[first part redacted]…Tim, why does it matter whether some stocks are perpetually overvalued or undervalued? You talked before about home some stocks like Altria are always cheap, and others like Hershey are always expensive. But if that condition persists for years and years (decades?) then why does it matter? Doesn’t it all work out the same in the end? [rest of conversation redacted] –William
Hi William. That’s a wise question. You’re right to point out that, if a stock price does not change its valuation (that is to say, it always trades at 15x profits, or always trades at 30x profits), then it seemingly takes away your opportunity to benefit from “buying low” … Read the rest of this article!
One of the things that makes investing so interesting is that there is a tension between the abstract principles that value investors advocate compared to their actual ability to execute on the strategy.
Take something like this: Most people agree with the notion that they like to buy stocks on sale. As a general rule, though, absent 1973 or 2009 type of market conditions, the types of stocks that are on sale tend to have something going wrong with them at the time—as I’ve discussed with previously, companies like Brown-Forman, Hershey, and Colgate-Palmolive are swimming along, and that’s why their stocks aren’t on sale.
On the other hand, when people encounter companies with … Read the rest of this article!
Even though income investing is the dominant theme of this site—it’s on the masthead, after all—there are times when it can be wise to look beyond dividend stocks, particularly if the company whose purchase is contemplated: (1) is achieving high internal rates of return, (2) is trading at a reasonable valuation, and/or (3) gives you something special that you can’t otherwise get through dividend stocks alone.
In the case of Berkshire Hathaway, the story has always been that Warren Buffett is the capital allocator, and that proved to be the reason why you’d see dividend investors have a stock portfolio of all the usual suspects, oh, and Berkshire Hathaway in an account somewhere.… Read the rest of this article!
Let us, for instance, look at what happens when you reach the conclusion that Procter & Gamble would be an excellent stock to carry with you throughout life, and you only get a chance to make a $5,000 investment in 1970, and to combat the temptation to needlessly accumulate wealth, you decide to collect the dividends along the way.
How does that story play out? Well, the initial $5,000 in 1970 would be immediately paying out $155 in immediate income. By 1980, things were starting to move along, as your $5k investment doubled into $10.1k that was now paying out $325 in dividends. That’s a steady advancement, but not to the point of … Read the rest of this article!
It’s weird living in a world where the stock demands 30x earnings for a share of Brown Forman to give you a 1.3% dividend yield while shares of McDonald’s trade at 17x profits and give you a starting dividend yield of nearly 3.5%. For comparison purposes, 2009 was the only year in McDonald’s history when the stock averaged yielding above 3.5% for the entirety of the year.
What’s the cause? From 2011 through 2013, the input costs for food ingredients at McDonald’s rose, and the company largely absorbed the cost to accept lower profit margins on its food items but hoped to make it up through higher volume and the continued opening of … Read the rest of this article!