Dividend Growth Investor - Recent Investments for July 9th, 2024
Good Morning,
I wanted to let you know that I made two investments today, both into existing holdings. I've been adding to these companies slowly, over the past few months, ever since initiating a position earlier this year.
This is consistent with my process of allocating money every month into attractively valued companies, and building out my positions over time, until they reach a certain size.
As far as the companies are concerned, they are both members of the dividend aristocrats list. In order to gain entry to this list, a company needs to be a member of S&P 500 and increase annual dividends to shareholders for at least 25 consecutive years. This last item does not happen by accident. It is usually a sign of a strong competitive advantage that allows a company to not only grow earnings per share for decades, but also to generate rising torrents of excess cashflows for decades as well. I do believe that a rising stream of annual dividends is a good initial indicator of quality.
However, this merely puts a stock on my list for further research. The next steps involved reviewing the trends in earnings per share, dividends per share, dividend payout ratios, and checking on valuations, in order to determine if the company is still fundamentally sound and also available at a good price.
I use a simple model when it comes to investments. Your returns are a function of:
1. Dividends
2. Growth in earnings per share
3. Change in the valuation multiple
As long-term investor, I care about the first two items, which are the fundamental returns. If I select a good quality company at a decent entry price, the goal is then sit back and hopefully let it keep growing earnings, dividends and intrinsic value. I do not try to bet on multiples shrinking or expanding. In general, if you look at long-term equity returns, the change in multiple matters the least in the long-run. It does matter in the short-run, like the next 5 years or so. But the longer one holds a business that keeps working, the less the impact of changes in the valuation multiple. This of course works on average, since multiples were generally around 15 - 20 times earnings. There were times where multiples were higher, but those were offset by times where multiples were lower. If we get starting multiples of 50 or 100 times earnings, then things would be different. But this has never been the case in the US, so we'd worry about it if/when it happens (though it did happen in Japan in 1989, but that's the story of another time).
For the US stock market in general, we have often heard that it has delivered a total annual return of 10%/year since either 1802, 1871 or 1926, whichever study is being referenced. This has been achieved through 6% annualized growth in earnings per share coupled with a 4% average dividend yield. Dividend growth has been close to 6%/year as well. As we all know rising earnings are the source behind future rising dividends.
6% + 4% = 10%.
This exercise really helps me think about the trade-off between dividend yield and dividend growth.
If equities never grow earnings per share, but are available at a dividend yield of 10%, then future total returns would be 10%/year, on average.
If equities never paid dividends, but grew earnings per share by 10%/year, then future total returns would be 10%/year on average as well (provided we do not
This is how I am thinking about it, relative to the two investments I made this morning.
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