The Good News About Failure With Blue Chip Investing

Includes: CL, COP, GM, JNJ, KMB, KO, PEP, XOM
by: Tim McAleenan Jr.

Picture this. It's the first week of 1980. You have $100,000 that you decide to invest across 10 different companies to help meet your living expenses in 2012. One of those companies that catches your attention is a dominant pharmaceutical firm, Johnson & Johnson (NYSE:JNJ). You decide to put 10% of your available funds into shares of Johnson & Johnson stock, acquiring $10,000 worth of the New Brunswick firm.

Now picture this: Every single one of your other investments for the rest of your life failed. Completely. Your other $90,000 went into blue chip firms that all went bankrupt, leaving you with nothing but your Johnson & Johnson stock. What would you have now, thirty-two years later?

Fueled by a dividend that grew every single year and some stock splits along the way, your 130 initial shares would have turned into 8,866 shares today. You could sell those 8,866 shares for $592,000. Or you could continue to maintain your ownership in the firm, perhaps using the $21,600 in annual dividend income to help meet your living expenses. And that all came from a single $10,000 investment 32 years ago, which is now paying out twice that amount nominally as dividend income each year.

This is why I don't wade into the survivorship bias argument about dividend growth stocks too often. I understand that if David Fish had compiled lists of dividend growth records in 1980, 1990, 2000, and so on-the lists back then would include companies that have fallen by the wayside. But I don't let that get me down because there are still plenty of companies that were dominant in the 1970s, 1980s, and 1990s that are still dominant today. Companies like Coke (NYSE:KO), Pepsi (NYSE:PEP), Exxon Mobil (NYSE:XOM), and Kimberly Clark (NYSE:KMB) could have easily substituted for Johnson & Johnson in my example and turned $10,000 investments into small fortunes over the course of the past 32 years.

I find it reassuring that a successful dividend growth investing strategy does not require that every investment turn out right. If I can get in the habit of throwing $10,000 at Coke, $10,000 at Colgate-Palmolive (NYSE:CL), or $10,000 at Conoco Phillips (NYSE:COP) throughout my late 20s and 30s, I only need a small handful to turn out well by the time I am in my 50s and 60s to do well.

While it's unlikely that the Johnson & Johnson investor in my example would have held onto his shares if all of his other blue chip investments failed, I also hope it's unlikely that I experience a 90% total failure rate with investments. Hopefully, I'll find some success with the monitor component of buy-and-hold investing. But it's helpful to keep in mind that even if I do mess up along the way, it's not the end of the world.

The reason I can get past the survivorship bias arguments and the threat of failure with blue chip stocks is because the failure of some firms does not take away from successful track records. If you put $10,000 into Johnson & Johnson and General Motors (NYSE:GM) in 1980, you'd still have $592,000 even though GM failed. And I find Johnson & Johnson's returns over the past 32 years to be quite exceptional given that J&J was a large-cap American company 32 years ago. Failure of blue chip firms can, and does, happen. If I'm a shareholder of such a firm, hopefully I'll monitor successfully and weed these companies out of the portfolio before they create a total loss.But the key is planting enough investment seeds along the way that have the opportunity to compound for twenty, twenty-five, thirty years so that all it takes is a few winners to help you meet your long-term investing goals. Given enough time, you may only need a small handful of winning investments to get the income stream or portfolio size that you desire.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.