Dividend Growth Investing Right Now In 2014

In August 2011, I wrote my first financial piece online. Even though I’ve been at it for three years, that has not been enough time to cover a full business cycle. Really, since 2009, the stock market and the economy has been moving in the same direction: up.

That leads to all sorts of distorted impressions, complicated by the fact that the constant updates about stocks (which we can sell at a click of a button!) that make it easy for us to rent company ownership positions on a yearly, monthly, or even weekly/daily basis without actually applying anything resembling a long-term framework.

For instance, I recently wrote something about The Craft Brew Alliance, which was trading at $11.06 last week when I wrote an article about it on Seeking Alpha. I pointed out some things I liked about the company: it was charging high premiums for its craft beer that was actually selling well to beer-drinkers, and it had special arrangements with Anheuser-Busch’s independent distributors that allowed it to have years of growth in the 15-20% range and carried an unusually small debt load because of this arrangement (which facilitates growth because you’re not earmarking money for interest payments and also makes the company an attractive takeover candidate for a larger brewer).

Anyway, shortly thereafter, Craft Brew reported unusually strong earnings and the price has spiked from $11.06 to $12.53 in the week since I wrote about it, for a 13.29% gain. Some readers wrote to say that they bought the stock because I wrote an article about it, and they wanted to thank me for it.

That. Shit. Terrifies. Me.

When I write an article about any company, the endgame is not for you to necessarily buy that stock. I write for information gathering purposes, in a “hey, have you looked at this? Are you seeing what I’m seeing?” sort of way. I do not possess, nor will I ever possess, any kind of mystical power where I can predict short-term earnings results or price predictions for a particular stock. All I can do is pick up general investing principles from people like Warren Buffett, Donald Yacktman, Benjamin Graham, John Neff, John Bogle, Charlie Munger, and Seth Klarman, and then look at numbers and make common-sense inferences when it seems that those principles are applicable to specific companies at specific prices in real-time.

I had no idea that Craft Brew would report a good quarter, and someone who bought for the short-term based on that article I wrote is setting himself up to get hurt. Why? Because it was complete, random luck. It’s an advancing economy; posting good earnings figures is sort of what companies do at this point in the business cycle. There was no skill on my part being applied, and the positive results were the result of luck, not skill.

Sure, there are companies where price appreciation seems warranted—if things are fairly valued ten years from now, BP, McDonald’s, IBM, and Bank of America should all be trading higher due to growth and a higher premium that investors are willing to pay for the stock, but whether the bulk of that happens in 2015, 2015, 2016, or 2017 is something that will be the result of luck and not have anything to do with skill on my part.

When someone says they read something I wrote about Johnson & Johnson when it was trading at $65 per share and are now happy to see it trading at $100 per share, it somewhat misses the point. Yeah, it’s nice to pick up on the fact that high-quality companies don’t drop dead in good times and generally post their highest rates of earnings growth and dividend growth in relatively prospering economies, but the appeal of Johnson & Johnson is that there are dozens of billion-dollar brands pumping out regular cash profits in the highest-quality way and have been raising the cash payout for over five decades.

You don’t own Johnson & Johnson because it might go from $100 to $100. You own it because economies don’t go up year after year, and it’s nice to figure out a plan for what to do in the bad years if you don’t have a crystal ball that magically sells stocks before market declines. The best thing I’ve found is excellent companies that keep profits relatively stable in bad times, and have a managed payout ratio so you actually get sent more cash in years like 2009 so that you’re not freaking out seeing your net worth fall from $400,000 to $275,000 because your monthly cash flow is increasing from $1,167 to $1,248.

And considering that investing is often a dual activity when you’ve got to have two partners working towards the same goal (even if one of the spouses is much more interested in the process), it’s a lot easier to explain dividend growth investing than other strategies when you’re talking to someone who is only casually interested in investing. You point out: “Coca-Cola pays $1.22 this year for every share we can get in our name. That amount has increased for over fifty straight years. When the price comes down a bit, look what happens: those dividend checks keep coming.”

Dividends reinforce the point that you’re the part owner of an actual business, and when you make that fundamental connection, you’ll be able to keep your head screwed on straight when ISIS (or whatever the international ne’er-do-well element happens to be) causes some tragic mischief that instantly sends your net worth down 10% or 20%, as has historically been known to happen.

The kind of investing strategies that I write about aren’t meant to give you smooth 10% increases in net worth and earnings growth every single year. The business cycle doesn’t work that way, and the prices that people pay for stocks certainly don’t work that way. I’m not trying to answer the question, “How can I invest in a way that nothing will ever go wrong?” Instead, I’m trying to answer the question, “If a whole lot of things did go wrong, what would still be standing? Where do the profits come from during the darkest days America may know during my lifetime?”

That inquiry leads me to weird places—water utilities like York Water which managed to mail out dividend checks during the Civil War so that even when Robert E. Lee and his band of Rebels cruised through your backyard, you could still walk to your mailbox and collect twenty dividend checks in total throughout 1861, 1862, 1863, 1864, and 1865.

The reason why I point out the wisdom of stuffing your portfolio with the likes of Coca-Cola, Johnson & Johnson, Procter & Gamble, Nestle, ExxonMobil, Chevron, PepsiCo, and Kraft isn’t necessarily for the experience you get in 2014. You attach yourself to those positions for life because they will be giving you cash and still reporting profits when the next recession arrives within the next few years, and that allows you to actually increase your purchasing power while most Americans are wondering whether they can keep the lights on and the mortgage paid.

I don’t write these articles with the purpose of showing you how to turbo-charge wealth in the good times, but rather, to alleviate the stress associated with the bad times. The fact that high-quality dividend stocks have made you a lot of money in the past few years is by no means a repudiation of a dividend growth strategy, but the days of the strategy’s true vindication are yet to come.

Originally posted 2014-08-13 00:40:02.

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5 thoughts on “Dividend Growth Investing Right Now In 2014

  1. Great article Tim. I totally agree with your main point that dividend growth investing is not about creaming capital growth, but is about the $1000 dividend income in year one that becomes $2061 in year ten if you get an average of 7.5% per year increase, AND that the increases keep coming even when the economy is not firing on all cylinders.

  2. Jenkins says:

    Tim, what do you think about the $DGRO ETF?  If it had a higher expense ratio, I wouldn’t give it a second thought, but it’s commission-free at Fidelity and has a small 0.12% expense ratio.

  3. Seviay31 says:

    Tim, I wouldn’t necessarily be terrified if someone compliments you or thanks you for “causing” them to buy something.  Perhaps they mean “thank you for bringing this company to my attention that I wouldn’t have otherwise known about; I researched it and liked what I saw, so I bought it.”  If it helps you sleep better at night, that’s how you should view it.

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