayed gratification is often rewarded. This is because most large profitable businesses have retained earnings, and with those retained earnings, they are able to invest for the future and deliver ever-higher profits into the future. In some sense, the stock market is a transfer mechanism in which those with impatience and oscillating emotions sell low, and then unknowingly and inadvertently redirect their wealth to those who maintain this multigenerational view of markets.
Here is a reader question I received from Ken B., and since my reply went over 1,000+ words, I figured I would turn it into a mailbag question since it covers generally applicable ground that could be relevant for most people contemplating a dividend strategy:
I have been reading your articles on seekingalpha.com for a while now. They are truly enlightening when it comes to DGI. In most of your articles, you refer to ‘assuming an optimal tax strategy’. Wanted to get clarification on this. Does it mean that you assume investing in dividend growth stocks inside a tax sheltered plan (401k, IRA, Roth)? Also, would you suggest DGI in a taxable brokerage account? (with a 15% hit every year on qualified dividends). Wanted to get your insights on that. Thanks much.
Originally posted 2013-06-05 00:54:36.
Back in 2003, Microsoft stock traded in the $20s. And guess what happened? It continued to do so every year for the next decade that followed. Between 2003 and 2013, there was at least one trading day in each year in which the software giant traded in that price range. During this 2003-2013 stretch, Microsoft’s earnings grew incredibly from $0.97 to $2.65 per share. The profits quadrupled!
As Seth Klarman once said in Margin of Safety:
“Investors are sometimes their own worst enemies. When prices are generally rising, for example, greed leads investors to speculate, to make substantial, high-risk bets based upon optimistic predictions, and to focus on return while ignoring risk. At the other end of the emotional spectrum, when prices are generally falling, fear of loss causes investors to focus solely on the possibility of continued price declines to the exclusion of investment fundamentals. Regardless of the market environment, many investors seek a formula for success. The unfortunate reality is that investment success cannot be captured in a mathematical equation or a computer program.”