This series, entitled "The Great Growth Debate," was not actually written, or motivated, in order to debate the advantages of growth stocks over dividend-paying stocks, or vice-versa. The true purpose and motivation of this series was to point out the danger of utilizing stereotypes or generalities in our thinking when approaching the investment process. Getting investing done right is difficult enough, without diluting the process with erroneous or potentially misleading assumptions or conclusions.
A secondary purpose and motivation for these articles was to point out that sound investing strategies can come in all sizes, shapes and flavors. Investing is never a "one size fits all" endeavor. What's best or right for one investor may not be the best or right strategy for another. Individual needs, goals, risk tolerances, experience and knowledge base and many other factors can come into play. Yet none of what I've just said implies that there are not sound and prudent principles that can universally apply and fit all investors, regardless of the individual differences listed above.
In my opinion, there are principles that all investors should be aware of and heed if they are to find long-term success. Knowledge is truly power, and in my opinion there is no endeavor where this is more true than with investing. Building a sound strategy based on universal principles can make all the difference in the world between success and failure. To my way of thinking at least, the most important of these principles deal with where and how rates of return come from. If the investor has a solid understanding of these important factors, then not only will the investing process make more sense, but the opportunity for success is greatly increased. There are two universal principles that I would like to conclude this series of articles by focusing on. There are other important principles, but to my way of thinking these two are the most important for investors to understand.
The first principle deals with the importance of business results to long-term performance. The most common measurement that deals with business results is earnings (earnings-per-share) and the growth rate or lack thereof. To be clear, dividends, if a company pays any, are a function of the company's earnings results. The more consistent the earnings growth is, the more consistent dividend growth will be also. For example, I challenge anyone to show me a “Dividend Champion" -- which is defined as a company that has increased dividends by 25 years or more -- without a corresponding record of earnings growth. Business results -- good, bad or ugly -- will be a major driver of long-term returns to include dividends.
Principle number two is the principle of sound valuation. As many commenters have already pointed out on the previous two articles, the stock market is not, as many academics would like us to believe, always efficient. Another way of putting that is to say that the stock market can often incorrectly price a company's stock and/or risk. However, it is my contention that any mispricing in the market at any given moment in time will eventually rectify itself. In the long run, the earnings, cash flows, assets and other fundamentals will inevitably be properly valued. Ben Graham pointed this out with his famous quote: "In the short run, the market is a voting machine but in the long run it is a weighing machine."
A simple study of performance via F.A.S.T. Graphs™
The following will be a medley of F.A.S.T. Graphs™ that will review many various nuances of performance and where it comes from. This "mini study" is not meant to be all-inclusive, and the companies were picked solely on the various operating results that each company possessed. The graphs will all be historical and review the price and earnings relationship and the associated dividend record (if any) on each company. We will let the graphs speak for themselves, and no commentary or explanation will be provided on each specific company. The goal is to illustrate the importance of the universal principles of earnings and valuation and how they relate to long-term performance.
I am going to present 10 different companies, a few of which were cited in the comment section of my previous articles. For those who are interested in digging a little deeper, a short video presentation where I point out some important features of each stock will follow the graphs. It's important for me to state that hundreds and perhaps even thousands of examples could be cited beyond these 10. However, the main point is to illustrate the importance of each individual company’s operating results to performance gained by shareholders. In my opinion, when we focus too much on generalities and not enough on specifics it can be easy for us to miss the things that are truly important.
[Click all to enlarge]
This series of articles has been about focusing on the specific generators of rates of return; in other words, how and where rates of return and dividends come from. In contrast to the generalities that many investors are forced to rely upon, I believe that a specific approach is both more precise and relevant. Instead of only having some vague idea or ideas about what makes a stock investment a good one or a bad one, a more clearly articulated concept of the truth is invaluable.
Furthermore, I believe this applies equally to growth investors or growth and income investors. If investors are empowered to make better investment decisions with more precision, the benefits go well beyond just better numbers. More peace of mind and confidence in your portfolios and the strategies behind them are just a few that come to mind.
When it's all said and done, it's up to each individual investor to make the best decisions that fit his unique goals, risk tolerances and objectives. However, I also believe that it's important to make those decisions with the clear understanding and knowledge of what these decisions mean. Building investment portfolios that can provide investors and their families a more secure and comfortable future is a sacred undertaking. There is no room for muddy thinking, what's at stake is just too important.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.