A Big Threat To A Long-Term Dividend Investing Strategy

I was just reading over Michael J. Burry’s commencement speech to graduates at UCLA, and I came across this passage in his speech that I’d like to share with you:

“Information swarms us. It comforts us. It disrupts us. It’s an Age of Infinite Distraction, for those so willing. You are the generation that has had instant messaging, Facebook, Twitter, and Angry Birds nagging your fingertips at every moment. It’s been arguably as addictive as any other drug throughout history. And I do imagine it took some terrific willpower during your studies to study.”

If I had to make a short list of the things most likely to mess up the execution of a long-term investing strategy, I would dedicate a slot to what I call “information overload.”

“Information overload” is one of those subtle things that can make it incredibly easy to deviate from a long-term strategy. When Mayor Bloomberg in New York was looking to limit the size of soda containers at certain venues in New York City, I received actual honest-to-god correspondence from some readers wondering if they should consider parting with their Coca-Cola stock.

That is what information overload can do to you. If God handed Moses a tablet with ten financial commandments, one of the slots would say, “Thou shalt not sell thy Coca-Cola stock.”

Here’s the company profile:

(1) The company has 15 brands that generate $1 billion in annual sales. I’d have to review the annual report to find the exact ones, but off the top of my head I know they include Coca-Cola, Diet Coke, Cherry Coke, Sprite, Powerade, Minutemaid, Fanta, Dasani, and Vitaminwater. If you go to Wal-Mart to buy a drink, good luck finding something that is not manufactured by Coca-Cola, PepsiCo, or Dr. Pepper.

(2) The beverage giant has been raising its dividend every year since JFK ordered the Bay of Pigs invasion.

(3) The company generates over $10 billion in annual profit across 207 countries while maintaining a return on equity figure around 30%.

Really? You are considering selling something simply because there is a size restriction on the product in one city in one state which is just one of 207 countries in which the company sells beverage products?

We saw the same thing with Johnson & Johnson over the past couple of years. The stock appeared to be “stuck” in the low $60 range as it issued recall after recall. Some investors got scared, grew impatient, and sold out. But if you took a look at the company’s balance sheet, you would have seen that the company has increased its cash flow per share in each of the past three years: the company posted $5.92 worth of cash per share in 2010, $6.25 in 2011, and $6.48 in 2012. What some people saw as a sign of weakness (constant recalls), I viewed as a sign of strength—even when things were going wrong for Johnson & Johnson, the company kept posting more and more profits. Those are the kinds of companies you want to spend your life accumulating.

Headline risk is a great way to react to short-term noise to mess up a long-term strategy. Every company will have spates of bad news. The best way to monitor what is actually going on is to look at the company’s balance sheets. For Coca-Cola and Johnson & Johnson, the profits keep rolling on despite the headline drama generated by the media to sell newspapers. When you stuff your portfolio with companies that have dozens of billion-dollar brands under their corporate umbrella, you can withstand a lot of abuse and still grow profits. That is the whole point of making them long-term holdings in the first place.


Originally posted 2013-07-17 08:44:31.

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4 thoughts on “A Big Threat To A Long-Term Dividend Investing Strategy

  1. It is important to ignore noise, as a long term investor. However, you also need to avoid having your head stuck in the sand too. It is a delicate balance, and there are no black or white rules of what to do.

    However, you should never be married to a position. KO is great today, but chances are that there might be a big issue 10 years from now, that none of us have thought about today.

    Think asbestos in the 1960s – who would have thought it would be so uncool 20- 30 years later

    1. Tim McAleenan says:

      True true true. The rise of asbestos that eventually bankrupted some construction companies is one of the most important reasons I know for diversification–that truly was an event that blindsided many people, investors included.

      On an unrelated note, I was catching up on my SA reading, and I was surprised you caught so much flak for using a $3,000 monthly investment as an example in one of your recent pieces. I didn't understand all the caterwauling about it being "unrealistic." Whenever I read an article (on finance or any other topic), I take the spirit of the argument and apply it to my own life. If the $3,000 per month is too big, try $300 and see if the premise still holds. If it does, great. If not, move on and find something else.

      I don't like it when readers expect all the information to be spoon-fed to them. It shouldn't require much mental energy to take a figure like $3,000 and divide by 10 to get something more realistic if need be. Too many people have this idea of "the average person" in their heads, and try to relate everything down to that common denominator. While that's usually a good thing because it means a particular point is accessible to everyone, it doesn't hurt to dare for greatness every once in a while, and I personally was thankful for your post.

      1. I actually really like your site, and your ability to write an article every single day.

        As for readers, sometimes they miss the forest for the trees. It was kind of sad however, when so many told me that a young person cannot do anything to increase their income.

        By the way, do you have an email? I would like to be able to correspond privately, if you have the time ( I am not spamming you, I promise)

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