When people discuss stock prices for a given business, they often perform their analysis by looking at the highest recent price that a stock achieved and then compare it to the subsequent low. With a business like oil giant Chevron, they might point out that Chevron’s stock price hit a high of $135 per share in 2014 and then fell to $69 in 2015. And then this 48% paper loss is often touted as one of the risks with stocks.
These types of business risks can be dramatically mitigated if you perform a more wide-reaching analysis that gives a more clear-eyed view of the risks associated with business ownership if you incorporate the advantages bestowed by dividends and general business growth that occur over time.
With a business like Chevron, you can modify the question by saying: “Okay, what happened if I owned the stock at the highest possible point five years before the price decline, accumulated dividends, and then weighed the effects of the lowest price point five years later?”
The Chevron stock price and dividend analysis would look like this: Five years prior to the 2015 share price decline, the San Roman-headquartered firm hit a high price of $92 per share in 2010. The company shared a large chunk of its profits with shareholders over the intervening five years, raising the annual dividend from $2.84 in 2010 to $4.28 in 2015. This resulted in a cumulative total of $21.83 in dividend payments.
In 2015, the Chevron shareholder saw the stock decline from that $92 high point in 2010 to a low of $69 per share. With $21.83 in dividends, though, you would be up to $90.83. Basically, you broke even over a five-year time frame if you are comparing the absolute highest price point to the absolute lowest price point and counting the effect of dividends.
This is an important lesson for people who have a history of panic selling or losing their conviction in response to the latest market gyration that brings down the paper value of something that you own. Most of the fear is the result of comparing the highs that a stock experiences to the lows that result over a one to two year time frame, exclusive of the effect of dividends.
But those figures do not give you an accurate snapshot of what happens if you stick around for years, giving the e to pile up and offset the effect of a falling stock price.
Since 2000, each share of Chevron has gone on to produce $59.88 in total dividends. Almost sixty bucks! The price of the stock at the time was $42. For a long-term income investor, it doesn’t get much better than that. If you purchased 1,000 shares for $42,000, you would have collected $59,880 in dividend income just by passively receiving the benefits that flowed from the sale and refinement of oil, natural gas, and chemicals.
All you had to do was come up with the initial investment amount. No matter how much you set aside in Chevron stock back in 2000, you would know that each dollar that you came up with to invest would have ended up producing $1.42 in total cash on behalf of you and your family.
That is one of the absolute best blue-chip income investments that you could have made. If you were in a position to reinvest, your 1,000 share position would have ballooned to 1,674 shares paying out $4.32 each for annual income of $7,231.68.
But here is the kicker. Only 7.5% of Chevron’s current shareholders held the stock back in 2000. The business is just so dang volatile. There have been at least three separate instances in the past seventeen years in which the price of Chevron stock fell by at least 30%. Here, you had a business that followed Charlie Munger’s proverb about “drowning you in cash”, and yet, hardly anyone stuck with it for the long haul.
My advice for getting yourself into that 7.5% is three-fold.
First, as mentioned previously, you should analyze the business broadly over time, taking into account Chevron’s stock price from peak to trough with the inclusion of dividends. The “worst case” scenarios over a five-year period are not nearly as scary as the one to two year period situations that are often discussed.
Second, you should always maintain cash available to take advantage of opportunities as they become available. If someone invested $10,000 into Chevron in 2010, and then saw it falling dramatically to the $70-$85 range in 2015, the character of your investment can be dramatically improved by investing an additional $5,000, $10,000, or even $15,000 into the oil business while the stock price is down. The ability to have cash available to invest during market downturns is the difference between having a recessionary stock environment be “something that happens to you” and instead become “something you can take advantage of.”
Third, you should remain diversified such that one given egg in a basket never becomes the object of intense scrutiny and fixation in a way that leads to emotional decision-making. If Chevron represents 35% of your wealth, of course that decline down to $69 is going to have some type of effect upon you unless you possess extreme rationality and understanding of the fundamental business.
But if Chevron is one of dozens of investments in your name, and represents less than you 5% of your cumulative wealth, you can shrug off the fluctuation because you might own something like Nike, Visa, or 3M that is performing excellently while you wait for Chevron to perform better.
And, in fact, some companies thrive on lower oil prices, and you can arrange your portfolio to be “all-weather” by acquiring ownership in businesses that excel in different conditions (e.g. if you own shares in the sunscreen and the umbrella company, there aren’t too many weather patterns that will prevent you from selling something to someone at some point in time.)
Cash, diversification, and a broad-based perspective. If you want to successfully have ownership interests in cash gushers like Chevron, and you want to structure your life in a manner that reduces the probability of emotional decision-making, then you should focus on those three things to make sure that volatility is your friend and that the short-term fluctuations in the stock prices of business likes Chevron don’t put you in the category of the 92.5% of investors that don’t build the business inter-generationally.
Originally posted 2017-07-02 06:00:43.