Three Life-Changing Investment Lessons From Conoco Phillips

Over at Seeking Alpha, I wrote an article about what I expected to see from Conoco Phillip’s dividend policy over the next five years. My argument in a nutshell was this: Conoco chose to keep its payout ratio at the $2.64 mark after it spun off Phillips 66 to its shareholders, and this effectively amounted to a dividend hike that took the dividend payout ratio from the 30% range to the 45% range. Going forward, Conoco will either have to: give shareholders lower dividend increases for a bit during the good years so its payout ratio can get to a more manageable level, or freeze the dividend during the next downturn in the price of commodities.

After writing that piece, I got into contact with a long-time owner of Conoco stock, who informed that he bought this dean of the dividend university way back in 1983. Over the past three decades, he has reinvested some dividends, sold some of the stock, bought some more of it, and eventually reached a point where he trimmed the position to 5,000 shares and then decided to spend the dividends for the rest of his life.

I wanted to share this story with you for three reasons:

Number 1. I liked that his life experience with Conoco Phillips represented the hussle-and-bussle of real life, as he bought some of its stock, sold some of it, and had a mixed relationship with reinvesting dividends over the years. A lot of times, financial analysis calculates what happens to $10,000 investments over long periods of time, or what happens if you invest $500 per month in a stock for a long enough period.

There’s nothing wrong with that; it’s a clean way of presenting data so people can get the gist of the point (it would be weird if I wrote articles discussing buying BP stock in 1993 and 1994, selling some of it in 1995, and then selectively reinvesting dividends thereafter). Nevertheless, real life is not a finance article. It doesn’t matter if there is a bit of messiness to putting together the investing side of your life.

Weird crap happens that costs you money unexpectedly, and you acquire more investing knowledge over time that calls for you to modify your strategy, and this will lead to an investing that doesn’t look like something out of a textbook. So what? The point is that, if inflation is running at 3-4% and you want to increase your purchasing power over time, you are buying assets that actually have a high probability of doing that. Conoco is one of those companies that gets missions accomplished, because the management team has 9 billion barrels of oil equivalents in reserves, of which Conoco groups production at 3-5% annually and can get earnings up at a 8-12% rate depending on what kind of changes we get from commodity prices.

When I asked him how much he spent accumulating his shares, he guessed he spent somewhere around $10,000-$15,000 in total. Today, those dividends 5,000 shares could be sold for $418,000 or so, but that’s not what is important here. The capital gains tax bite on actually selling would take a good bite out of the apple, and it’s clear that the point isn’t to sell. If he did sell, he’d either have cash to deplete or he’d be looking for something else that generates income: basically, he’d be looking to put it somewhere like Conoco.

What you ought to get excited about is that those shares generate a little bit over $1,100 per month. The reward of patience is that the amount of money he set aside to invest in Conoco and diligently wait now roughly equals the cash profits he is receiving from the company ever year. There’s a reason why you don’t see too many “former” dividend investors; once you’ve been at it a decade, you start achieving a cash flow that can’t be achieved as easily and predictably as you could anywhere else.

Number 2. All it takes is one successful investment to help you get past “mistake-itis.” The fear of loss of money is what discourages people from taking their hard-earned cash and putting it in the capital markets. I think that investment mistakes need to be accepted in the way that sales taxes are accepted. If you’re going out to eat, you don’t say, “I’m not going to eat that burger because the $9.99 menu price is really $10.83 after sales taxes.”

No, we accept it as part of the experience and make our peace with it, because in our minds we are implicitly doing the calculation that burger plus sales taxes is better than no burger and no sales taxes. Someone could sit on the couch all day petting their cat and counting their hundred-dollar bills, and seemingly, no financial mistakes would be made. In reality, you’d be racking up mistake of omission after mistake of omission after mistake of omission. At some point, you start to recognize that accomplishing some successes that are accompanied by “sales tax” failures are better than accomplishing no successes and paying no “failure” taxes.

In Math terms, the successes of risk taking + a certain percentage of failure > no risk taking + no failure.

This guy could’ve said, “Screw it, investing is hard, the stock market is a casino, and I could lost money.” And maybe that money would’ve gone in a certificate of deposit yielding 5% over the 90s. He could have made eight $10,000 investments that went completely bankrupt, and the story still would have been a success: instead of turning a $10,000 capital pool into over $400,000, it would have been a $90,000-$95,000 in capital that got turned into $400,000+. Given enough time, it only takes one stock of blue-chip caliber to change your life.

Number 3. Behavioral psychology is huge when it comes to dividend investing stocks. When I asked him why he had to sell some Conoco shares (and I prefaced my question by noting it was a personal question and he was perfectly free to tell me to go take a flying leap and I wouldn’t be offended), he said that he had already sold everything else and Conoco was all that he had left to help him out when he had a tuition and mortgage payment due simultaneously that left things tight.

There is a reason why decently high-yielding dividend stocks that are growing their payouts over the long haul are the last stocks to discard in a portfolio. If you have a cash flow dilemma, you’re not going to get rid of your investments that are doing the best job to resolve that dilemma by giving you more and more cash to help you out. When you need cash, you’re going to be reluctant to get rid of the machines that generate cash.

This is why I chose dividend growth investing to be the area of finance where I would focus my energy. Index funds didn’t do it for me because the starting yields were so low, and it would be possible to individually select companies that are growing their dividends faster than the S&P 500 in aggregate (nothing in life is guaranteed, but Disney, Becton Dickinson, and Colgate-Pamolive have about a 90% chance of combing to have a better dividend growth rate than the S&P 500 as a whole over the next ten years in my estimation).

And the craziest thing of all is that these insights are accessible to people of all levels of intelligence. Whether you are an excellent hedge fund manager or someone that hated school and only uses books as doorstops, you are capable of figuring out that Conoco is going to be around twenty years from now pumping out profits. You don’t need my site, you don’t need to buy my Ebook, and you don’t need to read my Seeking Alpha writings to figure that out. It’s all internal. Every single one of you reading this has the talent to identify the truly superior long-term investments, so that the only question becomes, “What are you doing today, right now, to buy a permanent stake in one of them over the next few months?”

Originally posted 2014-06-17 02:07:54.

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