One of the unfortunate side effects of buying an overvalued stock is that, almost by definition, there will be a period of time in which the total return rate that the investor enjoys will likely trail the growth rate of the firm (provided prices are rational and do not transition from "overvalued" to "more overvalued"). This fact can make it worthwhile to pose the following question: If I currently own a stock that is trading above a price that I would be willing to pay to purchase additional shares, what is the point of continuing to hold it?
In a bit of fortunate timing, four high-quality blue chips stepped up to answer that question in the past two weeks:
On Monday, April 15th, Procter & Gamble (NYSE:PG) announced a quarterly dividend raise from $0.562 per share to $0.6015 per share. That's a 7% increase.
On Wednesday, April 24th, Exxon Mobil (NYSE:XOM) announced a quarterly dividend raise from $0.57 to $0.63 per share. That's a 10.5% increase.
Later that same day, Chevron (NYSE:CVX) announced a quarterly dividend raise from $0.90 per share to $1.00 per share. That's an increase of 11%.
On Thursday, April 25th, Johnson & Johnson (NYSE:JNJ) announced a quarterly dividend raise from $0.61 per share to $0.66 per share. That's an increase of 8.2%.
That right there is what makes a dividend investing strategy so satisfying. I can't break it down any more than that. Everyone knows Procter & Gamble is an excellent company. Everyone knows Exxon is an excellent company. Everyone knows Chevron is an excellent company. Everyone knows Johnson & Johnson is an excellent company. None of this takes particular sophistry to figure out. And look at what happens each year like clockwork once you set aside some capital to acquire ownership in one of these companies: you receive a raise each year that is well above the 3-4% historical rate of inflation in the United States. It is hard to find assets that not only act like ATM machines four days out of the year, but will dispense even more cash your way each year thereafter. That's par for the course with the best-in-class dividend growth stocks.
This is why a long-term investor can easily hold Procter & Gamble at $78 per share even if he would only be willing to pay over $70 per share to acquire a new stake. As a business, Procter & Gamble does things that make the stock worth holding on a long-term basis. Heck, the company has been giving investors raises for over half a century. JFK's assassination? Yeah, P&G raised its dividend through that. Vietnam War? Yeah, P&G raised its dividend through that. Awful economy of 1973-1974? Yep, P&G raised its dividend through that. End of Cold War and collapse of the Soviet Union? Yeah, P&G raised its dividend through that. 9/11, Afghanistan, Iraq War? You know the answer: P&G raised its dividend through that.
The Great Recession of 2008-2009? High unemployment? $16 trillion in debt? Large business operations in European countries that are going through their own Great Depressions right now? Yes, Procter & Gamble continues to raise its dividend through this. This is why people hold excellent companies long-term. This is why you stick with an excellent blue-chip stock even if it is selling at a price that is 10-15% above what you would pay for it.
Of course, the decision is up to you. It's your money. Benjamin Graham made a career out of selling stocks once they reached fair value, and he was able to compound the money in his Graham-Newman Fund at rates approaching 20% over long periods of time. There's plenty of ways to skin a cat and all that, as the saying goes.
For me, it just so happens that most of the investors I admire get in the habit of buying excellent assets, and then taking the profits that those assets generate to buy other high-quality assets. They then wash, rinse, repeat this process through life. You don't see Charlie Munger show up in the news a whole lot for selling businesses that he has acquired over the years. Buffett does not divest many business from the Berkshire (NYSE:BRK.B) umbrella. This does not mean that you do not sell if the fundamentals deteriorate or the prices reach a point that they become disjointed from reality (if anyone ever offers me over 30x normalized earnings for my Procter & Gamble stake, you can have it), but it is a strategy that does not rely on finding attractive spreads between the buy and sell price to create long-term wealth.
Every strategy comes down to temperament. I enjoy getting in the habit of buying an excellent business, taking the cash that business generates, and then buying something else. I enjoy structuring my life so that I focus on (1) acquiring capital to invest, and (2) then researching an excellent company to buy. All of that energy is upfront. Once you make the purchase, you're on relative cruise control. You can get in the habit of reaping the benefits from seeds planted long ago when you continue to receive the growing dividend checks from a Johnson & Johnson investment you made in 1985, 1992, 1997, or whatever. When you find the right companies, they reward you like clockwork. These blue-chip dividend increases that we have seen in the past week reaffirm why someone may stick with an excellent company, even if it happens to be overvalued at the present moment.