12-08-2013, 04:22 PM
So I just read one of Tim McAleenan’s recent articles up at his blog The Conservative Income Investor, titled "What If You Only Make One Good Investment Your Entire Life?" I truly admire and enjoy Tim’s writing and approach, and only wish that I had understood as much as he does when I was his age. If I had, I might be retiring comfortably about now in my mid-40s. I think Tim is right about almost everything he writes, and I recommend his articles to anyone interested in dividend growth investing.
So with all of that said, I feel compelled to examine one small aspect of Tim’s writing. Very often, in supporting the merits of dividend growth investing, he will point out that an investment in a good dividend growth stock many years ago would bear amazing fruit today. Yesterday’s article is a great example of this. It is a neat read. He argues that if you had made ten separate $5000 investments in the 1980s in blue-chip dividend-paying companies, and had the bad luck to have nine of the ten go bankrupt, a lone excellent investment could outweigh all of the loss. In his hypothetical, a $5000 investment in JNJ at the beginning of 1983 would today be worth $304,000, and would be throwing off $8760 in dividends annually. That one investment would more than compensate for the nine losers. It is a great illustration of the power of time and compounding with a good dividend growth stock.
But is there any reason to expect similar performance out of JNJ for the next 30 years? This is what always jumps out at me about these examples. Of course we all know that past performance does not indicate future returns, but it does seem to be the implication underlying the examples.
So let’s look forward instead of back. A $5000 investment today would get you about 53 shares of JNJ. Let’s assume that the dividend grows by 8 percent each year for the next 30 years, and that all dividends are reinvested. To calculate the share price over time, I’m going to assume for simplicity that the current yield of 2.8 percent persists. Here’s a rough take on how the next 30 years will go:
Of course this is crude. Share price and yield will fluctuate (which I think would bias the results upward). And you could argue about whether 2.8 percent is a good choice for yield. And dividends are reinvested quarterly, not annually (though I think this would only boost the results by a few thousand dollars over 30 years).
In my opinion, the results seem impressive. That initial $5000 investment, with no other work, turns into $115,000 in 30 years, and an annual dividend of $3223. Not too shabby. But they are not even in the same ballpark as the $304,000 and $8760 that Tim uses as an illustration from the last 30 years.
Now, if you inflate the initial investment of $5000 dollars from 1983 to $11,724 today (using the Bureau of Labor Statistics’ calculator), you’ll have a more impressive $270,000 value in 30 years (approximately). Still shy of the example from the last 30 years, but at least in the same ballpark.
I’m not sure whether we can expect even the venerable, but already huge, JNJ to continue to grow earnings and dividends at that pace for the next three decades. There are lots of reasons to think that, for companies like JNJ, the next few decades will see slower growth than the last few. So I certainly would temper my expectations and hedge my bets.
But as Tim’s article points out, if you are careful, the odds of you choosing nine losers out of ten are low. So even with lesser returns, given enough time, a well-constructed dividend growth portfolio should do well. At bottom, I think that Tim’s core points, if simplified, are unassailable.
Now, if only I had 30 years until retirement. I’ve got to pull it off in 20!
So with all of that said, I feel compelled to examine one small aspect of Tim’s writing. Very often, in supporting the merits of dividend growth investing, he will point out that an investment in a good dividend growth stock many years ago would bear amazing fruit today. Yesterday’s article is a great example of this. It is a neat read. He argues that if you had made ten separate $5000 investments in the 1980s in blue-chip dividend-paying companies, and had the bad luck to have nine of the ten go bankrupt, a lone excellent investment could outweigh all of the loss. In his hypothetical, a $5000 investment in JNJ at the beginning of 1983 would today be worth $304,000, and would be throwing off $8760 in dividends annually. That one investment would more than compensate for the nine losers. It is a great illustration of the power of time and compounding with a good dividend growth stock.
But is there any reason to expect similar performance out of JNJ for the next 30 years? This is what always jumps out at me about these examples. Of course we all know that past performance does not indicate future returns, but it does seem to be the implication underlying the examples.
So let’s look forward instead of back. A $5000 investment today would get you about 53 shares of JNJ. Let’s assume that the dividend grows by 8 percent each year for the next 30 years, and that all dividends are reinvested. To calculate the share price over time, I’m going to assume for simplicity that the current yield of 2.8 percent persists. Here’s a rough take on how the next 30 years will go:
Of course this is crude. Share price and yield will fluctuate (which I think would bias the results upward). And you could argue about whether 2.8 percent is a good choice for yield. And dividends are reinvested quarterly, not annually (though I think this would only boost the results by a few thousand dollars over 30 years).
In my opinion, the results seem impressive. That initial $5000 investment, with no other work, turns into $115,000 in 30 years, and an annual dividend of $3223. Not too shabby. But they are not even in the same ballpark as the $304,000 and $8760 that Tim uses as an illustration from the last 30 years.
Now, if you inflate the initial investment of $5000 dollars from 1983 to $11,724 today (using the Bureau of Labor Statistics’ calculator), you’ll have a more impressive $270,000 value in 30 years (approximately). Still shy of the example from the last 30 years, but at least in the same ballpark.
I’m not sure whether we can expect even the venerable, but already huge, JNJ to continue to grow earnings and dividends at that pace for the next three decades. There are lots of reasons to think that, for companies like JNJ, the next few decades will see slower growth than the last few. So I certainly would temper my expectations and hedge my bets.
But as Tim’s article points out, if you are careful, the odds of you choosing nine losers out of ten are low. So even with lesser returns, given enough time, a well-constructed dividend growth portfolio should do well. At bottom, I think that Tim’s core points, if simplified, are unassailable.
Now, if only I had 30 years until retirement. I’ve got to pull it off in 20!