When I first began to study investing, and began to learn about individual stocks, one of the first things that hit me about dividend growth investing is how obvious it was. When I read something about dividend growth investing, I feel like Thomas Jefferson could take a break from “declaring these truths self-evident” and start narrating an e-Book about why it makes sense to load up your portfolio with Procter & Gamble, Chevron, and Colgate-Palmolive.
When Warren Buffett gave lectures following his “The Superinvestors of Graham and Doddsville” speech, he explained that value investing (i.e. the pursuit of paying two or three quarters to buy dollar bills) is either something that immediately grabs you, or it doesn’t.
I think that blue-chip investing is the same way.
When you go to the gas station, you are immediately intrigued by owning Exxon, Chevron, Shell, Conoco, and BP, or you’re not.
When you walk down the beer aisle, you’re either intrigued by the thought of making money every time someone has a drink of a product owned by Brown Forman, Anheuser Busch, Heineken, and Diageo, or you’re not.
When you walk down the snack aisle, you’re either intrigued by the thought of owning almost any calorific treat they find by owning shares of Kraft, Mondelez, Nestle, Pepsi, Kellogg, and General Mills, or you’re not.
398 out of 400 homes currently have a Procter & Gamble product in them. That thought either excites you and makes you think “I want to get in on that”, or make you shrug your shoulders and think “That’s nice.”
We know what the excellent companies are. We know which companies dominate the American and global landscape. I think what sometimes deters people is that it is too obvious. We all know Coca-Cola is an excellent company with 30% returns on shareholder equity making over $ 10 billion in annual profit across 207 countries. There is nothing groundbreaking about buying Coca-Cola stock. You don’t get any points for originality. Who cares about that? You just got your hands on a money machine that is going to give you a dividend raise by 8% annually.
I just reviewed twenty years’ worth of data for the Coca-Cola company. Every single saw Coca-Cola give shareholders a raise of at least 6% at a minimum (2000 and 2001 were the only years that Coca-Cola gave 6% raises, and every other year was higher). The company is staring us in the face. It has been in the portfolio of Warren Buffett since the late 1980s. Charlie Munger has owned it since the early 1990s. Donald Yacktman has held it off and on for the past two decades, and he has said in interviews that things would have been a lot simpler if he just kept his Coca-Cola stock in his portfolio and let it ride.
We all know Coca-Cola is an excellent, and it is this obviousness that sometimes leads people away from companies like Procter & Gamble, Colgate-Palmolive, and Johnson & Johnson. Your life can get so much easier if you identify the companies likely to be profitable two decades from now, figure out a good price to pay (a good rule of thumb is to never pay more than 20x earnings ever for any company), and then hold the stock and leave it alone. Let the earnings go up. Let the dividends roll in. Coca-Cola has fallen 50% on five separate occasions in the past 93 years, but a single share—one friggin’ share—bought in 1920 at $ 40 would be worth $ 9.6 million today. The path to wealth creation in America couldn’t be easier.
All we have to do is three things:
(1) Generate surplus capital.
(2) Identify the rational price to buy an excellent company
(3) Own it and watch the dividends pile in.
Then wash, rinse, repeat. That’s it. That’s the magic formula. Anything else just overcomplicates your life and likely leads to poorer results.