Over the last few Sundays, we’ve been featuring essays from our CEO, Brian Hunt, detailing the power of investing in great businesses that pay solid dividends.
In today’s essay from Brian, we’re going to look at what happens when investors combine time with elite, dividend paying stocks. As Brian tells us, this combination is incredibly powerful, eventually generating massive yields on your original investment. All you have to do is sit back and let time work its magic.
If you tend to worry about your investments, this is a great strategy for more peace and better returns.
By the way, if you’ve missed Brian’s prior essays on dividends, or want to read ahead, you can always visit our InvestorPlace Education Center to access all these classic essays.
Enjoy.
Jeff Remsburg
Why Owners of Elite Dividend-Paying Businesses Don’t Worry About “The Market” When you know how to put time on your side, you never have to stress over the price of stocks or oil again
By Brian Hunt, InvestorPlace CEO
Your No. 1 job as an investor is to accumulate as many shares as possible of elite, dividend-paying businesses. When you realize that, you “graduate” into a higher class of investor.
You also experience a lot less stress than the average investor.
Let me explain …
Few people belong to this exclusive class because most folks are obsessed with short-term gratification.
They pore over tiny market movements, news releases, CNBC clips, and other things that are meaningless in the “big picture.”
These people are always busy trying to get the market to do something for them … instead of using the greatest power in all of investing.
That power is TIME.
And used properly, time causes extraordinary things to happen to your portfolio.
Time allows you to earn huge yields from elite, dividend-paying businesses.
Time makes it so you don’t care about the moods of the stock market.
Here’s how it works …
Let’s say you buy Reliable Breweries (a fictional company), which is an elite, dividend-paying business, for $20 per share. It has increased its dividend payment every year for the past 30 years. Currently, it pays a 5% annual dividend, or $1 per share.
Now, let’s say that dividend grows at 10% per year for the next 10 years (this rate of dividend growth is common with elite businesses).
After 10 years of growing at 10% per year, your annual dividend is now almost 13% of your initial investment. After 15 years of growing at 10%, your annual dividend is 21% of your initial investment. After 20 years of growing at 10%, your annual dividend is 34% of your initial investment.
Now … do you think a guy earning a safe 13% yield with one of the world’s best businesses cares about a stock-market correction?
Do you think he cares about a 5% decline in home prices? Do you think he cares about some economic news story on financial television?
No way.
He’s comfortable knowing that no matter what the stock market does, folks are still going to be buying products from Reliable Breweries.
He knows the broad market could decline by 20%, and he would still get that 13% yield on his shares. They could shut the market down for a year — and he’d still get his money.
That’s the peace of mind accumulators of elite, dividend-paying businesses enjoy.
By combining the power of an elite, dividend-paying business and the power of time, you are able to generate massive yields on your original investment. You just have to let time work its magic.
This concept is very important to understand … so let me pose a few more questions …
If you’re earning a 13% (and growing) yield on a stock, do you care if the share price falls 10%?
Do you care if oil climbs $10 or $20 per barrel?
Do you care that this guy or that guy is predicting a stock market decline?
No way.
No matter what stories the media is hyping, the “biggies” of the corporate world – companies like McDonald’s (NYSE:MCD) and Coca-Cola(NYSE:KO) — will still be No. 1 in their industries.
They’ll still have giant, insurmountable competitive advantages.
They’ll still have thick profit margins.
They’ll still generate huge cash flows.
They’ll still direct a portion of those cash flows to shareholders through ever-increasing dividends.
Their longtime shareholders will still earn 13%+ yields on their original investments.
For most folks, trying to trade in and out of stocks takes up too much time. It generates high fees. It produces losses. It causes sleepless nights. It drains mental energy.
But if you own a collection of elite, dividend-paying businesses, you won’t worry about much.
You sleep well knowing that all you need is TIME.
Time allows dividend growth to work its magic.
Think of it like planting a money tree:
Once you plant a tree, you don’t have to do anything more with it. The tree sinks its roots into the ground and starts to grow. Rain, air, and the nutrients in the soil are all the tree needs.
You don’t have to check on it every day. You leave it alone. You let the awesome forces of nature make the tree stronger and stronger as the years go by. The tree will provide fruit, beauty and shade for you, your children, and your children’s children.
Buy an elite dividend-paying business at a good price, leave it alone, and it will grow large in your portfolio.
Given enough time, it will throw off 5% … 10% … even 25% annual dividends on your original purchase price.
It will grow into a large money tree you and your family can enjoy for decades.
As you go through your investment career, keep in mind your No. 1 job: To accumulate as many shares as possible in great businesses purchased at reasonable prices.
Now, earlier I used a hypothetical example — but there are plenty of real stocks with 5%+ yields.
