Investing approach

There are two ways to getting paid while investing – capital gains and dividends. A stock’s capital gain is significantly impacted by what the broader market does in a given period. Of course certain stocks have more risk than others, but the price of a stock is the result of short-term supply and demand and may – at times – be illogical, chunky or erratic.

On the other hand, dividends are usually paid whether the broad market is up or down. In his book ‘The Little Book of Big Dividends’ the author Charles B. Carlson mentioned that roughly 40 percent of the stock market’s long-run total return comes from dividends. Companies like Coca Cola or Procter & Gamble are making profits every quarter and returning them to their shareholders. Should we suppose to be worried if the stock price declines on broader market news? Or possibly some “earnings miss” by analysts at banks or brokers who earn their money if people speculate with their money, instead of investing with it?

The other reason dividends are attractive is that they can grow – unlike fixed income instruments such as a savings account. Coca Cola (KO) has increased their yearly free cash flow from $6 billion to $8 billion since 2010; this is a 10% compounded annual growth rate. The payment of dividends comes from this cash flow. The history of these dividend champions is impressive; KO has increased its dividends for 51 consecutive years. That’s right, 51 years! During this time we’ve seen various recessions, bubbles, (geo)political crises and wars. Despite all this, people all over the world still drank their cokes and KO was able to increase the dividend every year. Using these dividend payments to buy more shares of KO exponentially improve the results of your investments. Einstein called this the 8th Wonder of the World; the magic of compounding.

Considering all the above I want to purchase safe, dividend paying (and increasing) companies which have a competitive moat. They will provide me with a growing income stream which I in turn can use to buy more shares!

1 comment:

  1. Hi, I have built an interactive tool which allows for quick identification of the strongest stocks in each sector. For example ACCEL can be replaced by PII, UNA by CL, RDSA by XOM, WMT is the best sector choice, PM can be replaced by MO, INTC by AVGO, TGH by MAIN, BBL by WCN. This would the immediate output of the tool at What do you think? Martin