When people say that they "invest in the market" I usually do a mental double take. Now I can't be certain, but I would surmise that they do not mean that they are investing in the NYSE Euronext (NYSE:NYX) or the Nasdaq OMX Group (NASDAQ:NDAQ). Instead, it seems logical that they mean they own a collection of businesses that happen to be represented in the market. In the real world, this complication does not exist. If you were to "buy the market" you would quite literally be purchasing a portion of the market place; the equivalent to "buying the grocery." Think about where you purchase the majority of your items. If I had to guess, I would pick Wal-Mart (NYSE:WMT) or Target (NYSE:TGT) as the frontrunners. Although assuredly there are others like Kroger (NYSE:KR), Safeway (NYSE:SWY) and Costco (NASDAQ:COST). But the point is that it's overwhelmingly probable that you go somewhere to pick up your goods. Fortunately, we have the wonderful opportunity to partner with our local market places. So this means that every time Joe buys General Mills (NYSE:GIS) cereals or Mary picks up Listerine mouthwash (NYSE:JNJ) we profit. Even though we have no interest in making these items ourselves, we're still treated to the spoils. What a world. So in this world, wouldn't it be great if we could get free groceries as well?
According to the U.S. Bureau of Labor Statistics Consumer Expenditure Survey the average U.S. "consumer unit" - which consisted of 2.5 persons - spent $49,705 in 2011. Of that total, $6,458 was allocated to food, of which $3,838 was divvied up to "food at home." On a per person basis, that's about $1,535 worth of annual groceries. Now you can argue over whether that number is too high or too low for you personally, but on an individual basis I don't think it's all that unreasonable. Fast forward to 2013 and we'll call it $1,630 ($1,535*1.03^2) a person or something along the lines of $125 a week for a family of four. Now, whether you go to Wal-Mart, Target or Kroger the question from the title becomes: "how do I get my weekly stockpiling free of charge without also receiving a complimentary ride in a cop car?"
The straightforward answer is nothing comes for free. But there is a proxy that works quite well. Let's take a look at the $1,630 yearly grocery expense and your weekly WMT purchasing experience for a moment. If you take a quick glance at the underlying business of Wal-Mart, you will notice a roughly $76 share price and $1.88 in annual dividend payouts - which equates to a current dividend yield just under 2.5%. Take the $1,630 in needed annual income, divide it by the current 2.47% dividend yield and boom the math tells you that all you have to do to receive effectively free groceries is invest about $66,000 in WMT. For a family of four, all of you have to do is invest a little over a quarter of a million dollars. Of course I hope that you noticed my less than subtle sarcasm. Suggesting that you simply invest those amounts is about as helpful as comedian Steve Martin's advice on 'how to make a million dollars': "First get a million dollars." I'm guessing if you have $66k or $250k just waiting to be deployed then buying groceries probably isn't your problem. And if so, I'd be glad to help in that regard with my new book. But just because the investing amount isn't readily at hand, this doesn't mean that the ideology doesn't carry weight. We'll get to a more practical approach, but think about what's happening when you're "buying the grocery." You hand someone owning WMT or TGT or wherever you happen to go X amount of dollars, you get free groceries for life, and then when all is said and done you very likely receive an adequate return on capital as well.
What about inflation, you suggest? Glad you asked. Let's look at the Wal-Mart and Target through the fastgraphs.com tool:
Here we see that WMT has been able to increase its dividend by an average of 19% a year for the last two decades, while TGT has increased its payout by an average of just less than 13% per annum. Obviously past performance does not indicate future results, but it should be pretty apparent that both companies have a propensity to keep on increasing dividends. More than that, WMT has not only paid but also increased its dividend for 39 straight years and still only hands out about one-third of its profits. Not to be outdone, Target has increased its payout for 41 straight years and also pays out just around one-third of its earnings. Add in Wal-Mart's $15 billion share repurchase program along with Target's $5 billion program and even marginal earnings growth leads to above average dividend growth. In fact, Target management has so much as said that it expects to compound the dividend by 20% over the next several years. So to those concerned about the dividend increases keeping pace with grocery inflation, it appears those fears can momentarily be set aside.
Yet we're still not to the point of free groceries. Let's figure out a realistic way of getting there. Instead of $66k right away, what about saving $500 a month? It definitely still takes effort, but that's a lot more tangible than tens of thousands of dollars. I'll even give you a month off, and we'll call it $5,500 of annual contributions to fund a Roth IRA. Assuming - say 4% annual grocery inflation, smooth $5,500 contributions, a 2.5% current and reinvested dividend yield and an 8% dividend growth rate - that means that it would take about 11 years to reach your goal of "free" groceries. Here's what that looks like in table format:
|Year||Grocery Expense||Total Contribute||Dividend Income|
Notice - depending on how you account for the time value of money - that the ending contribution amount is relatively close to the originally quoted lump sum number. However, thinking about saving say $125 a week is lot easier than seeing a five-digit number and having your eyes glaze over. Through the benefit of owning a profitable company, eventually your partnerships can quite literally yield dividends for your life. It simply takes time and effort.
Now you might say "oh this looks good and well, but I'm certainly not diversified." To which I would like to make two points. First, if you think about buying a portion of a grocery store for what it is - a market place that continuously offers goods - then in effect you are diversified. You are not reliant on one or even a handful of products to sell. Instead there are literally thousands of items each day, many of which you don't even have to market, that people will buy and you will profit from. The second note that I would like to make is that company-wise you might have a point. If the company goes under, you're certainly not diversified. But you can break it down in steps. I find this useful not only for diversification purposes but also for setting smaller targets to reach your goals.
For example, think about some of your small yet regular purchases.
Perhaps you spend $5 a week on Coca-Cola (NYSE:KO) products. With an annual dividend of $1.12 and a resulting current yield around 2.7%, this equates to needing to save about $9,600 or two years worth of Roth contributions to achieve "free" weekly beverages.
Maybe your go-to toothpaste is Colgate (NYSE:CL) whereby your bi-monthly tube pickup is setting you back $80 a year. With a $1.36 yearly payout, or 2.2% yield that would require a $3,600 investment. As long as the dividend grows faster than the price increases, that my friends is effectively free toothpaste.
Perchance you pick up PepsiCo's (NYSE:PEP) whole-grain Scoops every Sunday whereby PEP's $2.27 annual dividend and 2.8% current yield would require about a year's worth of contributions to make the chips perpetually gratis.
I'm not sure how emotional or allergic you are, but if you spend just a fourth of a year contributing to say Kimberly-Clark (NYSE:KMB) with its $3.24 annual payout and 3.3% current yield, that equates to over 8 tissues a day for life.
Take half a year apiece investing in General Mills and then Kellogg (NYSE:K) - currently yielding 3.2% and 2.8% respectively - and that roughly translates to a box of cereal each and every week.
Of course I could go on and on naming items and scenarios but once you have the beverages, toothpaste, chips, tissues and cereal the other stuff is just filler anyway right? Now I realize that the title suggests "free" groceries. But of course nothing comes free; you still need to save and put out the capital. However it is apparent that with consistent effort, a decent amount of time and the propensity to partner with wonderful businesses, that eventually it is quite possible to live off these fundamental partnerships. I used "free" not in the "no cost to you" sense, but rather within the ideology that eventually you're not working in the steel mill or grinding it out at your desk each day to obtain these products. Personally, this seems like a reasonable way of incentivizing regular and worthwhile investing contributions.