In this Sunday edition of the Digest, we pick back up with our series from CEO Brian Hunt.
In today’s essay, Brian reveals a powerful way of identifying stocks that are worthy of your money — think of it as a “cheat sheet” for investing. After all, if you’re like a lot of people, you don’t have the time to spend hours going over financial statements as you vet a potential investment.
The good news is there’s a shortcut around doing all that work. It involves looking for one specific trait that’s common to great long-term stocks.
The Shortcut for Finding the World’s Best Businesses Think of a stock’s dividend history as a “cheat sheet” for assessing whether it’s worth your money
By Brian Hunt, InvestorPlace CEO
You can spend a lot of time searching for stocks to buy.
You can study for hours and learn how to analyze stock charts and corporate balance sheets. You can spend hours going over financial statements.
But if you’re like a lot of people, you don’t have the interest or the time. You’ve got a job and a family, and they keep you busy.
The good news is there’s a shortcut around doing all that work.
You can simply look for businesses that have increased their dividends for at least 10 years in a row.
Remember, dividends are cash payments distributed to a company’s shareholders. Only businesses with durable competitive advantages can pay increasing dividends for more than a decade (on top of all their other financial obligations).
Out of the more than 5,000 publicly traded businesses, less than 5% of them meet this high standard of quality.
These businesses are the beachfront real estate of the stock market.
Some legendarily profitable and stable members of the “dividend raiser” club include:
• Johnson & Johnson (NYSE:JNJ)
• McDonald’s (NYSE:MCD)
• Automatic Data Processing (NASDAQ:ADP)
• IBM (NYSE:IBM)
• PepsiCo (NASDAQ:PEP)
• 3M (NYSE:MMM)
• Wal-Mart (NYSE:WMT)
• Procter & Gamble (NYSE:PG)
• Coca-Cola (NYSE:KO)
• Chevron (NYSE:CVX)
• ExxonMobil (NYSE:XOM)
The longer the string of consecutive dividend increases, the more impressive it is. Only truly fantastic businesses with durable competitive advantages can increase their dividends for 20, 30, or even 40 consecutive years.
As of 2019, discount retailer Walmart has increased its dividend payment every year for 44 years. Oil giant ExxonMobil has increased its dividend payment every year for 36 years. Soft-drink giant Coca-Cola has increased its dividend payment every year for 56 years.
These businesses paid and increased their dividends through recessions, government shutdowns, wars and real estate busts. They paid their dividends during the dot.com bust. They paid their dividends during the 2008-2009 financial crisis — the ultimate dividend “stress test.”
In terms of consistency, these firms rank just behind the rising sun.
Companies with more than 10 or 20 years of consecutive dividend increases are the strongest, safest companies in the world. Many of these firms sell “basic” products like medicine, soda, food, candy, cigarettes, toothpaste and deodorant.
Ordinary companies can’t raise their dividends for 10 or 20 consecutive years. In fact, they probably won’t even exist that long. This is because their business models are shaky, unpredictable and vulnerable to competition.
The average investor will spend lots of time chasing hot tips from brokers, coworkers and relatives. He’ll chase “get rich quick” schemes. He’ll try to pick stocks based on chart patterns. He’ll stay up at night worrying about the risky stocks he owns.
It’s bizarre behavior when you realize there is a group of elite, dividend-paying businesses available to him. He’s choosing SPAM over filet mignon.
Instead of owning risky stocks, I like the predictability of owning robust, reliable businesses like McDonald’s and Coca-Cola.
I can’t pick the next hit website, the next miracle drug, or the next retail fad — but I know it’s very, very likely that folks will keep eating burgers, drinking soda, and brushing their teeth.
Again, you can spend lots of time learning how to analyze business … you can spend a lot of time searching for them. Or, you can simply “weed out” over 99% of stocks by focusing on companies with long strings of consecutive dividend increases.
Several of these lists are compiled each year. One is called “Dividend Achievers.” It’s the list compiled by Nasdaq of companies that have increased their dividends for at least 10 consecutive years. As of 2019, there were 264 members of this list.
Another list is called “Dividend Aristocrats.” It’s the list of S&P 500 companies that have increased their dividends for 25 consecutive years. As of 2019, there are only 57 members of this list.
You can think of these lists as “cheat sheets” for finding the world’s best businesses.
You work hard for your money. Don’t abuse it by investing in low-quality businesses.
Instead of buying unproven business based on whims, chart patterns, and hot tips, demand quality from the businesses you buy.
One of the greatest indicators of business quality is at least 10 years of consecutive dividend increases. This is the blue ribbon worn by the best public businesses.
Over at Profitable Investing, my friend Neil George has done more “due diligence” on this than the folks at Nasdaq or S&P Dow Jones.
