Henry Ford famously said: “That which can be measured, can be managed.” When he met with his company’s sales managers approximately a century ago, he told them that he could get the best out of them by telling them to do their best, but rather, he set specific goals that: (1) were few in number so that focus would not stray; (2) were measurable; (3) contained a deadline; (4) were tangible and realistic; and (5) resulted in an award if they were met. Notably, he would offer $500 sales bonuses to any executive who could achieve a monthly sales goal of $10,000, and then he would add an additional $100 bonus for each goal level reached above that.
With investing in publicly traded stocks, it is tricky to set a specific goal because so much is out of your control and the best targets focus as exclusively as they can on factors within the control of the participant. If you try to increase your net worth by X% per year, you will be dwarfed by a down year like 2009. Or, a rising year like we have seen the past decade will make you think you’re doing something when really it is just valuation rises taking you upward.
Likewise, measuring yourself in terms of total dividend income can be erroneous if they focus you to prioritize a business with higher yields and lower growth over a company that offers a better growth profile but lower starting dividend yield.
The only metric you can truly control is your savings rate, and I would argue that real wealth is on the fast-track to creation when a household can invest 20% of its household income into investments each year, with the goal of a minimum of $1,000 set aside for investments throughout one’s investing career. Investing below that figure should not be cause for despair, as even a few hundred dollars invested into Abbott Laboratories sixty years ago resulted in multi-million dollar balances by the end of one’s lifetime, but I do think $1,000 per month is the benchmark for trying to transition from middle class to upper-middle class within a generation of one’s lifetime.
One of my favorite concepts, though it has obvious limitations, is trying to fill your investment portfolio with a collection of a dozen or two businesses that each generate $1,000 per year in dividends.
This type of engineering is possible with a steady business like Coca-Cola. One possible goal for the investor might be, “I want to get my hands on $1,000 per share in dividends from Coca-Cola by 2025.” The nice thing about such a strategy is that, once part of the foundation is laid, dividend growth can work together with the initial shares to get you on track towards the goal.
First, I would figure out where I expect Coca-Cola’s dividend to be in 2025. My guess is that the present $1.60 per share dividend will increase to $2.34 per share by that time. If the goal is to reach $1,000 in KO dividend income by 2025, with an expected payout ratio of $2.34 per share, it will require 427 shares. With prices hovering around $50 per share, it would require approximately $20,000 laid out between now and then to reach the goal, with some modifications for price swings one way or the other. It’s about 6.5 years until the close of 2025. It means you would need to acquire approximately $3,000 per year in Coca-Cola stock between now and then for you to reach the goal of $1,000 dividends by 2025. Execute that strategy twenty times with similarly situated companies, and boom, you’ve got as much financial security as can be found this side of government pensions.
Maybe your starter company is Philip Morris International. Or Chevron. Or Apple. Or maybe you measure yourself by acquiring $1,000 per year in “earnings yield” by acquiring shares of Alphabet or Berkshire Hathaway. Or maybe its a set number of S&P 500 Index shares in your company’s 401(k) plan. Given this strategy’s obvious shortcomings due to overcommitment biases and theoretical scenarios for suboptimality, I would recommend that you tailor it accordingly. I mention it, though, because a theoretically imperfect measurement tool for building wealth is still better than sleepwalking through life with no deliberate plan.
You will get the best out of yourself when your goal is specific, measurable, and has a deadline.