The Shocking Math Behind Dividend Growth Investing
Monday morning, I was interviewed by The South Florida Sun Sentinel about my book, Get Rich with Dividends. The first question the reporter asked me was, “What do you say to investors who are nervous about the market?”
Then, a few hours later in a marketing meeting for Investment U, someone posed the question, “How do we market to investors who are nervous?”
And investors are scared. Their fears are completely valid:
- The Euro seems to be falling apart at the seams.*
- Our elected officials in Washington (and many states) are the most incompetent and ineffective in generations.*
- There seems to be a new financial scandal every few weeks.
- No matter who wins the election in November, half the population is going to be very upset.
The list goes on…
In the financial publishing business, it’s known that it’s easy to market yourself if you’re bearish. Fear has, and always will be, a powerful motivating factor. And there’s always a logical reason to be bearish. Stocks are overvalued, earnings are weak, the economy is weakening, investors are too complacent, etc. It’s a lot tougher to argue that investors should be in stocks.
But there’s one key reason why they should.
Long-term investors almost always win.*
Last week, I told you that over 10-year periods, stocks have made money 91% of the time.
Since 1937, stocks finished positive in 67 out of 74 10-year periods. The average gain has been 129% over 10 years.
The seven negative 10-year periods were all tied to the Great Depression and Recession. And not all 10-year periods that included the Depression and Recession were negative. Only seven of them.
So based on history, it would take a catastrophic economic collapse to not make money in the stock market over the next 10 years.
How to Make Money Despite the Bad News
So how do you make money in the face of the euro, Obomney and Iran?
You invest in great companies that pay and raise the dividend every year and then you go about your life. That’s it.*
You check in with those companies from time to time to make sure the dividend is safe and continuing to be raised and then you get back to what you were doing, i.e. your job, your family, Civil War re-enactments…
The beauty of investing in Perpetual Dividend Raisers – stocks that raise the dividend every year – is that they tend to continue to raise the dividend no matter what’s happening in the White House or around the globe.
If a company has been raising its dividend for 25 years, like Mercury General (NYSE: MCY) has, chances are it’s going to raise it for a twenty-sixth year. If they don’t, investors are going to be furious, as they’ve come to expect a dividend hike every year.
A company that doesn’t raise the dividend after 25 years in a row of dividend growth will find its stock in a steep sell-off and its executives getting their resumes together after being thrown out by shareholders.
Those executives are going to do everything in their power to ensure they can continue to raise the dividend year after year.
There are few sure things in life and past performance is no guarantee of future results, but chances are that a company that has lifted its dividend every year for a couple of decades is going to do it again this year, and next year, and the year after that, and that year after that…
Investing in Perpetual Dividend Raisers allows you to outpace inflation, earn more income every year and, if you’re reinvesting your dividends, compound those dividends to the point where you can easily make 12% per year in conservative blue-chip stocks.
At 12% per year, you more than triple your money in 10 years. Considering we’re emerging from the “lost decade,” I bet you would have been very happy tripling your nest egg while most people barely saw any return over 10 years, if they made any money at all.
Investing in dividend-paying companies is easy, it’s conservative and best of all, it almost always works.* Certainly more than any other investing strategy. If you can name another strategy with a better than 91% track record that can grow your money at 12% per year in conservative investments, I’d like to know about it.
There are valid reasons to be nervous. No one is saying you shouldn’t be concerned about world and economic events. Just don’t invest like you are. History is not on your side.
P.S. Thank you for making Get Rich with Dividends a bestseller. It spent the past week as No. 1 in “Investing” on Amazon and got as high as No. 14 in all books. It did so well Amazon actually ran out of copies. They’ll have more next week. If you don’t want to wait, you can download it for the Kindle on Amazon or you can order the book from Barnes and Noble.
*The views and opinions expressed in this piece are those of the author and do not necessarily reflect the official position of professional analysts.
About Marc Lichtenfeld
A master of the steady, reliable science of income investing, Marc’s commentary has appeared in The Wall Street Journal, Barron’s and U.S. News & World Report. He has also appeared on CNBC, Fox Business and Yahoo Finance. His book Get Rich With Dividends: A Proven System for Double-Digit Returns achieved best-seller status shortly after its release in 2012. He captures the hearts and minds of readers approaching their golden years in his daily e-letter, Wealthy Retirement.