One of the criticisms that has come my way lately about dividend growth investing is that success with such a strategy is purely "anecdotal." I have always found that comment quite odd since dividend growth investing contains a strong element of fact and truth. It's a fact that Coca-Cola (KO) has paid out rising dividends for decades, and it's a fact that Altria (MO) just paid out $0.41 per share on January 10th, 2012. Likewise, it's a fact that Johnson & Johnson (JNJ) recently declared a $0.57 per share dividend, and it's a highly probable event that investors who own 1000 shares of J&J stock will receive $570 on March 13th, 2012. Likewise, it's a fact that each of these companies have been paying out rising dividends for over twenty years. Today, I want to spotlight the long-term performance of Procter & Gamble (PG) stock to demonstrate that dividend growth investing is much more than mere "anecdotal" evidence, and can provide a very tangible, real track record that we can judge.
In 1991, shares of Procter & Gamble traded for an average of $7.21 per share on a split-adjusted basis. Since 1992, P&G has paid out a total of $17.92 in dividends cumulatively, plus the one-time stock spin-off of the Jif/Crisco units. At Friday's market close, Procter & Gamble was selling for $65.81 per share, and the long-term results of a P&G investment look pretty good to me any way I try to slice it-in terms of total dividends paid, total returns, or the current growing annual dividend stream that a long-term investment in P&G would provide.
The numbers above give you enough information to play with various possible investment return scenarios on your calculator, but for the example I'm going to use, let's imagine that an investor put $25,000 into Procter & Gamble stock slightly over twenty years ago. He would now own 3,467 shares of P&G (and we're not assuming dividend reinvestment), which would deliver a $1,820 check to the investor's mailbox every three months, for a total of $7,280 in annual dividends based on the current rate. That's a 29% annual dividend yield relative to initial investment, which is the kind of thing that I suspect provides a fair amount of emotional satisfaction (which comes from the joy of generating annual cash dividends equal to almost a third of the original nominal dollar investment).
The 3,467 shares could be sold for $228,163 based on the per share price of Friday's market close, and the dividends paid out along the way would have totaled $62,128 that the investor could have used to pay the electric bill, make a mortgage payment, go on vacation, donate to charity, or reinvest into other securities (although putting the money back into Procter & Gamble might not look too bad). In terms of total return, that $25,000 P&G investment would have turned into $290,291 right now. That's 11.61x greater than the initial investment.
I don't know if that type of return impresses you or not, but it's enough to get me interested in the dividend growth strategy with mega-cap blue chips that have a long track record of increasing profits and dividends every year. If someone would have invested $86,132 into P&G stock in 1991, they'd have a million dollars today.
What I really like about this statistic is that it's not like Procter & Gamble was a young upstart company in 1990-it had long since established itself as a titan of corporate America much like it still is today, and a simple walk through a grocery store would have revealed this fact. P&G owns Bounty paper towels, Cascade dishwashing soap, Covergirl cosmetics, Crest & Oral B toothpaste and toothbrushes, Dawn dishwashing detergent, Duracell batteries, Febreze air freshener, Fusion and Gillette razors, Head & Shoulders shampoo, Herbal Essences shampoo, Iams cat and dog food, Olay skin care, Pampers diapers, Puffs tissues, the drug Prilosec, and Tide laundry detergent.
Have your eyes glazed over yet? And those are just the Procter & Gamble products I can name off the top of my head. The company has a slew of other products under the P&G umbrella as well. One of my objectives as a dividend growth investor is to buy the greatest amount of risk-adjusted future profits at the lowest possible price. When I mention the words "risk-adjusted", I'm not just including that as a cutesy phrase. It would take a lot of things to go wrong (probably on the order of fraud or extremely reckless management) for Procter & Gamble to go bankrupt. I think that Tide laundry detergent, Crest toothpaste, and Iams pet food are most likely going to be around and making profits ten years from now.
While I don't think it's possible to guarantee much in the world of investing, betting on the long-term viability of Procter & Gamble products falls within my range of comfortability. If Duracell batteries, Head & Shoulder shampoo, Pampers diapers, and all the other P&G products go under, then that's a failure I can live with-betting on a company with a near century-long record of paying out dividends, increasing profits almost every year, a moderate level of debt, exposure in almost every country across the globe, and no signs of falling victim to technological obsolescence gives me one of the strongest impressions of risk-adjusted safety that I can find in the stock market. It's not like I'd be putting my money into Delta Airlines (DAL) or Crocs (CROX) shoes and thinking, "This company better post growing profits every year and compound my investment at 10% for decades!" Part of the magic, if you will, of a Procter & Gamble investment over this time frame is that the company seemed boring and predictable back in the early 1990s, and yet was still able to deliver this type of performance without the risk one might traditionally assume comes with an investment that turns $1 into $11.61 twenty years later.
What's amusing to me is that investors who bought Procter & Gamble for the dividends ended up doing quite well in the total return category, too. I volunteer at the local elementary school by where I live, and last week I was reading Peter Pan in Spanish to the students. I remember coming across the part where Captain Hook gets jealous of Peter Pan's form, and realized how much this applies to dividend growth investing. Captain Hook is bothered that Peter Pan has good form without even trying (that's the only way to really have it), and it seems to hold some truth with dividend growth investing as well. The people who trade blips on a screen all day trying to amass the greatest amount of wealth possible may not get there, but the investors who buy-and-hold stodgy blue-chips for the long-term while only paying primary attention to the growing dividend stream might one day wake up and realize, "I could sell these shares for a heck of a lot of money."
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.