I was watching an old Bruce Springsteen interview on television a while back when the Boss had this to say about Bob Dylan, "Every time I listen to a Dylan song, I think, 'I wish I wrote that.'" That quote shouldn't surprise anyone - most of us probably wish that we could put out a masterpiece like this (click here).
Anyway, I experienced the financial journalism equivalent of that when I came across a recent passage from Morgan Housel at The Motley Fool that talked about "biases of Titanic proportions." Housel's article is worth a read by clicking here, but there is one passage in particular that I wish I wrote:
Think about this: One thousand dollars invested in the S&P 500 in 1950 would be worth about $78,000 today if you focus on the index alone. But with dividends reinvested, your $1,000 actually grew to $622,000 -- eight times higher than the index shows. Over the long haul, dividends provide the majority of returns. That should be the biggest story investors spend their time and energy on. Yet look what gets almost all the attention in the media: daily market swings of a few points here and there, none of which matter over the long term. Apple fell a few percentage points on Monday, bringing shares back to where they were literally a few weeks prior. And the media went wild. By my count, nearly 2,000 articles referenced Apple's "plunge," many as front-page stories. Meanwhile on Monday, Procter & Gamble raised its dividend for the 56th consecutive year, this time by a lofty 7%. Only a handful of news outlets picked up on the news; most were buried by headlines of Apple's one-day hiccup. For those looking to build wealth, consistently growing dividends are far more important than daily market wiggles. Yet most of us are captivated by the latter. There's your Titanic bias.
Wow. What a great passage. Now don't get me wrong, I understand the desire to write about Apple (AAPL) ad nauseam. There's only so many mega-cap stocks that can offer you 100% returns over the course of a year. But Housel's quote does a fantastically concise job of explaining why dividend-focused investing should have the center seat at the table when it comes to long-term wealth building strategies. I get that the static price movement of companies like Johnson & Johnson (JNJ) cause some people to doubt the viability of investing in top-quality stocks, but it shouldn't.
Let's take a quick look at the 10-year income growth for Procter & Gamble (PG), Coca-Cola (KO), Pepsi (PEP), Johnson & Johnson , and Kimberly-Clark (KMB). For this calculation, I'm going to assume that you bought $5,000 worth of each stock at the median price point in 2002, and then compare the 2002 dividend income to the expected 2012 income (based on Value Line estimates).
As you can see, these typical names in the dividend growth world doubled or tripled your annual income over the 2002-2012 period, even if the stock price didn't. Most of this has to do with the fact that many mega-cap stocks were trading at P/E levels way above a price that a disciplined investor would pay. After all, if you invested $5,000 into each of these companies at the median price point in 2002, your starting yield would have been 1.67%. That's a terrible yield to begin your compounding at. But that's not the fault of these five companies - it was our fault collectively as investors for bidding the shares up to that kind of valuation. Housel's point is that we should focus on the relatively predictable dividend growth that these companies offer. This hypothetical portfolio collection grew its annual income from $418 in 2002 to $1,180 in 2012. That's almost a tripling of annual income without having to reinvest or do anything other than cash the quarterly dividend checks-just identify great companies, and then sit on your keister as the dividend grows.
This cuts to the heart of what a successful long-term strategy for wealth building might look like. Sure, Apple has been a great story, but it's just one star in the sky. If we take a step back and look at the big picture of building wealth with our investments, we can use the presumption of 7% annual dividend increases from the likes of the Cokes and Johnson & Johnsons of the world to offer us a steady path to long-term wealth creation. If you can pick up 100 shares of Procter & Gamble in 2012, 100 shares of Johnson & Johnson in 2013, 100 shares of Exxon Mobil in 2014 (XOM), and then take a "Wash-Rinse-Repeat" attitude toward the dividend growth companies that Mr. Market throws your way at attractive prices, then you are well on the path to building immunity from the "Gasp! Apple fell 3% Today!" headlines that often try to steal the show.