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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Agora Series
- Sprache: Englisch
2016 Book of the Year award winner by the Institute for Financial Literacy "Set it and forget it" investing, with less risk and higher returns Get Rich with Dividends is the bestselling dividend-investing book that shows investors how to achieve double-digit returns using a time-tested conservative strategy. Written by a nineteen-year veteran of the equity markets, this invaluable guide shows you how to set up your investments for minimal maintenance and higher returns, so you can accumulate wealth while you focus on the things that matter. Using the author's proprietary 10-11-12 system, you'll learn how to generate the income you need on a quarterly or even monthly basis. You'll discover the keys to identifying stocks that will return twelve percent or more every year, and how to structure your investments for greater security and financial well being. This method is so easy to use, you'll want to teach it to your children early to set them up for financial independence and help them avoid the problems that plagued many investors over the past decade. Dividends are responsible for 44 percent of the S&P 500's returns over the last eighty years. They represent an excellent opportunity today, especially for investors who have been burned in recent meltdowns and are desperate for sensible and less risky ways to make their money grow. This book describes a framework that allows investors to reap higher returns with a low-to-no maintenance plan. * Set up an investment system that requires little to no maintenance * Achieve double-digit average annualized returns over the long term * Focus on other things while your money works for you * Increase returns even with below-average growth in share price Market risk is high and interest rates are low, making it a perfect time to get started on a more sensible wealth generation strategy. With expert guidance toward finding and investing in these unique but conservative and proven stocks, Get Rich with Dividends is the only book on dividend investing you'll ever need.
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Additional Praise forGet Rich with Dividends
“Marc Lichtenfeld's book is a timely, necessary, and easy-to-read reminder about the importance of dividend paying stocks. For a long time, especially during the tech boom, investors sacrificed steady dividend payments in favor of a stock's growth potential. Ultimately, however, stocks fell and those investors were left with neither cash nor capital appreciation. Don't let this happen again. Read Marc's book.”
—Gregg GreenbergPersonal finance reporter, TheStreet.com
“In today's global financial environment, investors would be wise to empower themselves with knowledge and insight. Mr. Lichtenfeld delivers on that mission.”
—Todd HarrisonFounder and CEO, Minyanville Media, Inc.; author of The Other Side of Wall Street
“Marc Lichtenfeld's name may be hard to pronounce, but his guide book is easy to implement. He practices what he preaches with his incredibly successful Perpetual Income Portfolio at the Oxford Club. His book should be called Get Rich Sooner than You Think. Investing in stocks that pay steady and rising dividends will make you a fortune you can enjoy while you're still young!”
—Mark SkousenEditor, Forecasts & Strategies
“Marc has put together a New Bible for Investing. And in the process, he's debunked one of Wall Street's most widely held beliefs: that the average investor simply cannot outperform the market. He can! All it takes is a little legwork to find great companies that pay steady, rising dividends. And Marc's step-by-step system makes it easy. So put it to work, get rich, and start spreading the good news.”
—Louis BaseneseFounder and chief analyst, Disruptive Tech Research
“Speculators can get lucky occasionally. They can even get rich once in a while. But if you want to build wealth consistently, you have to let your money work for you. There is only one time-tested strategy for doing this and that is through dividends and reinvesting those dividends. However, investing in dividends is a strategy. Fortunately, you now have one of the best guides and guidebooks in the business. Marc Lichtenfeld is an accomplished researcher, with years of experience in the field of investing and dividends. His information is well thought out, well researched, and well written. Save yourself some time and set yourself up with a perpetual money machine by reading and following Marc's advice—religiously! You will get rich . . . or richer by doing so.”
—Karim RahemtullaEditor, Wall Street Daily;Author of Where in the World Should I Invest: An Insider's Guide to Making Money Around the Globe
Get Rich with Dividends
A PROVEN SYSTEM FOR EARNING DOUBLE-DIGIT RETURNS
Second Edition
Marc Lichtenfeld
Cover image: Money Land © iStock.com/imagedepotpro; Falling confetti © iStock.com/BanksPhotosCover design: Wiley
Copyright © 2015 by Marc Lichtenfeld. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
The first edition of Get Rich with Dividends was published by John Wiley & Sons, Inc. in 2012.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages.
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Library of Congress Cataloging-in-Publication Data:
Lichtenfeld, Marc.
Get rich with dividends: a proven system for earning double-digit returns / Marc Lichtenfeld.—Second edition. pages cm ISBN: 978-1-118-99413-9 (cloth); ISBN: 978-1-118-99415-3 (ePDF); ISBN: 978-1-118-99414-6 (ePub) 1. Dividends. 2. Portfolio management. I. Title. HG4028.D5L53 2015 332.63′221—dc23
2014044967
For Holly, Julian, and Kira, who have made me rich in the most important way
Contents
Foreword by Alexander Green
Preface
Chapter 1 Why Dividend Stocks?
“Y'all Must've Forgot”
Marc Lichtenfeld's Authentic Italian Trattoria
The Numbers
Keeping Up with Inflation
The 10–11–12 System
Summary
Notes
Chapter 2 What Is a Perpetual Dividend Raiser?
Dividend Aristocrats
The Index
The Champions
Junior Aristocrats
Survivorship
Summary
Chapter 3 Past Performance Is No Guarantee of Future Results, but It's Pretty Darn Close
Performance of Perpetual Dividend Raisers
How Do Bonds Compare?
Are You an Investor from Lake Wobegon?
Summary
Notes
Chapter 4 Why Companies Raise Dividends
Buybacks versus Dividends
Management Speaks
Attracting the Right Shareholders
Signals to the Market
Summary
Notes
Chapter 5 Get Rich with Boring Dividend Stocks (Snooze Your Way to Millions)
How Much Do You Want to Make?
Summary
Note
Chapter 6 Get Higher Yields (and Maybe Some Tax Benefits)
Buying $1 in Assets for $0.90
MLPs
REITs
BDCs
You Don't Have to Play Mahjong with Mrs. Zuckerberg
Preferred Stocks
Summary
Chapter 7 What You Need to Know to Set Up a Portfolio
The
Oxford Income Letter
Portfolio—An Example
Setting Up the Portfolio
Yields
Payout Ratio
Dividend Growth Rate
Special Dividends
Summary
Note
Chapter 8 The 10–11–12 System
Yield
Dividend Growth
Payout Ratio
Formula
Numbers
When to Sell
Summary
Chapter 9 DRIPs and Direct Purchase Plans
Summary
Chapter 10 Using Options to Turbocharge Your Returns
Covered Calls: The Espresso of Income Investing
Option Prices
Volatility: An Option Seller's Best Friend
Time Is on Your Side
Who Should Sell Covered Calls?
20% Annual Returns
Selling Puts
Summary
Chapter 11 Foreign Stocks
One Lump or Two?
Lumpy Perpetual Dividend Raisers?
Other Risks
Summary
Chapter 12 Taxes
Foreign Taxes
Tax-Deferred Strategies
Tax Law Changes
Summary
Note
Conclusion: The End of the Book, the Beginning of Your Future
Glossary
About the Author
Acknowledgments
Index
End User License Agreement
List of Tables
Chapter 1
Table 1.1
Chapter 2
Table 2.1
Table 2.2
Table 2.3
Chapter 3
Table 3.1
Table 3.2
Table 3.3
Table 3.4
Chapter 4
Table 4.1
Chapter 5
Table 5.1
Table 5.2
Table 5.3
Table 5.4
Table 5.5
Table 5.6
Chapter 7
Table 7.1
Table 7.2
Table 7.3
Chapter 8
Table 8.1
Table 8.2
Table 8.3
Table 8.4
Table 8.5
Table 8.6
Table 8.7
Table 8.8
Table 8.9
Table 8.10
Table 8.11
Table 8.12
Table 8.13
Table 8.14
Chapter 9
Table 9.1
Chapter 11
Table 11.1
List of Illustrations
Chapter 1
Figure 1.1
1929–2010: $100 Original Investment
Chapter 3
Figure 3.1
1972–2010: $100 Original Investment
Figure 3.2
Dividend Aristocrats vs. S&P 500
Figure 3.3
The Power of Unfixed Income
Figure 3.4
Better Returns, Both Absolute and Risk-Adjusted
Figure 3.5
Chevron
Figure 3.6
1990–2010: Equity Mutual Fund Investors' Poor Timing Leads to Subpar Results
Figure 3.7
Asset Class Returns vs. The “Average Investor” 20 Years Annualized (12/31/1993–12/31/2013)
Figure 3.8
Bad Timing
Chapter 4
Figure 4.1
Eaton Vance Beats the S&P by Nearly 10,000%
Chapter 5
Figure 5.1
Dendreon's Wild Price Swings
Chapter 6
Figure 6.1
Closed-End Funds Association Site
Figure 6.2
Deutsche Municipal Income Trust
Figure 6.3
Average Annual Total Return %
Chapter 7
Figure 7.1
Statement of Cash Flow, Meredith Corp.
Figure 7.2
U.S. Dividend Champions
Figure 7.3
American Eagle Outfitters Dividend History
Figure 7.4
Dividend Payment History for American Eagle Outfitters
Chapter 8
Figure 8.1
Vulcan Materials Company Dividends
Chapter 9
Figure 9.1
Fees When Reinvesting Dividends or Purchasing Stock Directly from Altria
Figure 9.2
Clorox Plan Fee
Guide
Cover
Table of Contents
Preface
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Foreword
When it comes to the stockmarket, most investors prefer glamour to profits.
Why do I say this? Tell average investors about a company with a cutting-edge technology, an exciting Phase III drug, or a new gold strike and they are all ears. But tell them about a blue chip stock with steady sales, a big order backlog, and a rising dividend yield and they are more likely to stifle a yawn.
That’s unfortunate. Because, contrary to what most investors believe, startling innovation is not a good predictor of business success. Or, as the famous industrialist and steel magnate Andrew Carnegie succinctly put it, “Pioneering don’t pay.”
A young company that is just feeling its oats—and retaining all its earnings—is unlikely to be the best long-term investment. It’s a widely recognized fact that 80% of new businesses fail in the first five years.
What really makes money for investors over time—and without the hair-raising volatility of hypergrowth stocks—is steady businesses paying regular dividends.
For example, over the past decade, with dividends reinvested, oil producer Chevron Corp has returned 200%. Altria Group, the U.S. tobacco giant, has returned more than 300%. Even musty old Con Edison, originally founded asNew York Gas Light Company—a utility that was born 23 years before Thomas Edison—has returned 130% over the period.
In this excellent new book, my friend, colleague, and fellow analyst Marc Lichtenfeld shows you how and why to invest in great dividend stocks. And let me make two things clear at the outset. Number one, you could not find a more worthy, knowledgeable, or trustworthy guide to the investment landscape. And, second, this investment approach really works.
How can I be sure? Marc runs the Oxford Club’s Perpetual Income Portfolio, a portfolio based solely on growth and income investments. He has done a superb job. In fact, when I looked at the returns recently, I had to ask him, “Holy crap, Marc. How do you do it?”
Fortunately, Marc shows you how you can earn returns like this yourself. He has made me a believer. At investment seminars today, I tell attendees, if you are looking for growth, invest in dividend stocks. If you are looking for income, invest in dividend stocks. If you are looking for safety, invest in dividend stocks.
Why? Earnings may be suspicious due to creative accounting. Revenues can be booked in one year or several years. Capital assets can be sold and the value listed as ordinary income. But cash paid into your account is a sure thing, a litmus test of a company’s true earnings. It’s tangible evidence of a firm’s profitability.
Regular payouts impose fiscal discipline on a company. And history reveals that dividend-paying stocks are both less risky and more profitable than most stocks.
Dr. Jeremy Siegel, a professor of finance at the Wharton School of the University of Pennsylvania, has done a thorough historical investigation of the performance of various asset classes over the last 200 years, including all types of stocks, bonds, cash, and preciousmetals. His conclusion? High-dividend payers have outperformed the market by a wide margin over the long haul.
There is an awful lot of fear and anxiety about the economy andthe stock market today. Investors are understandably confused and uncertain about what to do with their money.
Marc Lichtenfeld has your solution. He demonstrates that even during market declines, dividend-paying stocks hold up better than non-dividend-paying stocks and often fight the broad trend and rise in value. The reason is obvious: These tend to be mature, profitable companies with stable outlooks, plenty of cash, and long-term staying power.
Bear in mind that U.S. companies are sitting on a record amount of cash right now, more than $2 trillion. Companies are not hiring, and they’re not boosting spending. So a lot of this cash is rightfully going back to shareholders. The Dow currently yields more than bonds. And dividend growth among U.S. companies has averaged 10% per year over the last two years,more than double the long-term dividend growth rate.
The current outlook is especially promising. Over the last 50 years, for instance, the highest 20% yielding stocks in the Standard & Poor’s 500 returned 14.2% annually. That’s good enough to double your money every five years—or quadruple it in ten. And if you were even more selective, say investing only in the ten highestyielding stocks of the 100 largest companies in the S&P 500, your annual return would have been even better, 15.7%.
I should add the standard caveat here about past performance and point out that there are risks with dividend stocks too. As Marc points out, an investor would be foolish to plunk down money for a stock just because the dividend is large. You have to be selective. The market is full of “dividend traps,” troubled companies that pay hefty dividends to keep investors from bailing out.
In the pages that follow, you’ll learn how to avoid those and zero in on potential winners.Marc shows you how to look at cash flow and payout ratios and whether the dividend is sustainable.
Does this require a bit of legwork? Yes, but the payoff is large.
It astonishes me that investors are willing to lend money to the U.S. Treasury for the next ten years at less than 2%. What a terrible bet, one that virtually guarantees a negative, real (after inflation) return over the next decade.
A far better bet is a diversified portfolio of dividend-paying stocks. Over the eight decades through 2010, dividends contributed 44% of the U.S. stock market’s return, according to Fidelity Investments. Sometimes it was much more. During the 1970s, for example, dividends generated 71% of returns.
Marc makes a strong case that dividend stocks today represent a historic opportunity. Not only are U.S. companies flush with cash, but payouts are less than one third of profits, a historic low.
Dividends alone won’t generate a mouth-watering return. But they will rise over time—and surprising things happen when you reinvest them. Picture a snowball rolling down hill.
Albert Einstein understood this. As he observed, money compounding “is the most powerful force in the universe.” And the best way to compound your money? Great companies that pay steady, rising dividends.
This book is your key because Marc Lichtenfeld does a great job of showing you just where to find them.
Alexander Green
Preface
It was a eureka moment.
I was working on a dividend spreadsheet, changing the variables, when the size of the numbers I saw surprised me. I realized that if my kids' money was invested according to the formula I was working with, they should never have any financial problems in adulthood, no matter what job or career they choose.
I also recognized that using the same formula, my wife and I should never have to worry about income in retirement.
And last, I understood that if my parents invested according to the formula, they, too, should have no worries about income in old age.
That's when I knew I had to write this book.
Get Rich with Dividends is for the average investor—the investor who is just getting started and the investor who is playing catch-up, the investor who has been burned by the booms and busts of the recent past and the investor who trusted the wrong advisor and ended up paying thousands of dollars for worthless advice.
This book is for all investors who are serious about creating real wealth for themselves and their families, investors who are willing to learn a simple system for making their money work as hard as they do (or did). It's easy to learn and implement and takes very little free time. Importantly, it's not a theory. It's been proved to work over decades of bull and bear markets.
And it's designed for investors who have other things they'd rather do than spend hours on their portfolios. Implement the 10–11–12 System and let stocks and time work their magic. All that's required is the occasional check-in from you to make sure the companies in your portfolio are still behaving the way you expect them to. If they are (and you'll learn how to pick companies that are most likely to meet your expectations), no further action is necessary.
As the editor of the Oxford Club's Oxford Income Letter, I receive e-mails every month from investors who are yearning for higher yield. In this low-rate environment, current yields aren't cutting it for many retirees. I was inspired to find a strategy that would ensure investors will not be in the same boat in the future as today's income seekers, who are taking on too much risk by chasing yield.
The 10–11–12 System outlined in Get Rich with Dividends will enable investors to achieve yields of at least 11% (and possibly much more) in the next 10 years—all while investing in some of the most conservative stocks in the market. These are companies with track records, some decades long, of taking care of shareholders. And if you don't need the income today, 12% average annual total returns (which crush the stock market average) are easily attainable. Earning 12% per year more than triples your money in 10 years, quintuples in 15 years, and grows by well over 10 times in 20 years. In other words, earning an average of 12% per year for 20 years turns a $100,000 portfolio into nearly $1.4 million. And that's with no additional investments.
What would an extra $1.4 million mean to you in retirement? First of all, it might spin off enough income that you wouldn't need to touch the principal. The money could be used for vacations with your family, a grandchild's college education, or peace of mind that you'll always have the best medical care.
Perhaps most important, you'll learn how my 10–11–12 System can still enable you to earn significant yields and double-digit returns in flat or down markets. Despite the nastiest bear market, you'll be sleeping comfortably, even smiling, once you implement my 10–11–12 System.
As you make your way through this book, you'll learn everything you need to know to become a successful investor. It's easy to read and even easier to get started.
In Chapters 1 and 2 we go over why dividend stocks are the best kind of investment you can make for the long-term health of your portfolio. Since you don't want to invest in just any old company paying a dividend, we discuss the special kind of stocks that you should select and how to find them.
I don't expect you to simply take my word for the claims I'm making, so in Chapter 3 I show you how I arrived at the various numbers, taking you through examples of how your income and total return can grow every quarter, with an example of how the 10–11–12 System still works and even thrives in bear markets.
In Chapter 4, we look at the big picture and the reason companies pay dividends. You'll understand why it's an important factor in determining the health of a business.
You'll see why certain conservative stocks are your best bet in Chapter 5. There's no reason to take excess risk to achieve your goals when some of the most conservative stocks on the market will achieve better results.
Chapter 6 discusses some interesting types of stocks you may not be aware of—stocks that typically yield more than regular dividend payers.
In Chapter 7, we lay the foundation for your portfolio, and then Chapter 8 is where you'll learn all about the 10–11–12 formula that you'll use to set you and your family up for long-term, double-digit yields and returns.
In Chapters 9, 10, and 11, we go over dividend reinvestment plans (DRIPs), foreign stocks, and options—all ways to turbocharge your returns.
Chapter 12 discusses everyone's favorite subject—taxes. Even if you use a CPA to do your taxes for you, be sure to read Chapter 12 as there is important information that could make your investments much more tax efficient.
And we wrap it all up in the conclusion and set you on your way to a lifetime of market-crushing returns and nights of worry-free (at least about your portfolio) sleep.
The strongest endorsement of the 10–11–12 System that I can make is this: I'm using it for my investments and for my kids' money as well.
Writing this book has been a labor of love because I know there will be thousands of families who will achieve financial freedom, be able to send a kid to college, make a down payment on a house, and enjoy retirement as a result of following the 10–11–12 System.
I'm glad yours will be one of them.
CHAPTER 1Why Dividend Stocks?
Let me start by making a bold statement: The ideas in this book are one of the most important gifts you can give to yourself or your children. On the pages that follow is the recipe for generating 11% yields and 12% average annual returns for your portfolio—significantly more if the stock market or your particular stocks cooperate.
I'm not trying to brag. I wasn't the one who first came up with the idea of investing in dividend growth stocks. I just repackaged it in a compelling, easy-to-read book that you will cherish for a lifetime and want to buy more copies of for all your friends and family, or at least lend them yours.
Enough jokes (for now). What I did was create an easy-to-learn system for investing in dividend growth stocks. You'll not only understand why dividend growth investing is one of the most lucrative and uncomplicated ways to invest but also learn the simple steps of how to do it.
If you follow the ideas in this book and teach them to your children, it's very conceivable that many of your concerns about income in the future will be over. And perhaps just as important, if your children learn this strategy at a young age, they may never have financial difficulties. They will have the tools to set themselves up for income and wealth far before they are ready to retire.
Keep in mind that I cannot teach you or your kids how to save money. If you would rather buy a new car at the expense of putting money away, I can't and won't attempt to fix that. This book is for the people who already know how to save and are trying to make that money work as hard as they do.
As far as saving money is concerned, the only advice I'll offer can be found in one of my favorite finance books, The Richest Man in Babylon, by George S. Clason. In that book, first published in 1926, Clason writes: “For every ten coins thou placest in thy purse take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to thy soul.”
Many personal finance gurus proclaim the same advice, but with a more modern bent to it, stating, “Pay yourself first.”
Even if you are not able to save 10% of your current income, saving anything is crucial. As you will see, the money you save and invest using the ideas in this book will grow significantly over the years. So if you can save only 8% or 5% or even 2%, start doing it now. And if you get a raise or an inheritance or win the football pool, do not spend a dime of it until you have put away 10% of your total income.
Here's a scary statistic. According to a 2013 survey by the Employee Benefit Research Institute and Mathew Greenwald & Associates, 57% of American workers had less than $25,000 saved for retirement, with half of those people reporting less than $1,000 saved (see Table 1.1).1
Table 1.1 Total Savings and Investments Reported by Workers in 2013 (not including value of primary residence or defined benefit plans)
Amount Saved
Percentage of Workers
Less than $1,000
28%
$1,000 to $9,999
18%
$10,000 to $24,999
11%
$25,000 to $49,999
9%
$50,000 to $99,999
10%
$100,000 to $249,999
12%
$250,000 or more
12%
Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, 2013 RCS Fact Sheet #3: Preparing for Retirement in America, 2013, accessed November 15, 2014, www.ebri.org/files/Final-FS.RCS-13.FS_3.Saving.FINAL.pdf
And in 2013, the average 65-year-old's 401(k) account had just $25,000 in it.2
If you are serious about improving your family's financial future—and I know you are because you're investing the time to read this book—start saving today, if you haven't already.
Imagine if you saved 10% of your money and put it into the kinds of dividend stocks discussed in this book. Over time, your wealth should grow to the point that it will have generated significant amounts of income, perhaps even replacing the need to work.
This is the last point I will make about saving. You didn't spend your money on this book (or drive all the way to the library) just to have me beat you up about saving. Instead, I will assume you really are serious about securing your future and want to learn how to take those funds and add a few zeros to the end of the total number in your portfolio.
And if you're already retired and you need income right away, the strategies in this book can help you, too. You may not have the ability to compound your wealth, but you can invest in companies that will generate more and more income for you every year. Not only can you beat inflation, but you can also give yourself and even your loved ones an extra cushion.
There are lots of ways to invest your hard-earned money. But you'll soon see why investing in dividend stocks is a conservative way to generate significant amounts of wealth and income. This isn't theory. It's been proved over decades of market history.
Some people believe that real estate is the only way to riches. Others say the stock market is rigged so that the only people who make money are the professionals—therefore, you should be in the safety of bonds. Still others trust only precious metals. None of these beliefs is true at all.
Within the stock market, there are various strategies that are valid. Value investors insist you should buy stocks when they're cheap and sell when they're expensive. Growth investors believe you should own stocks whose earnings are growing at a rapid clip. Momentum investors suggest throwing valuation out the window and investing in stocks that are moving higher—and getting out when they stop climbing.
Still others trust only stock charts. They couldn't care less what a company's earnings, cash flow, or margins are. As long as it looks good on the chart, it's a buy.
Each of these methodologies works at some point. The effectiveness of value and growth strategies tend to alternate: One will be in favor while the other is out until they trade places. For one stretch of time, value stocks outperform. Then for another few years, growth will be stronger. Eventually, value will be back in fashion.
Whichever is in vogue at the moment, supporters of each will come up with all kinds of statistics that prove their method is the only way to go.
The same dynamic applies when it comes to fundamentals versus technicals. The technical analysts who read stock charts assert that everything you need to know about a company is reflected in its price and revealed in the charts. Fundamental analysts, who study the company's financial statements, maintain that technical analysis is akin to throwing chicken bones and reading tea leaves.
There are plenty of other methodologies as well. These include quantitative investing, cycle analysis, and growth at a reasonable price (GARP), to name just a few more.
Die-hard supporters of all these strategies claim that their way is the only way to make money in the markets. It's almost like a religion whose most fanatical followers act as if their beliefs are the only truth—period, no debate, end of story. They're right and you're wrong if you don't believe the same thing they do.
I'm no authority when it comes to theology. But when it comes to investing I know this: Dogma does not work.
You will not consistently make money investing only in value stocks. Again, sometimes they're out of favor. If you only read stock charts, sometimes you'll be wrong. Charts are not crystal balls. Quantitative investing tends to work until it doesn't. Just ask the investors in Long-Term Capital Management, which lost everything in 1998.
Long-Term Capital was a $4.7 billion hedge fund that utilized complex mathematical models to construct trades. It made a lot of money for investors for several years. It was supposed to be fail-safe. But like the Titanic, which was also supposed to be unsinkable, Long-Term Capital hit an iceberg in the form of the Russian financial crisis and nearly all was lost.
“Y'all Must've Forgot”
During his prime, legendary boxer Roy Jones Jr. was one of the best fighters that many fans had ever seen. However, Jones didn't seem to get as much respect as he thought he deserved. So, in 2001, he released a rap song that listed his accomplishments and reminded fans about just how good he was. The song was titled “Y'all Must've Forgot.” Roy was a much better fighter than he was a rapper. The song was horrendous.
Looking back, investors in the mid to late 1990s remind me of boxing fans in 2001, when Roy released his epic tribute to himself. Both groups seemed to have forgotten how good they had it—boxing fans no longer appreciated the immense skills of Jones, and investors grew tired and impatient with the 10.9% average annual returns of the Standard & Poor's (S&P) 500 (including dividends) since 1961. After decades of investing sensibly, in companies that were good businesses that often returned money to shareholders in the form of dividends, many investors became speculators, swept up in the dot-com mania.
I'm not blaming anyone or wagging my finger. I was right there with them. During the high-flying dot-com days, I was trading in and out of Internet stocks, too. My first “10 bagger” (a stock that goes up 10 times the original investment) was Polycom (Nasdaq: PLCM). I bought it at $4 and sold some at $50 (I sold up and down along the way).
However, like many dot-com speculators, I got caught holding the bag once or twice as well. I probably still have my Quokka stock certificate somewhere in my files. Never heard of Quokka? Exactly. The company went bankrupt in 2002.
With stocks going up 10, 20, 30 points or more a day, it was hard not to get swept up in hysteria.
And who wanted to think about stocks that paid 4% dividends when you could make 4% in about five minutes in shares of Oracle (Nasdaq: ORCL) or Ariba (Nasdaq: ARBA)?
Did it really make sense to invest in Johnson & Johnson (New York Stock Exchange [NYSE]: JNJ) at that time rather than eToys? After all, eToys was going to be the next “category killer,” according to BancBoston Robertson Stephens in 1999. It's interesting to note that eToys was out of business 18 months later and BancBoston Robertson Stephens went under about a year after that.
If, in late 1998, you'd invested in Johnson & Johnson, a boring stock with a dividend yield of about 1.7% at that time, and reinvested the dividends, in mid 2014, you'd have made about 8.6% per year on your money. A $3,000 investment would have nearly quadrupled.
Johnson & Johnson is a real business, with real products and revenue. It is not as exciting as eToys or Pets.com or any of the hot business-to-business (B2B) dot-coms that took the market by storm.
But 16 years later, are there any investors who would complain about an 8.6% annual return per year? I doubt there are very many—especially when you consider that the S&P 500s annual return, including reinvested dividends, was just 4.2% during the same period.
Now, you might have gotten lucky and bought eBay (Nasdaq: EBAY) at $2 per share and made 16 times your money. Or maybe you bought Oracle and made five times your money. But for every eBay and Oracle that became big successful businesses, there were several Webvans that failed and whose stocks went to zero.
In the late 1990s, the stock market became a casino where many investors lost a ton of money and didn't even get a free ticket for the buffet. It doesn't seem that we've ever completely returned to the old way of looking at things.
My grandfather, a certified public accountant who owned a seat on the New York Stock Exchange, didn't invest in the market looking to make a quick buck. He put money away for the long term, expecting the investment to generate a greater return than he would have been able to achieve elsewhere (and possibly some income).
He was willing to take risk, but not to the point where he was speculating on companies with such ludicrous business ideas that the only way to make money would be to find someone more foolish than he to buy his shares. This is an actual—and badly flawed theory used by some. Not surprisingly, it is called the Greater Fool Theory.
There were all kinds of companies, TheGlobe.com, Netcentives, and Quokka, to name just a few, whose CEOs declared we were in a new era: This time was different. When I asked them about revenue, they told me it was all about “eyeballs.” When I pressed them about profits, they told me I “didn't understand the new paradigm.”
Maybe I didn't (and still don't). But I know that a business has to eventually have revenue and profits. At least a successful one does.
I'm 100% certain that if Grandpa had been an active investor in those days, he wouldn't have gone anywhere near TheGlobe.com.
One principle that I believe many investors have forgotten is that they are investing in a business. Whether that business is a retail store, a steel company, or a semiconductor equipment manufacturer, these are businesses run by managers, with employees, customers and equipment, and, one hopes, profits. They're not just three- or four-letter ticker symbols that you enter into Yahoo! Finance once in a while to check on the stock price.
And these real businesses can create a significant amount of wealth for shareholders, particularly if the dividend is reinvested.
According to Ed Clissold of Ned Davis Research, if you'd invested $100 in the S&P 500 at the end of 1929, it would've grown to $4,989 in 2010 based on the price appreciation alone. However, if you'd reinvested the dividends, your $100 would've grown to $117,774. Clissold says that 95.8% of the return came from dividends.3 (See Figure 1.1.)
Figure 1.1 1929–2010: $100 Original Investment
Source: Chart: Marc Lichtenfeld; data: Ned Davis Research
Marc Lichtenfeld's Authentic Italian Trattoria
Years ago, my wife and I were in Ashland, Oregon. We loved the town and started talking about escaping the rat race, moving to Ashland, and opening a pizza place. We've repeated that conversation on trips to Banff in the Canadian Rockies; Asheville, North Carolina; and even Tel Aviv, Israel.
Considering that I know nothing about the restaurant business, would not be happy if not in close vicinity to a major American city, and am a lousy cook, the pizza joint remained a happy fantasy.
But for the purposes of this book, Marc Lichtenfeld's Authentic Italian Trattoria will serve as an example of a business with revenue and profits. We're also going to assume that I'm your brother-in-law (your sister was always a very good judge of character) and you've agreed to become my partner in the business.
One day I come to you, my favorite brother-/sister-in-law, with my plans for the restaurant. I have the space lined up. It's in a popular location with a lot of foot traffic. I've been talking with a wonderful young chef who is eager to make an impression on local diners and critics. All that's missing is start-up capital.
This is where you come in. In exchange for a $100,000 investment, you will receive a 10% ownership stake. I show you my projections: The restaurant will break even the first year and make $100,000 in the second year and $200,000 in the third year.
One of the questions you may have is how will you get your money back. Do you have to wait for the restaurant to be sold, or will you receive some of the profit each year?
If I tell you that my goal is to build the business to $1.5 million in sales and then sell it for two times sales ($3 million), where you'll receive $300,000, your response might be very different from what it would be if I tell you that half the profits will be invested back in the business with the other half split up among the partners in a yearly payout (dividend).
Your decision on whether to give me the money will depend in part on your goals. Are you willing to speculate that you'll receive the big payoff in several years when the business is sold, or would you rather receive an income stream from your investment but no exit strategy (plan to sell the restaurant)?
When buying stocks, investors have to make similar decisions. Do they buy a stock with the sole purpose of selling it higher down the road, or do they buy one that provides an income stream and opportunities for income growth in addition to capital gains?
I don't know about you, but if I'm investing in someone's business, I want to see some money as soon as possible rather than wait for an exit strategy.
Here is another factor that might affect your decision to invest in my trattoria: Instead of offering to pay you your cut of the profits every year, I might offer to reinvest that money back into the restaurant and give you more equity. That way, your piece of the profits gets larger each year. Eventually, you can start collecting a significant cash payout annually, or receive a bigger slice of the pie when you sell your stake in the business because your equity has increased above your original 10%.
This last scenario is the same as reinvesting dividends, a method that is the surest way I know of to create wealth.
And what I love about this strategy is that it works (and has worked) no matter who is President of the United States; what happens in Europe, Iran, or the Middle East; how high unemployment and inflation are; and so on. Sure, those things will affect your short-term results, but over the long haul, they mean nothing and in fact could help you accumulate more wealth, as I'll explain in the section on bear markets in Chapter 3.
The Numbers
Investing in dividend stocks is the best way to make money in the stock market over the long term.
But don't just take my word for it. Harvey Rubin and Carlos Spaht II, both of Louisiana State University in Shreveport, write, “For those investors who adopt ten and fifteen year time horizons, the dividend investment strategy will lead to financial independence for life. Regardless of the direction of the market, a constant and growing dividend is a never-ending income stream.”4
Just a few pages ago, I told you that dogma doesn't work, yet here I am sounding fairly dogmatic. The proof that dividend investing creates wealth is in the numbers.
