Today’s a sad day as I’ve been coming to grips with the fact that I have chosen the wrong topic for my site. I should’ve killed this whole passive income thing and gone into women’s lifestyle blogging.
Are any of you aware of the perks in that field?
Larissa Faw of Forbes Online wrote a piece about what I’m missing out on:
In fact, brand executives and women bloggers say the going rate for a $300 kitchen product is 500 monthly views; an all-expense trip to Hawaii requires at least 20,000 monthly views.
Because I was lucky to have some Seeking Alpha readers follow me over when I launched my site, I could have spent the last year building up a tricked-out kitchen and studying for exams on a Hawaiian beach on the dime of corporate advertisers. Why am I writing about Bed, Bath & Beyond’s stock buyback program when I should be telling you which of their pillows I think look best in the master bedroom.
Oh well, I made my bed (ahem), and I’ll continue to lay in it:
Let’s talk Abbott Laboratories. For much of the second half of the 20th century, it was considered the blue-chip equivalent to Johnson & Johnson in the healthcare industry, except it lacked a consumer products division that would sell things like Johnson’s Baby Lotion, Band-Aids, and Tylenol that made Johnson & Johnson accessible to the average investor in a way that Abbott Labs was not.
Shareholders of Abbott Labs, however, have been reaping 14.79% annual returns since 1983, being one of those magic stocks that turned a $20,000 investment into a $1,475,000 fortune. The company grew at a 12.5% rate over that period.
In other words, someone who bought the stock for $47 in 2003 (the highest price Abbott saw that year) would have been intelligently applying the same principles of conservative dividend investing that lead people to companies like Nestle, Colgate-Palmolive, and Johnson & Johnson.
The earnings growth was there. The dividend record was there. The diversified stream of healthcare products was there. Yet, an interesting thing happened during the 2000s: the price change in Abbott Labs severely lagged the business performance of the company.
A quick overview to describe what I mean: In 2003, Abbott Labs traded at a high of $47.20 per share. In 2011, before announcing the Abbvie stock spinoff, Abbott Labs traded at $47.20 per share. The business performance, however, was much better: the company grew its profits from $2.21 per share to $4.66 per share, and the dividend grew from $0.98 per share to $1.88 per share. Put simply, you had profits doubling and dividends doubling, but the stock price remaining stagnant.
It’s something you need to prepare for, because almost every company I have ever studied has experienced a decade like this—Coca Cola from 1998 onward, Exxon during a good chunk of the 1980s, Johnson & Johnson during the 2000s, and so on.
But this is why I like dividend investing: even during that 2003 through 2011 period when Abbott Labs did nothing in terms of price change, you collected $12.28 in dividends. If gold starts a decade at $1,200 per ounce and finishes the decade at $1,200 per ounce, truly nothing happened; you have made $0 over that time frame. With a productive, profitable business that sends cash your way on an ongoing basis, you have this situation where even though Abbott Labs is trading at $47.20 in 2011, it as is if the price is really $59.48 when you tally up the total benefit generated by you from the investment. The dividend is why investors received 26% total returns over 2003-2011 rather than 0%, judging by the stock price.
Someone who bought Abbott Labs and just collected dividends would have received returns of 2.93% annually. Basically, you got your dividend, and that was it, since the price didn’t change. If, however, you had reinvested your Abbott Labs dividends into more shares of Abbott Labs during that 2003-2011 timeframe (taking advantage of the fact that the business was growing faster than the stock’s price change), you achieved 5.4% annual returns (and then things greatly improved in 2012 during the Abbvie spinoff in which you found yourself owning two separate businesses that rapidly increased in price during the 2012-2014 interim).
No, I’m not arguing that people salivate over 5.4% annual returns at the time they make an investment. Instead, I’m showing the mitigation effects that occur even when things don’t work out as planned. When you bought Abbott Labs in 2003, you probably didn’t think the stock would be trading at the same price years later in 2011. That’s a realistic bad case scenario that came to fruition. Yet, the business performed fine: you got to collect about 3% in annual dividends that you could have spent, and if you allowed your money to quietly reinvest, you got returns slightly better than 5%. It’s in the nature of a cash-generating business; you take your dividend, and automatically purchase a greater stake in the company. Not only do you have new shares, but the dividend goes up the next year as well. This kind of downside protection—the ability to somehow get 5% returns over a nine-year period even the price goes nowhere—is what makes long-term investing so enjoyable.
If you get the company right, everything else eventually takes care of itself, even when an increasing stock price isn’t the reason for the wealth-building (although, in a way it is, because the sustained low price of Abbott Labs let you buy more shares and receive higher subsequent income when you chose to reinvest).
Originally posted 2014-08-14 14:46:31.