The general focus on my personal finance articles that I come across tends to center around the idea of maximum wealth creation. But as I mentioned here, being average in investing has become seriously underrated - according to the DALBAR study I cited in that article, the average investor has experienced returns that are four percentage points annually below what the broad stock market would have indicated. What's the culprit that can generally undo an investor? Selling low in a fit of panic.
To me, that is the first question I would ask in trying to develop an investment strategy: What is a strategy that I could continue to follow even during - no, especially during-periods of fear and doom like 2008 and 2009? In my opinion, this is where all arrows point (and a neon sign appears) in the direction of the dividend-paying stocks of blue-chip firms.
One of the greatest advantages of owning dividend-paying blue chips is that, well, they pay the dividends even when the economy is looking rough. If you choose to focus on the income generated by your holdings instead of the absolute value that you could sell your holdings for, then it is likely that you will remain steadfast and loyal to your strategy when the world is falling apart - Colgate-Palmolive's (NYSE:CL) stock price may have fallen over 30% from peak to trough over the last recession, but to an income-focused investor, the dividend checks continued to roll in and even increase as the recession wore on.
That's the fun part of being a dividend-growth investor: you monitor your holdings, check the dividend payouts relative to the earnings generated by the firm, and if the results are satisfactory, you can go about your business and even add to your holdings during these tumultuous times. When you change the terms by which you judge success, it can become relatively easy to become a value investor with dividend-growth stocks: everyone else is following the daily headlines and worrying while your income flows into your checking account and may even increase throughout the recession.
It is quite possible that many dividend growth investors are aware that Johnson & Johnson (NYSE:JNJ) and Coca-Cola (NYSE:KO) have both reached the half-century mark of granting investors a dividend increase each and every year over that time period. But here's a fun thing to think about-it's not as if Johnson & Johnson and Coca-Cola were junk investments 51 years ago, it's just that they didn't raise the dividend. The history books may show that Hershey's (NYSE:HSY) dividend streak "started" in 2009, but in reality, it's just that the company maintained the payout at $1.19 per share in both 2008 and 2009. While not ideal, that's not a terrible place to be in.
Most of the focus is (rightfully) on the streaks of annual dividend growth that excellent companies possess, but there is also quite a story to tell for how long some of the top-dog American firms have been paying annual payouts period (even if they didn't get raised every year). Stanley Black & Decker has been paying out dividends every single year since the 1870s, around the time that Otto Van Bismarck was launching the Kulturkampf against Catholics in Prussia. If you trace the history of Big Oil (Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP)) back to its Standard Oil roots, you can find that uninterrupted dividend payments have been going on since 1882, when Thomas Edison was stealing ideas from Nikola Tesla and Roderick McLean tried to assassinate Queen Victoria because she didn't like his poetry. IBM (NYSE:IBM) has been making continuous dividend payments since 1913, when Woodrow Wilson was sworn in as president and Henry Ford introduced the assembly line. Excellent companies have storied histories of taking care of their shareholders through World Wars and Depressions - that's the kind of history that can inspire the confidence to be a long-term investor with blue-chip companies that pay out dividends.
This does not mean the strategy is always going to be foolproof - after all, a Kodak shareholder in 1990 could have happily looked upon his half-century of dividends and thought all would be forever well, with little knowledge of what was to come ahead. The point isn't that you'll go through your investing life without brushing up against a Wachovia or Kodak along the way - but rather, that a diversified basket of these blue-chip companies will provide the kind of income and long-term security that can realistically forge a path to success.
There's a strong tendency for many in the financial media to overcomplicate this thought process-and I'm not necessarily knocking. There's a big difference between earning 7% on $100,000 for 30 years compared to earning 8%. One will get you $800,000 and the other will get you about $1.1 million. That's real money, and looking for that extra spread is what brings many readers to Seeking Alpha every day. But for me, that difference is dwarfed by the necessity to avoid selling out at the bottom - the avoidance of selling is the dividend investor's key to success. If you can craft a strategy that holds through fear and panic, you've won. You did it. You've conquered the biggest demon of the capitalist markets. That's the big point of dividend-growth investing: the growing income checks during periods of economic turmoil provide a comfortable measurement that prevents investors from irrationally selling out at a market low. That's the secret sauce.