Yesterday, while watching my nightly SportsCenter re-runs before bed I came across an interesting interview from an investing perspective. This was a pleasant surprise for me, I love my daily sporting news and this gets even better when it gives potentially valuable insights for my financial future. ESPN was airing the second part of an interview one of their journalist had conducted with injured Los Angeles Lakers superstar, Kobe Bryant. Last night's portion of the interview was focused around Kobe's future. For those of you who don't follow the National Basketball Association closely, Bryant has been the cornerstone of the Lakers franchise for over a decade and is considered to the one of the greatest basketball players of all-time. He began his professional career straight out of high school roughly 15 years ago and played at an incredibly high level for years before suffering two major injuries in the two most recent seasons. The interview began focused on Kobe's basketball future; whether or not he believes he can come back from his knee and Achilles injuries, but took an interesting turn towards financial and long-term money management.
Bryant spoke about the stark reality of his professional basketball career potentially ending blindsiding him and his reaction to this realization. He said that during the past year while he's been injured and unable to play he's been doing his best to learn more about marketing and to pursue potential entrepreneurship opportunities. Because of his stardom, Bryant finds himself in the unique situation where he is able to sit in on business classes at premiere universities as an honored guest during his travels. He is also able to contact very successful business men and women that the average individual would not have the opportunity to conserve with.
Speaking about his preparation for life after basketball, Bryant said:
"Being that I didn't go to college I wanted to sit in the classroom and hear exactly how things are being taught because there [are] things I've been doing for years but not really putting terminology to them. So you sit in the classroom and you're listening to how things are being executed. Then from talking to some of these amazing entrepreneurs who've had these incredibly success stories, you know, the one thing that's a common denominator with them all is their ability to understand people and to communicate properly and to have a vision, and then to have you know, guts, and then to have kind of this patient persistence with the process, and that's something that's been a common denominator through all of them."
I was half-heartedly listening to this interview with one eye on the television and the other on my computer screen browsing social media, but my ears perked up when I heard his statement. I quickly rewound the TV and couldn't help but think that Kobe, without meaning to, was laying out the foundation for running a dividend growth portfolio. Now, I'll admit that this is a classic example of someone seeing what they want to see. I am a conservative dividend growth investor and I love finding evidence that validates my investment philosophy. And, what better evidence that the common denominators that Kobe derived from the myriad of extremely successful financial resources that he has available to him?
In case you're still not convinced, let me break down his statement into segments, looking at each of them through a dividend growth magnifying glass. Bryant began his statement by highlighting the importance of "understand[ing] people" and being about to "communicate properly". Kobe is specifically talking about business management, which is ultimately about relationships with people and their productivity. But, when this statement is viewed through a portfolio management lens it makes a lot of sense in two respects. One being, an investor's ability to "understand people" will enable him or her to understand the general market. And two, being able to understand one's self; his or her strengths and weaknesses and being able to manage and control these personal aspects, especially the deficiencies (for instance, I know that I am incredibly impatient and I must constantly check myself before making rash decisions), will enable them to make objective, rational decisions on a regular basis. Being very socially perceptive will help an investor diagnose trends in the market which in the case of a dividend growth portfolio can help to minimize downside risk by acknowledging irrational exuberance and momentum unsupported by fundamentals. Jumping onto band wagons once they've began moving, and especially after they've reached dangerous speeds, is a quick and easy to way expose yourself to unnecessary risk and potentially wreak havoc on investing capital. With so many media pundits offering advice, especially on the market's high flyers, it will do an investor a lot of good to be able to sort through the nonsense and pick out the tidbits of information that are most pertinent to his/her personal investing strategy.
Speaking of investment strategy, I like to think of my portfolio as a business. I carefully select components (stocks) that fit well into the business I run (my portfolio) and on a monthly basis I collect checks (dividends) from the different segments of my company and I re-invest these earnings back into the business because I want it to continue to grow. This may be a bit of a narcissistic way to look at portfolio management. Another way to envision the process is to consider yourself an employee of the companies you invest in through your part ownership and therefore, the dividends you collect constitute your annual salary. This can be a nice way to look the process because if your focus is on dividend growth it is very possible that you'll receive an annualized double digit raise.
I bring up the fact that I think of my portfolio as a business because of Kobe's point that proper communication is paramount. A business plan is required to run a successful business. An investor with this mindset will have to create a set of rules and guidelines so that they are able to keep track of their progress towards their goals. My business goal is simple: I want to create a reliably increasing stream of passive income with my investments. Eventually, I would like to live off of this income stream, but in the meantime, throughout my accumulation phase I plan on re-investing this passive income, compounding it over the long-haul. This goal is the "vision" that Bryant listed as a common denominator.
To achieve this "vision" I have a strict set of guidelines. Namely, I only go long into stocks that I feel comfortable investing in due to their current fundamental valuation, their perceived future earnings power, the strength of their moat and the competitive advantage that they have over their peers, the health of their dividend and financial balance sheet, their history of shareholder friendliness, and the effectiveness of their management team in regard to maintaining these strengths and their company's dividend growth. I have several fundamental screens that I put stocks through before pulling the trigger and purchasing them. Having a set plan for stock ownership allows an investor to stay disciplined and consistent on the path towards the vision that they've chosen for themselves. Goals will be met sooner if false steps are avoided and proper planning in the only way to ensure efficiency.
I try to be as risk averse as possible when making investment decisions. When discussing my investment philosophy with friends my age the common consensus amongst them is that I am limiting my potential returns due to my conservative nature. They ask me, "How can you sleep at night knowing that your missing out on huge recent gains in companies like Tesla (NASDAQ:TSLA), Chipotle (NYSE:CMG), or Netflix (NASDAQ:NFLX) (the type of companies that they are more interested in owning)?" Some of my peers go even further investing in OTC stocks, sometimes cashing in 10-baggers on day trades, not caring about losses because their wins are so significant. I recently had a friend tell me about triple digit returns from a penny stock he held for less than an hour after reading about a potential price move on Twitter. His point was that he made more money in 45 minutes holding a stock that he knew nothing about than my dividends would produce in a month's time. In the face of such success via speculation it is difficult for me to stick to my dividend growth guns. Obviously I'd like to make a quick buck like they do, anyone would, but there is no accountability in their process. They admit that these gains are not predictable. It takes the "guts" that Kobe mentioned to stay disciplined and stay on course. I know that there is no such thing as a sure bet in the markets, there will always be risk associated with potential return, but I do believe that it is possible to create a reliable income stream with high quality dividend paying companies and I believe that this is the safest and most predictable way for me to achieve the goals that I've set out financially for my family.
The last, and in this case, what I believe to be the most important common denominator that Kobe listed is the "patient persistence with the process". This line from his interview was really what caught my ear, the patient persistence with the process is really what dividend growth investing is all about. Many of the dividend stalwarts are slow growers. They produce consistent earnings results and therefore, can be counted on for an annual dividend increase usually in the high single digits. Most of these stocks, the Cokes (NYSE:KO), the Procter & Gambles (NYSE:PG), the Johnson & Johnsons (NYSE:JNJ), the Kimberly-Clarks (NYSE:KMB) of the world do not offer investors exciting short term results. They have low Betas and often times during raging bull market scenarios they underperform. But, over the long haul, when held for decades on end while reinvesting their dividends, these types of investments can lead to great wealth.
The aforementioned Procter & Gamble is a perfect example of this. This is a company that I do not own, though I would love to (I've been waiting for a more attractive entry price). Since the beginning of 2012, with dividends reinvested, PG is up a very respectable 16.3%. However, the S&P 500 is up 24% during this time, meanings that PG has underperformed the market by 32%. What results seemed respectable not too long ago now look disappointing, especially when you have buddies laughing as they take their 215.2% that Netflix returned since January 1, 2012 to the bank. But, when you realize that companies like Netflix are few and far between and the speculation necessary to ride the wave of a momentum stock like that can just as easy break the bank as it can bolster it, and you look at the long-term results of a much more predictable company like PG, it's easy to pat your buddy on the back and congratulate him on his earnings while smiling to yourself and the foundation you've built. Over the last 20 years, Procter and Gamble has given an investor an annualized rate of return of 11.2% with dividends re-invested (as opposed to the 9.4 return of the S&P 500). This means that a $10,000 investment made on January 1, 1995 would be worth $77,513.95 today. The annual dividends collected in 1996 worth $263.92 would have turned into over $2,100 in dividends for 2013. This equates to a 21.8 annual yield on cost on the original investment. 20 years into this investment, the growth curve of the compounding that this long-term reinvestment has created is just starting to pop.
Source: F.A.S.T. Graphs
Assuming business as usual for PG another 10 years or so, this compounding will create even more astounding results. Analyzing historical evidence like this shows the importance of staying disciplined and maintaining a "patient persistence with the process" and proves, that is Kobe learned nothing more during his time off with injury (which I'm sure he has), he's gained essential knowledge that could augment his already existing wealth greatly through the compounding of dividend growth (re)investing.
Disclosure: I am long KO, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.