“If it’s too good to be true, then it probably is”. Sound familiar? This is generally true, especially when it comes to your finances. Hear me out though. You can earn a 100% return on your investments. How? You might ask. The answer lies in the power of dividend growth and patience.
Real Life Examples
Let me provide you a few real life examples using recognizable stock names. Microsoft (MSFT)’s current annual dividend is $1.56. On August 6, 1991, if you had the wisdom, foresight, or luck and purchased shares, your price per share was only $1.55. A few days earlier on July 25, 1991, the stock traded at $1.40.
Patience is necessary every single day following that purchase date. Counting back from today’s date, that’s 9237 days of other people attempting to convince you to sell. There are so many naysayers out there and their voices tend to be loud. Many major news events have happened in between. The death of the PC? Recession? CEO retiring? Whatever. The stock would have taken you for a wild ride over the years if you’d allow it to be; a dot com bubble and collapse; a financial crisis. None of that matters to you, the patient investor.
Your reward for holding the stock for 25 years? Considering the dividends MSFT is paying you today, this is a 100% annual return just on dividends! This assumes MSFT won’t cut their dividend payments.
Microsoft is a bit of an extreme example. You won’t find many stocks that reach this kind of dividend growth in 25 years. Let’s proceed to some more examples.
Johnson & Johnson (JNJ) pays an annual dividend of $3.20. On March 13, 1986, it traded at $3.19. If you had purchased shares on that date, and then held for just over 30 years you’d be receiving a 100% return just from dividends.
Pfizer (PFE) pays an annual dividend of $1.20. You could have purchased shares of that stock close to $1.20 back on August 17, 1982. Thirty four years isn’t too shabby to be receiving a 100% return on the share price you paid. If you had bought this stock in year 1982, when you were in your late 20s, then you’d have reached this level of return just before you hit typical retirement age.
Ford (F) pays an annual dividend of $0.60. You could have bought this stock for $0.67 back on February 22, 1982. Today’s annual dividend payment is not a 100% annual return yet, but close at 89.5%. What’s even crazier with this stock is you could have bought it in February 2009 at under $2 per share. It would have taken only three years of today’s dividend payments to get back your original purchase price (the share price in February 2009).
IBM (IBM) pays an annual dividend of $5.60. The last time it traded at this price was back on April 2, 1963. Fifty three years is a long time for anyone to wait. For a 100% annual return, is it not worth the wait though? IBM was an often overvalued stock throughout the 60s and 70s due to an investing craze called The Nifty Fifty.
Buy Low
All of my examples have several things in common. All of them are household names. Many today would be considered boring investments. Each of them have had times in the past when they were considered hot investments. Each company has had multiple moments of panic throughout the decades. There were times when people questioned these companies’ abilities to survive or their abilities to continue to grow profits. Were they operating efficiently?
In each of the example I mentioned above, the share prices highlighted were relatively low for the time period. If you look at the price history of each of these stocks, you’ll notice higher prices before the dates I listed. This is why it’s so important to buy low. Microsoft doesn’t fit this example though as it could have been purchased much cheaper in the years just before 1991. The IPO in March 1986 was just ten cents a share.
Who Really Holds a Stock That Long?
You may be asking, “Who holds a stock for 30 to 35 years?”. Why not you? If you’re in your 20s or 30s, then it very easily can be you. Demonstrate patience by thinking of your future self. Even if you’re already in your 40s, why not you? Life expectancy is only getting longer. The probability that you’ll live to 80 or 85 is high. And you will need income in those later years as well.
There is another group of investors who hold stocks for decades upon decades. They are institutional investors. This group includes university endowments and pension funds. Certainly, some get caught up chasing hot investments. Others just buy good companies at good prices and then hold onto them forever.
Warren Buffett was once asked about his time horizon for holding a stock. His answer is “forever”. I like his answer and try to model my investing philosophy after that. Most of my dividend yields are already in the 5 to 10% range. One yield is roughly at 20%. These yields are not based on the current share price. They are based on the prices at the time of purchase. With more time and patience, these yields will only get sweeter. I hope this investing philosophy becomes a part of your investing plan as well.
What do you think about holding a stock investment for decades?
Have you ever taken an investment action due to a naysayer? What was the result?
How does your investing philosophy differ from what I described?