The question comes up again and again and again; where do you put your money? [Well,] there is a way to invest that makes sense, that’s easy to implement, and that has a high chance of succeeding in meeting your long-term goals at the end of the road. [Let me explain.]
There is, if
- you’re a long-term investor, a person that can look out a minimum of 10 years and more and
- if you are a saver and builder, for people who understand (or want to understand) that the forces of time, modest and reliable growth, and compounding are on their side.
Investing means investing … the methodical accumulation of capital through a sensible and disciplined plan that recognizes that “shares” represent a partnership in a real and going business. Your plan, very simply, must recognize that you will manage your investments by actually being an investor … a passive partner in a real and going business.
There is a way to earn solid returns on your investments over the long term with the lowest possible risk and it’s an approach that can
- get you off the hook of information addiction,
- free you from the need to constantly keep up with the latest developments, and the opinions of a million pundits.
In effect, you can invest in stocks without “playing the market.”
When implementing a strategy, one goal, in addition to seeing your capital grow, is to sleep well at night. To be sure, your portfolio will go up and down, this can never be avoided if you hope to have reasonably good long-term gains, but the downs won’t bother you because you will understand why prices have declined, and you’ll have a high confidence level and a clear vision that prices will rise over the long term.
No investor can hope to succeed without having the ability to stick to a plan. You can’t let your convictions be shaken or you’ll jump from pillar to post the moment times become difficult, and in the end, you’ll have little to show for it. However, if you are comfortable with what you are doing, and you have confidence in what you own, you will stick with your plan. This level of confidence can be achieved because your strategy will be based on common sense.
Common sense investing
- means employing a strategy that’s inextricably linked to the actual corporations in which you’re invested…[and]
- is about being a partial owner of a real business; this fact should never be forgotten.
Common sense means
- your strategy needs to be effective in virtually all market conditions (it may shine in some types of markets and be just okay in others, but it should never contain the seeds of a short-term catastrophe if you’re to maintain a calm mind as a strong holder),
- having reasonable, achievable goals,
- never trying to hit a home run and
- never berating yourself with remorse for a situation that doesn’t work out.
The system that makes the most sense is income investing and income investing to me means dividend investing.
According to a recent study by Brandes Institute, over longer time frames, dividends were to be a significant component of total return … not share price … dividends. The time frame for the study was from 1926 to 2014.
One of the key components found, at least for long-term investors, [was that] the income component of equity returns reached equality with the capital appreciation component around the 10-year horizon, and then became increasingly dominant as the time horizons were extended further.
According to Brandes Institute, the debate over the relative importance of income versus capital price changes is a classic case of “tortoise vs. hare.” In today’s information-saturated world, investors tend to focus on financial items that tend to change rapidly (i.e., prices) rather than those that may be more stable, such as dividends. But their studies showed clearly that over the long term, income-dominated capital price movements as a source of returns, even for equities.
Brandes Institute has long held that paying excessive attention to short-term price movements is a behavioral error that can lead investors to make bad investment decisions. Its data, in its research reports, suggests that investors might do much better to focus on their portfolio’s income stream as it develops over time. Its study shows that the volatility of that dividend income stream was a very small fraction (under one-twentieth) of the volatility of stock price movements.
To the extent that volatility causes investors to worry, switching attention from price volatility to dividend volatility might ease that worry substantially.
In the January 25, 2016, issue of Barron’s, on page 9, an article titled The Dividend Dilemma by Ben Levisohn, says…[that one can not] overstate how important dividends are to a market’s total return. Since the end of 1969, the S&P 500, including reinvested dividends, has returned four times more than its price appreciation alone.
In the same article, Iman Brivanlou, managing director for income equities at asset manager TCW says it’s sticking with its old standbys, such as consumer staples Coca-Cola, Altria Group and PepsiCo…[and] utilities and telecoms. What they all have in common is the ability to pay their dividends no matter what the economy does…
Conclusion and Summary:
1. Income provided a substantial part of long-term returns.
2. For investors who focus primarily on their income stream, the volatility of the income from dividends was a small fraction of the volatility of stock prices.
3. The Brandes Institute study has shown the income components of equity returns reached equality with the capital appreciation component after 10 years and then became increasingly dominant as the time frame was extended.
The message is clear; the combination of the power of the income component to drive returns, along with the power of compounding, may provide potentially attractive opportunities for long-term investors who own a globally diversified portfolio of dividend-paying stocks.[The original article, as written by “Chowder”, is presented here by the editorial team of munKNEE.com (Your Key to Making Money!) and the FREE Market Intelligence Report newsletter (see sample here – sign up in the top right corner) in an edited ([ ]) and abridged (…) format to provide you with a fast and easy read.]