If the sole goal of dividend-focused investing were dividends, then almost every dividend investor would be fighting it out to buy shares of Student Transportation (STB), a debt-laden and share-dilutive bus company that offers an 8.5% yield. But of course, that's not the case. Intelligent dividend investing focuses on the safety and reliability of the dividend, and that's why companies that yield 2%-5% like Coca-Cola (KO) and Johnson & Johnson (JNJ) are often staples in the portfolio of the dividend investor. It's because dividend investing with mega-cap stocks is not about the dividend exclusively.
Sometimes I think it would be appropriate to rename dividend growth investing with mega-cap stocks "Last Man Standing Investing." We don't flock to Coca-Cola and Johnson & Johnson just because they pay a dividend, but rather because these are the strongest companies on the planet that are likely to be standing in moments of terrible financial distress. I cannot promise investment success in the event of some kind of WW III, but I can look for companies that I believe would be the "last domino" to fall under such terrible circumstances.
I don't just look at a company like Coca-Cola and think, "Wow. This company pays out a dividend that has been growing for 50 years. That's the only reason I want to own it." Rather, I am impressed by what that statement represents. Coca-Cola is such a strong and dominant enterprise that through a myriad of wars, ballooning government deficits, sky-high unemployment, unfathomable advances in technology, and even nuclear threats, Coke has not only maintained profitability, but has grown profits through all of these challenges in such a way that it can keep paying out more and more to shareholders each year. I believe that a dominant company expresses its dominance by paying out an ever-growing stream of profits to the owners each year.
It's like what Confucius said in IX. 28 of The Analects, "Only when the cold season comes is the point brought home that the pine and the cypress are the last to lose their leaves." All the trees look good in the summertime. I want to know what's still looking green in the coldest frost of winter. When things are going well and the economy is booming, any company can make money.
The fact that a company held up well in the mid-to-late 1990s does not impress me. What impresses me are the companies that continue to thrive when the world is in crisis. I want to own the companies that raised their dividends during the financial crisis of 2008-2009 and mostly maintained or even increased profitability during that time. I want companies like Colgate-Palmolive (CL) that increased earnings from $3.66 in 2008 to $4.37 in 2009. Or McDonald's (MCD) raising earnings from $3.67 in 2008 to $3.98 in 2009. These are the kind of ownership stakes I want to go through life collecting.
We all have our own ways of defining what makes an investment strategy successful. Many people define a successful strategy as one that makes the most money. That's not how I approach it. I measure a company's success by looking at its performance when the overall economy is in terrible shape. The fact that Procter & Gamble (PG) and Colgate-Palmolive have not missed a quarterly dividend payment since the 1800s necessarily implies dividend payouts through WW I, The Great Depression, WW II, The Cold War, and so on. When I see records like that, I am not just thinking about the dividend. I am thinking about the business model.
Effectively, these companies are saying, "Through thick and thin, we have paid you more and more." If a company can not only survive the financial crisis but also manage to pay shareholders even greater dividends through periods of global recession, then it provides a strong clue that I may have found a candidate for my "Last Companies Standing" portfolio. That's why I don't consider dividend investing only about the dividend. It's about finding companies with the business models that are so strong that they can afford to depart with a larger amount of profits when the world around it is in turmoil.