Andrew Page
Andrew Page

Last week we saw how the ‘decade of lost growth’ is a bit of an overstatement. But although we managed to turn a loss into a gain, through some very basic strategies, it was still hardly anything to write home about. In this edition, we seek to remedy that and show how the first decade of the 21st century was a great period for income focused investors.

From Index to Shares

The more telling truth to note is that few investors simply invest in the wider index. There are literally many dozens of quality blue chip companies that performed very well over this period, and it wouldn’t have taken a Warren Buffet to see the value of investing in solid, proven blue chip stocks like McDonalds or Coca-Cola. Below are a handful of some quality blue-chip US stocks, and their performance between 2000 & 2010.

Company Start Price
Jan 2000
End Price
Jan 2010
Total Dividends Received Price gain Total return
3M Co $48.03 $82.67 $15.84 72.12% 105.10%
PepsiCo Inc $35.25 $60.80 $10.23 72.48% 101.49%
Exxon Mobil Corp $39.75 $68.19 $11.75 71.55% 101.11%
McDonald's Corp $39.94 $62.44 $8.47 56.33% 77.54%
Johnson & Johnson $46.56 $64.41 $12.21 38.34% 64.56%
Walgreen Co $29.25 $36.72 $2.56 25.54% 34.30%
Procter & Gamble $54.78 $60.63 $11.31 10.68% 31.32%
Kimberly-Clark $65.44 $63.71 $18.03 -2.64% 24.91%
Coca-Cola Co $57.31 $57.00 $10.78 -0.54% 18.27%

(Note that I could have picked some spectacular speculative performers, but the point is that these would have been very difficult to pick in advance. The stocks listed above were all quality proven, dividend paying stocks in 2000 and would have appeared very attractive at that point in time).

But for those not satisfied with a focus only on individual stocks, we can instead employ the use of an index. But rather than use something like the S&P500, which in my view contains many poorly managed enterprises, let us use the S&P Dividend Aristocrat Index. This index includes all companies within the S&P 500 that have consistently increased dividends for at least 25 years. As you can see, investors who followed a sensible policy of investing in ‘boring’ income stocks actually experienced a very favourable decade.

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Dividends Matter

One thing that becomes abundantly clear with such an analysis is that dividends matter, a lot. Even in the US where yields are considered to be quite pathetic (they are about half the Aussie market average) we have already seen the impact they can have. Sadly though most investors pay them little attention, and focus entirely on share price appreciation.

Consider the performance of ASX Ltd for the three years following the start of 2007, which saw shares drop by 8.4%. Certainly it wasn’t what investors would have hoped for, but we must also consider the fact that the company returned over 18% of its starting price back to shareholders in the form of dividends over that period. That’s a total return of almost 10% for shareholders, which although far from spectacular certainly highlights the importance of dividends.

Understand that I’m not saying that this was an outstanding success story, and certainly I could have picked far better examples, but I just want to illustrate how dividends can so easily make all the difference between profit and loss. It also serves to warn against the derision of low yields: ASX shares were trading with a dividend yield of just 3.1% at the start of 2007. What most investors fail to grasp is that it is the growth in dividends that is just as important, if not more important, than the starting yield.

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Buy & hold is alive and well

Buy & hold, although a rather simplistic description of what it is long term investors actually do, is far from dead. I cannot help but notice that those who most commonly argue in favour of a more active approach are usually brokers, and brokers make their money through commissions; the more you trade the more money they make. Buy and hold doesn’t help your broker’s bottom line nearly as much as active trading.

Of course I cannot argue that a well timed series of trades won’t deliver far superior returns. But you have to assume that the majority of your trades will indeed be well timed, something that is far from certain in my opinion. Moreover, if instead your trades are ill timed, then you will experience substantial losses, well below what ‘buy & hold’ would have delivered. It comes down to how much risk you are willing to take with your capital. Personally, I wouldn’t advocate the gamble.

If making an investment in quality dividend paying stocks makes sense, why not check out the DividendKey course? You’ll be surprised of the benefits income investing can yield, even for those strictly focused on growth.

Make the markets work for you

Andrew Page