Never forget these two axioms:
Money frees us, but its pursuit may enslave us.
It’s not how much you have at the end; it’s how much you could have made.
I was ready to move on to funds, but some people contacted me to give all of you some concrete hard numbers to look at it rather than all my usual argy-bargy ivory tower talk.
Sarcastic Reader: About damn time!
So, let’s talk real concrete numbers and make it simple as possible. Let’s say you and your friend both save up some money and have $10,000 to invest.
Your friend decides they will pile all their money at once into a S&P 500 index fund.
You, on the other hand, decide to spread your money out into ten good paying dividend stocks ($1,000/company) all at once and have all dividends reinvested into the stock that generated that dividend in the first place.
So, let’s state that the time you’re putting in your money is January 1998 and finish our calculations at the end of November 2018. I’m picking these dates on purpose. First of all, a twenty year time spread is to show how time is your friend when doing investing of any kind, especially dividend growth investing. Secondly, I purposefully included both the tech sector bubble being burst in 2001 and the financial crisis of 2008-2009 to demonstrate how this strategy of dividend growth investing performs when the market heads south on you (and majorly south in the case of 2008/9).Thirdly, since December 2018 is still in progress (Oh, is it ever), I can’t include in returns as of yet. For people who want to look at different years or longer or shorter time spreads, use these calculators to do your own calculating.
So having said all of that, here we go…
Your friend puts in $10,000 in January 1998 into a S&P 500 index fund and checks where they are at on 12/1/18.
The total return for the S&P 500 (with the dividends reinvested) over the above time period is 313.007% which sounds staggering, but is actually only at a 7.045% annual average return over that time. Employing that ever so sweet Rule of 72, it would take your friend 10.22 years to double their money. The Rule of 144 suggests that it would take your friend 16.18 years to triple their money.
To be clear in concrete numbers what all of that means, your friend would have put in $10,000 in a S&P 500 index fund (with any dividends reinvested) on January 2, 1998 and on December 1, 2018, your friend would have…drumroll please…$39,060.11.
You, on the other hand, have decided to put $1,000 in ten different dividend paying stocks since you’re a savvy investor and perhaps influenced by what you read on the Internet (ahem) which is totally fine because everyone knows that whatever you read on the Internet must be true.
So here’s a list of these ten money maker stocks of yours…
3M, Altria, AT&T, Cincinnati FInancial, Clorox, Coca-Cola, Colgate-Palmolive, Johnson & Johnson, McDonald’s, and Procter & Gamble
All of them are dividend champions and all pretty famous companies that have 40 or more years of increasing dividends. (I suspect that you have heard of all of them except for perhaps Cincinnati Financial.)
The conditions are the same: $1,000 into each company on 1/2/1998 and checking again on 12/12018 with all dividends reinvested.
Here we go…
Company Annual Return Total Cash Value
3M (MMM) 11.59% $9,157.00
Altria (MO) 15.03% $16,886.49
AT&T (T) 4.52% $2,349.22
Cincinnati Financial (CINF) 5.83% $3,148.81
Clorox (CLX) 8.79% $5,474.44
Coca-Cola (KO) 3.65% $2,065.12
Colgate-Palmolive (CL) 8.89% $5,610.83
Johnson & Johnson (JNJ) 9.51% $6,292.12
McDonald’s (MCD) 12.33% $10,522.98
Procter & Gamble (PG) 5.82% $3,142.38
Total Averages/Returns 8.616% $64,649.39
So, head to head, the S&P 500 route gives your friend a 7.045% annual return and $39,060.11 versus an annual return of 8.616% and $64, 649.39 via your dividend growth investing strategy.
So some thoughts on all of this…
- A solid dividend growth investing portfolio will almost always outperform the S&P 500 provided all dividends are reinvested.
- None of the above figures have yet been taxed or subject to fees which only a mutual fund/ETF would be subject to and not the individual stocks themselves.
- A dividend growth investing strategy SHOULD NOT substitute for core holdings in index funds like the S&P 500.. This should be the second layering of investing on top of the foundation of your core holdings of index funds. As you can see, however, it can bring better returns than S&P 500 which is why it should be considered if it is within your risk tolerance to do so (and certainly why I employ this strategy).
- Note how varying your returns are over the years even within dividend champions. This demonstrates why you shouldn’t put all your eggs in one basket if you decide to go into individual stock picking, even if it is the dividend champions.
- Note how impressive Altria has been with 15% annual returns over the past two decades and comprising over 25% of the above returns. So much for the death of smoking…
On to evaluating funds next time!
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…