The Fun Thing About Planting Dividend Trees


If I had to make a short list of my favorite things about following a dividend growth investing strategy, one of the spots would be devoted to the fact that even if you hit a tight spot in your life and cannot continue to invest, the companies that you have acquired continue to chug out profits and dividends. In other words, your dividend tree continues to grow even if you stop watering it with fresh cash contributions.

I’ll give an example. Let’s say you find yourself in a situation like this: You have $5,500 to invest in a Roth IRA account this year, but next year, you expect money to be tighter (maybe you are getting a new roof, sending kids to college, etc.) and won’t be able to make any investments. Some people may think that if you have to take investing “pauses” at some point in your life, you are somehow messing up. That is not the case at all. While the continual addition of capital can help the compounding process along nicely, the fact that you stop making new additions still means that the money already invested continues to compound. That is the fun thing about the snowball nature of compounding: even if you stop adding to the size of the snowball on your own, it still continues to get bigger even if you do nothing.

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Originally posted 2013-06-07 09:00:09.

Investing In A Late Stage Bull Market

There is an old Wall Street adage that says a bull market moves in three stages–in the early stage, only a few perceptive individuals or entities are able to pick out glimmers of prosperity in the future. These are the investors who go on to reap the biggest gains. Then, halfway through a bull market, investors are “starting to come around”, and those investors tend to reap moderate gains. And lastly, everyone becomes excited about investing, and those investors tend to reap the fewest gains as most businesses become priced at a point that all but guarantees mediocre returns.

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Secured Bonds Investing: A Warren Buffett Secret

William Wrigley, Jr., the founder of the eponymous gum company that bears his name, is one of the greatest students of efficiency and pragmatism that the business world has ever produced. Wrigley was a young man with the equivalent of $1,000 in his pocket who moved to Chicago to become a soap salesman, and the William Wrigley Soap Company also provided baking powder with the purchase as a gratuity.

Finding that the customers preferred the baking powder to the soap, Wrigley changed his business to the William Wrigley Baking Powder Company and repeated a new iteration of his formula, this time giving two packs of gum as a gratuity to the baking powder purchases. You can guess what happened next. The gum outsold the baking soda! At that point, presumably sick of changing the name, Wrigley began to sell of his gum under the “Wm. Wrigley Jr. Company” umbrella.

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Why I Do Not Own Lorillard

Lorillard is probably the most attractively valued domestic tobacco company stock that investors could buy today. You’ve got a company that is buying back about 15 million shares of stock each year, raising the dividend by a rate around 10%, and the company is using its free cash flow to move into the e-cigarette market. Oh, and the Newport brand, which makes up 87% of the company’s sales, remains remarkably strong. The company trades at a little over 13x earnings, and gives investors a dividend yield over 5%. Any way I run the numbers, it seems that investors should experience total returns of at least 10% annually over the next 5-10 years, and considering that you have a growing 5% yield, it seems reasonable to think that at least half of your total returns will be in the form of cold, hard cash from the dividend.

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Originally posted 2013-06-06 19:34:44.

U.S. Bancorp Stock’s Perpetual Stability

With the tenth anniversary of the financial crisis upon us, I have been thinking about the sneaky way in which the bank fortunes of shareholders can be wiped out in a single turn of the investment cycle because lending institutions are so incredibly leveraged that a sharp uptick in unallocated-for defaults can wipe out decades of equity in a matter of months, if not days.

I took the 2008-2010 financial crisis as an important exhibit of the fact that balance sheets always matter, and eventually, leveraged trash collapses into the heap. On the upside, banks and other institutions with strong balance sheets can provide an often neglected source of real, sustainable wealth because no one pays attention to them during the good times when the relatively more leveraged institutions are prospering and during the bad times chastising the collapsed entities for their lack of prudence makes a better story than commending the diligent for their efforts.

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