Lately, I’ve been studying the companies that don’t have perfectly linear records of dividend growth, but have a strong tendency to give owners lots of cash for decades on end, especially when adjusted for the amount of money you have to invest (e.g. I’ve been looking at the companies that typically offer an initial yield north of 5% or so and offers a dividend that is generally higher every business cycle compared to the last).
My studies keep bringing me back to BP, because the company is beyond huge (it’s going to generate $14.5 billion in net profit this year, about 50% more than Coca-Cola as a frame of reference), has often served as Britain’s proxy equivalent to Exxon Mobil as the stock that you hold forever as you pass it down from generation to generation, and is one of the fair value stocks left in the market because people are hung up on the oil spill in 2010 even though BP is going to be fine in the long run because even after having to sell off a third of its business, the remains still generate almost $15 billion per year in annual profit.
In 1998, you could have purchased BP stock for $20 per share.
Since then, before and through the oil spill, the dividend scenario would look like this:
$1.45 in ’98.
$1.31 in ’99.
$1.35 in ’00.
$1.43 in ’01.
$1.57 in ’02.
$1.53 in ’03.
$1.66 in ’04.
$2.09 in ’05.
$2.30 in ’06.
$2.54 in ’07.
$3.30 in ’08.
$3.36 in ’09.
$0.84 in ’10.
$1.68 in ’11.
$1.98 in ’12.
$2.19 in ’13.
$2.33 in ’14 (estimated).
Each share purchased in 1998 would have gone on to generate $32.91 in dividend income for shareholders from 1998 through 2014. No, it hasn’t been a Colgate-Palmolive, Coca-Cola, or Johnson & Johnson type of experience where you get the smooth linear dividend increases coming your way each year (as you can see that 1998’s dividend income didn’t get surpassed until 2002, and the current dividend is at about the 2006 levels), but it’s very good at giving you lots of cash over long periods of time as compared to the amount of money that you actually invest.
If you spent $75,000 to purchase 3,750 shares of BP stock at $20 each in 1998, you would have collected $123,412 in dividends over that time frame. You could have used BP stock to build positions of almost $25,000 in each of the other big five oil companies in the world—Exxon, Chevron, Total SA, Royal Dutch Shell, and Conoco. Depending on when you selected Conoco, you would have also gotten spun off shares of Phillips 66 somewhere in there.
Or, I don’t know, you could have reinvested the dividends back into BP and collected another 3,100 shares, so that you would have 6,850 shares pumping out $16,000+ in annual dividend income. You’d be collecting over 20% of your purchase price annually in the form of BP dividends, even though the ride was bumpy along the way.
That’s the part of investing that I find the most interesting. If you mentioned BP as an investment to most people, they’d probably think of the oil spill and think it’s a terrible stock to own. But if you’ve been around awhile and putting the dividends to productive use, you could have either built a super collection of oil assets or you’d be collecting almost a third of the average American household’s annual income from your annual BP dividends alone.
This is why I stress that it’s important to have a cash cow, two, or three somewhere in your portfolio. It doesn’t have to be BP—it could be Realty Income, AT&T, GlaxoSmithKline, or when the price comes down a bit, Royal Dutch Shell. A sizable investment in one of those companies can be life-changing because they constantly give you options to make new brand new investments, build up private cash reserves, or use to make your life more enjoyable.
Originally posted 2014-10-29 08:00:30.