Never forget these two axioms:
Money frees us, but its pursuit enslaves us.
It’s not how much you have at the end; it’s how much you could have made.
I’ll try to make this a shorter post after going extra long in the last post. I’ve been flooded with questions and some gentle criticisms (and some not-so-gentle yelling ALL CAPS INTERNET STYLE!!!!) about my financial chicanery at the end of my last post.
Essentially, all of it boiled down to the following question: Why pick Microsoft with a PE ratio of 51.01 with a dividend when you can get the same dividend yield at a PE ratio of 19.87 with Apple?
First, the disclaimers…
I am not advising anyone what to do for themselves, but rather what someone with my risk tolerance (high), debt burden (low), and critical mass of core holdings (my index funds and Dividend Champions) MIGHT DO. [In full disclosure, I bought Microsoft decades ago and have held it since even as “investment experts” bashed the company and said it should be dumped despite its steady rise in dividend and, of course, now it’s tripled its stock price over the past five years.Way to go, guys. Score another one for the “experts.”]
I’m not even advising for you to pick stocks if that is out of your comfort zone. (Though I firmly hold the position you should at least understand this process even if you don’t pick stocks yourself as either your financial advisor and/or mutual funds are doing it in your name.)
As Chuck Klosterman would often say, ANYWAY…
The rationale behind buying Microsoft at a higher PE ratio for the same dividend yield (after droning on about using the PE ratio as a leading metric of value) has to do with not its growth (its PEG ratio—remember what that is?—is 2.27 while Apple’s PEG ratio is 0.91 and Facebook has a PEG ratio of 0.93), but rather the other type of investing that has always intrigued me. If you enjoy investing in individual stocks (which I do immensely) in hopes to “beat the market”, it’s intriguing to take an educated guess on what secular trends will elevate which companies. For example, who will win the cloud computing wars? Well, I’m certainly smart enough to know, but I am smart enough know how to read the best paper in the world for investors, the Wall Street Journal.
A multibillion dollar company with over 30 years being publicly traded with dividends since 2003 and increasing that dividend since 2012 with a PE ratio no more than twice the sector average (and a PEG ratio no more than twice the sector average) PLUS massively increasing revenues in a whole new market space with only one other major competitor (Hello, Amazon!) so far.
Sign me up for a (currently) well run company with a growing dividend and riding a secular trend with massive implications for the future any time.
Along with that, the money that was put in was not the most ($2,500 each for Microsoft and Facebook versus $5,000 for Apple) and would still allow to capture the advantages of Microsoft particularly since it will dollar cost average into more and more shares of a great company (provided you set up a DRIP from the start) with increasing shares leading to increasing dividend payouts leading to even a further increase in shares in a glorious upward spiral (I guess I am a bit of an investing evangelist).
Again, that’s what I’d do with where I am at in my investing life and with my risk tolerance (and my love for stock picking and seeing if I got a good deal and a great investment years later). THIS DOES NOT MEAN YOU SHOULD DO THIS FOR YOURSELF AND/OR YOUR FAMILY.
That is all.
I hope that helps…even and especially for your haters out there.
I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.
Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.
Until next time…