There are many ways to invest and grow your wealth. Stocks, bonds, ETFs, mutual funds, index funds, options, precious metals, real estate, etc. Legos. Ok, you get the idea. Frankly, all of these have their merits, and each have their chance to shine in different economies and at different times. Gold outperformed the other asset classes over the past 20 years. Bonds have had relative underperformance over the past 10 years and certainly now in this rising interest rate environment. However, stocks have outperformed all of the other asset types over the very long haul up until now and still offer the most promise over the long haul going forward.
Within the category of stocks or equities, there are four broad categories: Business Development Companies (BDCs), Master Limited Partnerships (MLPs), Real Estate Investment Trusts (REITs), and corporations. In turn the stocks of these broad categories can be classified into Growth or Value. These classifications are blurry at best, but in the spirit of boiling things down: growth stocks offer more capital appreciation in lieu of current income and value stocks offer a greater current income and less capital appreciation.
Growth vs. Value
Dividends paid plus the incurred capital appreciation or loss upon sale of the stock makes up the total investment return. Reinvested dividends and the power of compounding drives the larger share of total return in the stock market. And so, while there is much money to be made investing in growth stocks, there is also more risk and more volatility.
On the other hand, value companies tend to be larger, older, more established, and payers of dividends. There are companies who pay variable quarterly dividends based on the seasonality of their earnings. Some companies pay a constant dividend and don’t alter it for a decade at a time. Some pay a dividend when times are good, but as soon as the going gets tough, they reduce or eliminate the dividend altogether. During the pandemic of 2020, over a hundred companies cut or suspended their dividends. Some of those still have not resumed their dividend. Royal Dutch Shell cut their dividend for the first time since World War II and it did not sit well with long-term shareholders.
Dividend Safety
Since dividends are the largest source of investment returns, we want stocks that pay dividends, and we want to be able to rely on those dividends in the absolute worst of times. Furthermore, we want to own companies who understand the importance of those dividends to shareholders and who offer a passive income stream that increases every year – through hard times. The Dividend Kings are well-managed, shareholder friendly companies who have proven they have what it takes to deliver this passive income stream through multiple recessions, weathering the vicissitudes of doing business.
In the markets right now, there are great, undervalued companies with rock-solid balance sheets, safely paying high dividend yields. Perhaps they have a 20-year dividend streak going. No one is arguing that they would make a great investment. However, I contend (and will demonstrate) that one can actively build a great portfolio from the rather narrow universe of stocks that have the absolute longest track records. They are the pinnacle of dividend safety and if one is disciplined in their acquisition of these Dividend Kings, they will also set themselves up for significant price appreciation as well. At that point, to quote the legendary TV pitchman, Ron Popeil, “just set it and forget it”!