Last January, I wrote an article entitled, Why Dividend Stocks Dominate The World's "Most Valuable Brands". Within this piece, I detailed the propensity that the top 10 brands, as ranked by Interbrand, happen to have towards paying out dividends. The top 10 most valuable brands in 2011, starting from most valuable, included: Coca-Cola (KO), IBM (IBM), Microsoft (MSFT), Google (GOOG), General Electric (GE), McDonald's (MCD), Intel (INTC), Apple (AAPL), Disney (DIS) and Hewlett-Packard (HPQ), respectively. Within this subset, we have Coca-Cola not only paying, but also increasing its dividend for 50 straight years, IBM for 17 straight years, Microsoft for 10 consecutive years, McDonald's for 36 years and Intel for 9 years. Additionally, General Electric, Disney and Hewlett-Packard were all paying dividends. Notably, both Apple and Google were not paying dividends at that time. In fact, I addressed this seeming anomaly quite specifically in the article:
Google and Apple don't pay dividends; however I would argue that these companies are simply young in their process. Just as Microsoft waited until 2003 to initiate a dividend, in time dividends will likely come with GOOG and APPL too.
Now I don't want to say that I predicted that Apple would initiate a dividend, but I did predict that Apple would eventually pay a dividend exactly two months prior to the announcement. I suppose I'll stay humble in the fact that I'm only one for two thus far; although I would feel confident in suggesting that as long as Google remains fundamental, then a dividend is likely in its future as well. Moving forward, here are the top 10 brands of 2012, as ranked by Interbrand:
|Most Valuable Brands||2012||2011|
|1||Coca-Cola||77,839 ($m)||71,861 ($m)|
|2||Apple||76,568 ($m)||33,492 ($m)|
|3||IBM||75,532 ($m)||69,905 ($m)|
|4||69,726 ($m)||55,317 ($m)|
|5||Microsoft||57,853 ($m)||59,087 ($m)|
|6||GE||43,682 ($m)||42,808 ($m)|
|7||McDonald's||40,062 ($m)||35,593 ($m)|
|8||Intel||39,385 ($m)||35,217 ($m)|
Notice that the top eight companies are precisely the same as 2011, albeit jumbled greatly. The only consistencies that remain are Coca-Cola in the No. 1 spot and Google in the No. 4 spot. But it is noteworthy to underline the significance of this picture. Granted, one year isn't a very long time frame, but we see that powerful brands are likely to be inherently sticky. That is, once a brand becomes valuable, there is a tendency for it to remain valuable. Now, this doesn't mean that you can stop monitoring the most valuable brands, as circumstances change over time. For example, within this list, we saw both Disney and Hewlett-Packard fall from the 9th and 10th spots to 13th and 15th, respectively. Personally, I would argue that one should be more concerned about the latter rather than the former, especially in the short-term, but that point is neither here nor there. The important point of a valuable brand's relative stickiness is the substantive pricing power that it likely indicates.
As a relevant aside, I would like to note a rather astonishing fact within the importance of obtaining both value and consistent payouts. I would imagine that almost all dividend growth investors know the recent storied past of McDonald's dividend increases. Over the last decade, MCD has been able to increase its dividend by an average annual rate of over 27%. Consequently, the yearly price appreciation over the same period has been over 15%. Certainly, these are remarkable and desirable stats. In fact, if you invested $10,000 in MCD in 2003 and reinvested the dividends, you would have an ending value around $48,000 and a yearly dividend payout over $1,500. Cumulatively, your dividends would have been worth over $7,600; although these would be out of hand, as they are reinvested.
But compare this to purchasing shares of Apple in 2003, which paid exactly $0 in dividends from 2003 to 2011. Aside from the "better than a bank hold-up" ending value around $575,000, you would also receive a yearly dividend payout around $9,200. In essence, if you were fortunate enough to realize AAPL's potential early on, you could "have your cake, eat it, and open a chain of bakeries." The lasting point of this quick aside was to "keep your dividend growth options open".
I could be wrong, but I don't think that anyone is necessarily surprised by the fact that the most valuable brands tend to both remain at the top and pay dividends. Once you have a well-established and beloved brand, it's your job not to mess it up; the difficult portion has already been done for you. True, this in itself can be a full time endeavor, but it's obviously much easier than creating a brand new name for oneself. So how can we apply this knowledge to an income investing strategy?
Whether I was a first time investor or a well-seasoned dividend growth "professional" focused on a rising stream of income over time, I wouldn't hesitate to use Interbrand's most valuable brand list as a strong beginning focal point. In addition to the top 10 brands that I listed above, Interbrand also includes 90 more valuable trademarks. For example, other well-known dividend growth companies are aptly represented: Procter & Gamble's (PG) Gillette and Pampers, PepsiCo (PEP), Colgate of Colgate-Palmolive (CL), Johnson & Johnson (JNJ), 3M (MMM) and Kimberly-Clark's (KMB) Kleenex all make the list. And when you combine the storied dividend increase track records of these DG companies with their powerful brands, it's not difficult to see why they might be worthy of further research.
For that matter, it's not difficult to see why these companies make money. If you take a trip to Wal-Mart (WMT) or Target (TGT), you'll see people paying a premium for Coca-Cola over the generic, choosing between Pampers and Huggies, buying Listerine instead of the store brand of mouth wash, and trusting their shaves to Gillette. Aside from the added cost of incremental advertising, there really isn't that much of a difference between what it costs these companies to make their products against the generic -- yet the price premium is huge.
Now obviously, there are many more things to consider to determine if a security is correct for you and your strategy. However, I would argue that a valuable, premium-demanding brand is a fundamental driver in the process of a successful income-focused strategy. This is especially true when you couple this considerable benefit with a propensity to continuously increase the payout by a rate that far outpaces inflation. More specifically, there is value within the instinctive exceptionality that a strong brand commands.