Delayed Gratification Investing: A Nestle Stock Spotlight

If I had to choose the lowest-risk investment that is available in the publicly traded markets, I would choose Nestle. When I say lowest risk, I do not mean that owning Nestle stock will experience the lowest amount of fluctuations in its stock price over the long haul, but rather, the stock whose operating subsidiaries have the greatest chance of still existing fifty, sixty, even a hundred years from now.

“Nestle” is the answer to the question: “What stock should I purchase that I want to take care of me in retirement and provide for my children and grandchildren in the decades thereafter?”

I was thinking about Nestle yesterday when I saw that it paid out $2.4164 on every share of Nestle owned, for a 3.1% dividend yield at the current price that is hovering between the $76 and $77 range.

When I first started covering dividend stocks for Seeking Alpha, the most common criticism that I received was that of the necessity to delay gratification in executing an income investing strategy. In the case of Nestle, which has compounded at a rate of 12% including dividends but assuming no dividend reinvestment since Citigroup began sponsoring the ADRs in 1989, it would have taken an investor that bought $10,000 worth of Nestle stock back in 1989 almost thirty years to be collecting $10,000 in annual dividend payments–i.e. The purchase of $10,000 of NSRGY in 1989 would be worth around $320,000 and would have paid out a dividend for $10,100.

The delayed gratification on that decision would have been substantial–most people don’t want to wait three decades before they reap what they sow. The ability to enjoy the fruits of labor at 40 is better than 50, at 50 is better than 60, at 60 is better than 70, and you get it.

My initial view is that the disadvantage of delayed gratification has to be viewed alongside a certainty spectrum. Investments that can deliver returns from 1x to 10x in a few years probably have an outsized chance of going from 1x to 0x. While Nestle may take two or three decades to go from 1x to 10x, the certainty of forward movement is unmatched against nearly all peers in the publicly traded markets.

I couldn’t name any companies more likely to survive than Nestle, and it’s an essentially non-existent list (maybe Coca-Cola, Johnson & Johnson, ExxonMobil, Procter & Gamble, and Berkshire Hathaway among American firms) of companies that are just as likely to slog forward over time.

The terms upon which Nestle builds wealth is that it moves slower than maybe some would like, but the certainty of the forward movement is as close to a guarantee as you can find in the real world. If you buy 100 shares of Nestle and leave it alone for 30 years, there is going to be something substantial waiting for you at the end of the journey. In today’s ultra-competitive, it is relief to still find investments that can be inventoried and left alone without further thought.

My other view on the delayed gratification is that no individual investment is supposed to be responsible for the entirety of someone’s investment returns. Nestle is one business that has turned $10k in $320k over 29 years. Make 9 similar investments over the course of a lifetime, and you have built a $3 million portfolio.

A successful lifetime of investing could be described as: “Make 10 different $10,000 investments before age 45 that are correctly identified as dominant enterprises.”

What I have always liked about dividend stocks is that you can pick and choose whether or not you want to receive as cash your dividend payment. Maybe you reinvest your Nestle shares for 9 years, look at the $47,000 you have piled up, and then starting collecting the $1,200 in annual dividends to support your lifestyle or fund other investing endeavors.

The seemingly paltry 3% dividend of Nestle grows into a feastful harvest over time. Nestle is a chocolate, tea, coffee, dog food, makeup, and ice cream empire. Its economies of scale are so dominant that it could, if it wanted to squeeze suppliers like 3G does, instantly lowers its cost structure by 800 basis points.That has no peer among large-caps food companies. My guess is that, for those who reinvest those 3% dividend payments, they will soon collect $1,000 in dividends for every $100 they collect now within fifteen years. It seems like Nestle just sits there and does nothing, but if you give it 5-10 of patience and either quiet accumulation or dividend reinvestment, the end result tends to be magnificent especially in light of the extraordinarily low risk.

This is a publicly available version of an article shared with The Conservative Income Investor’s Patreon followers on May 26, 2018.

Originally posted 2018-12-12 01:20:19.

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