On the very first page of Vanguard Founder John Bogle's best-selling book "Enough," the mutual fund pioneer writes:
At a party given by a billionaire on Shelter Island, Kurt Vonnegut informs his pal, Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel "Catch-22" over its whole history. Heller responds, 'Yes, but I have something he will never have…enough.' Enough. I was stunned by the simple eloquence of that word-stunned for two reasons: first, because I have been given so much in my own life and, second, because Joseph Heller couldn't have been more accurate. - John Bogle, "Enough", page 1
I love this quote because it introduces a possibility that perhaps some of us never experience-satisfaction with the progress of our investments. I receive messages in my inbox occasionally from people complaining about the performance of a given stock I mention regularly-wondering why Pepsi (NYSE:PEP) went down last year, why Berkshire Hathaway (NYSE:BRK.A) has not gone up, or whatever the flavor of the month concern may be. When I respond, I usually try to note that earnings growth and stock prices do not move in lock-step over the short term, but that generally speaking, the long-term results for investors will come close to approximating the long-term growth of the company owned.
But these are all small issues that point to the bigger question at hand. What is your measuring yardstick for success as an investor, and what would it take for you to reach a state of satisfaction with the performance of your investment? This answer is intensely personal and necessarily varies from person to person. A retired farmer in Virginia, with a $3 million portfolio might be content with a rising income stream that just matches inflation, whereas a lawyer in Texas, may want to see the dividends from his stocks increase by several percentage points greater than the inflation rate. A doctor in Missouri, might not be interested in dividends at all, and might take a "Keeping Up With the Joneses" approach to investing, and feel happiness or sadness based on whether he "beat" the market or not. While I endorse some strategies over others, what I think doesn't matter to you. It's up to you to decide where you want to be and then determine the best way to get there.
In most financial articles out there, the measuring stick for success will be relative to a major index such as the Dow Jones (DJI) or the S&P 500 (NYSEARCA:SPY). Some investors may think that if the market goes down 20% yet their investments only go down 10%, this is okay because "that's what the market is doing." Personally, that's not the measuring stick that I use. I have less concern about stock price than most investors because it only reflects what someone else is willing to pay for a share of a business at a given point. This is something completely out of our control as investors and does not necessarily correspond to the improvement in a business in a given year. There's a reason why Berkshire Hathaway CEO Warren Buffett starts his Annual Shareholder Letter by posting the change in Berkshire's book value every year since 1965. Buffett is concerned with the increased profitability of Berkshire's investments and operating companies on an annual basis rather than trying to derive satisfaction from the fact that other market participants are willing to pay a greater amount for an ownership stake in those profits.
So what's my own personal measuring stick for trying to find satisfaction as an investor? I want to see dividend and earnings growth of at least 7% annually every year (based on inflation assumptions of 3%-4%). My primary focus is on the growing dividend income, but of course, I have to pay attention to the earnings growth as well. A company can only raise its dividend by a rate greater than earnings growth for so long before the dividend either stagnates, decreases, or goes kablooey. Additionally, I think that 7% annual dividend growth is reasonable if I focus my investments on companies with long track records of 7%-11% annual dividend and earnings growth, a payout ratio that appears sustainable, and an economic moat strong enough that I believe the earnings "quality" to be sufficient enough that I can sleep at night.
Occasionally, some of the personal messages I receive in my inbox accuse me of having a "dividend agenda" and discriminatory bias against non-dividend paying stocks in general. Well, in a word, yes. But if this is supposed to make me feel guilty, it doesn't. It's not like I emerged out of the womb fully formed one day and said, "Bruce Springsteen may have been born to run, but I was born to buy dividend-paying stocks." Rather, my strong inclination in favor of dividend-growth stocks emerged over time as I thought about my desire for financial independence and then considered the best approach compatible with my own personality as I make the journey through my investing life.
What's my end game? To generate enough annual income from dividend stocks to live off. What do I need to do to get there? Regularly set aside as much money as possible (finding the middle ground as I seek to balance the opportunity cost of enjoying life now while building toward a greater future) to put into the dominant dividend-growth firms in America, and then let time and compounding work their magic while I go through life. Hopefully, my account statements will show the snowball take off. If I do it right, $10 dividend checks will turn into $100 checks, and eventually $1000 checks, etc.-and then it's literally and figuratively downhill from there.
Let's say that over the next 5-10 years, I bought shares of the following excellent businesses when I found them to be undervalued: Coca-Cola (NYSE:KO), Chevron (NYSE:CVX), PepsiCo (PEP), Johnson & Johnson (NYSE:JNJ), Proctor & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL), and McDonald's (NYSE:MCD). I included a chart of what a certain amount of shares in each of the companies would pay out annually based on each company's current dividend rates. Based on this hypothetical seven-stock portfolio, I would be receiving $2,081 annually from those seven companies.
My personal "bottom line" as a dividend growth investor would be to see that $2,081 grow organically by 7% annually-meaning that without further investment on my part, the dividend stream would turn into at least $2,226 by the following year. Sure, I'm going to look at other factors as well - earnings growth of at least that amount, the maintenance of the company's competitive position, and I'll try to keep a vigilant eye out for anything alarming in the financial statements (like a high debt burden, for example) or a dangerously high payout ratio. But the dividend growth of at least 7% annually will be something I'll be looking for.
But these are just my own income investing goals, and the 7% annual dividend growth is my personal litmus test for gauging my progress as I try to get there. Most likely, your goals and methodology will be quite different. For you Greek scholars out there, the legendary Oracle at Delphi once proclaimed, "Gnowthi seauton!" which translates into English as, "Know thyself!" The blind prophet Tiresias claimed it was the secret to life, and I certainly believe that it applies to investing is well. It can be quite beneficial for investors to properly assess where they are, where they want to be, and what it takes to get there.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.