There is a wonderful (now defunct) blog out there called The Conservative Income Investor written by Tim McAleenan Jr. He’s gone subscription based and I’m too much of a cheap ass to pay for that. For no fee, there are a bunch of original and very unpopular anti-YOLO articles going back to 2013 about saving money and investing for wealth generation. His one article about the stealthly wealthy with a quote from Benjamin Franklin:
Remember that money is of the prolific, generating nature. Money can beget money, and its offspring can beget more, and so on. Five shillings turned is six, turned again it is seven and three-pence, and so on till it become an hundred pounds. The more there is of it, the more it produces every turning, so that the profits rise quicker and quicker, he that kills a breeding sow, destroy all her offspring to the thousandth generation. He that murders a crown, destroys all that it might have produced, even scores of pounds.
We spend a lot of times focusing on actual stock prices rather than what the underlying security provides. We fail to see the value in ownership In his one article regarding how dead people have outperformed their living counterparts in a Fidelity study:
Take something like BHP Billiton, one of the jewel companies with focused operations in Australia and South America. This is the premier to own for production of diamonds, oil, copper, zinc, manganese, silver, natural gas, coal, and iron ore. It has delivered 12% annual returns over the past quarter of a century, with a big chunk of those returns coming from the dividend payment.
Yet, over the past year, the price of the stock has come down from the $70s to the $40s. Many people have written about selling the stock. I found that move unwise because it is a classic example of selling low. Even with the price of commodities lower than usual, BHP Billiton is still expected to make $8.9 billion in profits this year. It’s still one of the fifty most profitable companies in the world even right now, and yet, people are getting mad that a cyclical commodities stock is having a cyclical trading pattern.
Instead, people should be taking advantage of the lower share price in the $40s and reinvest the $2.48 annual dividend that gets paid in two installments—you get $1.24 in March, and $1.24 in December. Even if the dividend froze for the next ten years, you would collect $24.80 in cumulative dividend payments from a $45 per share investment (or $43 per share if you are an American investor and choose to purchase the BBL listing.) Even without assuming dividend growth or adding the turbo-charged effect of reinvested dividends, you are still on pace to collect half your initial investment in cash profits from the business alone over the next decade.
Do not forget the stock is not just a thing that generates a one time cash out by speculation. The name of the game is not always buy low and sell high. Constantly buying and selling stocks to make money is sexy, but unsustainable. One bad move and you are holding the bag like me on Twitter. Now imagine owning a stock for many years, or even for a lifetime! Kind of a weird thought in today’s Robinhood world. Each share of a company (if they pay dividends) can generate a sweet check every year (or many times a year). You own part of the company and some companies pay a share of this profit as long as you own the share.
On the subject of holding on to companies forever, he states there is little risk for loss. Right now General Electric is the only original company of the Dow, he explains:
You’ll see people say things like, “Why would anyone buy and hold stocks when General Electric is the only company left in the Dow Jones?” That logic suggests that the other 11 of the original 12 Dow components went bankrupt. It ignores that American Cotton Oil are now Unilever shareholders. It ignores that American Tobacco became Fortune Brands and all the home security and Jim Beam Whiskey spinoffs. It ignores that the Distilling & Cattle Feeding Company was paid a 50% premium when it got bought out by private investors. It ignores that the original Chicago Gas shareholders are now Wisconsin Energy shareholders. It ignores that Laclede Gas may have left the Dow, but it still a profitable utility in Missouri generating 10.5% annual long-term returns with dividends reinvested. It ignores that United States Rubber shareholders became Michelin shareholders. It ignores that National Lead shareholders are now Halliburton shareholders. It ignores that the North American Company now exists as Pacific Gas & Electric stock. It ignores that Tennessee, Coal, and Gas exists today as U.S. Steel stock.
He states that 11 of 12 original Dow companies are still fruitful investments, with only U.S. Leather screwing their investors. The same can be said about the original 500 companies of the S&P 500 which have only a 1.5% chance of bankruptcy like Lehman Brothers or Enron. More intresingly is research done by Wharton finance professor Dr. Jeremy Siegel:
Siegel pointed out that buying the original S&P 500 and holding it forever would give you an extra 1.5% per year over actually owning an S&P 500 index fund that incorporates the new changes because the depressed valuations of companies leaving the S&P 500 provide a value basis for outperformance going forward.
Yes, even the constant rebalancing of the S&P is much for this dude. If you tracked all the jilted members of the S&P 500 ie: If you bought every company that got dumped from the index you would notice on average 82% of these companies continue to outperform the S&P 500! Have these millennial investors consider the possibility of holding on to a company well into their retirement years? Apparently they treat this partnership as very brief and much like their tinder dating they are off to the next hot new IPO offering.
There is a lot of upside to long term ownership and even ETFs that screen for high Dividend Yield. Form the Schwab OneSource list we have SPDR® S&P 500 High Dividend ETF SPYD at a 4.2% dividend over the last 12 months, WisdomTree U.S. Quality Dividend Growth Fund DGRW at 1.9%, Oppenheimer Ultra Dividend Revenue ETF RDIV at 2.9%, and Schwab U.S. Dividend Equity ETF™ SCHD at 2.81%.
Now like we saw with BHP a drop in share price causing some to panic on their income strategy. We have to look at stock ownership in a different light. He describes this in a wealth management article here where he would tell his client on the a portfolio going from $2.5 to $2.3 million:
I would give a best effort to make it clear to a client that the funds are being to acquire business ownership. I would provide spreadsheets mailed monthly that would make this apparent. I would segregate the contributions of the holdings, making it clear that the client is a part-owner in every toothpaste that Colgate sells, every Tylenol that Johnson & Johnson sells, every Cherry Coke sold by Coca-Cola, every dash of paprika sold by McCormick, every chocolate bar sold by Hershey, every razor sold by Gillette, every pint of Ben & Jerry’s ice cream which is owned by Unilever, every gallon of gas sold by ExxonMobil, and every loan created by Wells Fargo.
My spreadsheet would break down the earnings and expected dividends from each security, and it would culminate by saying something like: “Your initial $2,500,000 trust was invested into fifty stocks and fifteen bonds, and these business interests of yours generate $138,800 per year. This month, your business interests earned $11,500 in profits. Your account received $6,250 of these profits this month in the form of cash dividends from these business interests, and is on pace to deliver over $75,000 to your trust account this year in the form of expected dividend payments. You will receive a $50,000 distribution at Christmas and the remaining $25,000 will be reinvested so that a $75,000 distribution will only be a few Christmases away.”
We call that problem framing in the business. Upsell the dividends, downplay the $200,000 in unrealized loss. Good luck out there.