if you haven't already.
Imagine if you saved 10 % of your money and put it into the kinds of dividend stocks discussed in this book. Over time, your wealth should grow to the point that it will have generated significant amounts of income, perhaps even replacing the need to work.
This is the last point I will make about saving. You didn't spend your money on this book (or drive all the way to the library) just to have me beat you up about saving. Instead, I will assume you really are serious about securing your future and want to learn how to take those funds and add a few zeros to the end of the total number in your portfolio.
And if you're already retired and you need income right away, the strategies in this book can help you, too. You may not have the ability to compound your wealth, but you can invest in companies that will generate more and more income for you every year. Not only can you beat inflation, but you can also give yourself and even your loved ones an extra cushion.
There are lots of ways to invest your hard-earned money. But you'll soon see why investing in dividend stocks is a conservative way to generate significant amounts of wealth and income. This isn't theory. It's been proved over decades of market history.
Some people believe that real estate is the only way to riches. Others say the stock market is rigged so that the only people who make money are the professionals – therefore, you should be in the safety of bonds. Still others trust only precious metals. None of these beliefs is true at all.
Within the stock market, there are various strategies that are valid. Value investors insist you should buy stocks when they're cheap and sell when they're expensive. Growth investors believe you should own stocks whose earnings are growing at a rapid clip. Momentum investors suggest throwing valuation out the window and investing in stocks that are moving higher – and getting out when they stop climbing.
Still others trust only stock charts. They couldn't care less what a company's earnings, cash flow, or margins are. As long as it looks good on the chart, it's a buy.
Each of these methodologies works at some point. The effectiveness of value and growth strategies tend to alternate: One will be in favor while the other is out until they trade places. For one stretch of time, value stocks outperform. Then for another few years, growth will be stronger. Eventually, value will be back in fashion.
Whichever is in vogue at the moment, supporters of each will come up with all kinds of statistics that prove their method is the only way to go.
The same dynamic applies when it comes to fundamentals versus technicals. The technical analysts who read stock charts assert that everything you need to know about a company is reflected in its price and revealed in the charts. Fundamental analysts, who study the company's financial statements, maintain that technical analysis is akin to throwing chicken bones and reading tea leaves.
There are plenty of other methodologies as well. These include quantitative investing, cycle analysis, and growth at a reasonable price (GARP), to name just a few more.
Die-hard supporters of all these strategies claim that their way is the only way to make money in the markets. It's almost like a religion whose most fanatical followers act as if their beliefs are the only truth – period, no debate, end of story. They're right and you're wrong if you don't believe the same thing they do.
I'm no authority when it comes to theology. But when it comes to investing I know this: Dogma does not work.
You will not consistently make money investing only in value stocks. Again, sometimes they're out of favor. If you only read stock charts, sometimes you'll be wrong. Charts are not crystal balls. Quantitative investing tends to work until it doesn't. Just ask the investors in Long-Term Capital Management, which lost everything in 1998.
Long-Term Capital was a $4.7 billion hedge fund that utilized complex mathematical models to construct trades. It made a lot of money for investors for several years. It was supposed to be fail-safe. But like the Titanic, which was also supposed to be unsinkable, Long-Term Capital hit an iceberg in the form of the Russian financial crisis and nearly all was lost.
“Y'all Must've Forgot”
During his prime, legendary boxer Roy Jones Jr. was one of the best fighters that many fans had ever seen. However, Jones didn't seem to get as much respect as he thought he deserved. So, in 2001, he released a rap song that listed his accomplishments and reminded fans about just how good he was. The song was titled “Y'all Must've Forgot.” Roy was a much better fighter than he was a rapper. The song was horrendous.
Looking back, investors in the mid to late 1990s remind me of boxing fans in 2001, when Roy released his epic tribute to himself. Both groups seemed to have forgotten how good they had it – boxing fans no longer appreciated the immense skills of Jones, and investors grew tired and impatient with the 10.9 % average annual returns of the Standard & Poor's (S&P) 500 (including dividends) since 1961. After decades of investing sensibly, in companies that were good businesses that often returned money to shareholders in the form of dividends, many investors became speculators, swept up in the dot-com mania.
I'm not blaming anyone or wagging my finger. I was right there with them. During the high-flying dot-com days, I was trading in and out of Internet stocks, too. My first “10 bagger” (a stock that goes up 10 times the original investment) was Polycom (Nasdaq: PLCM). I bought it at $4 and sold some at $50 (I sold up and down along the way).
However, like many dot-com speculators, I got caught holding the bag once or twice as well. I probably still have my Quokka stock certificate somewhere in my files. Never heard of Quokka? Exactly. The company went bankrupt in 2002.
With stocks going up 10, 20, 30 points or more a day, it was hard not to get swept up in hysteria.
And who wanted to think about stocks that paid 4 % dividends when you could make 4 % in about five minutes in shares of Oracle (Nasdaq: ORCL) or Ariba (Nasdaq: ARBA)?
Did it really make sense to invest in Johnson & Johnson (New York Stock Exchange [NYSE]: JNJ) at that time rather than eToys? After all, eToys was going to be the next “category killer,” according to BancBoston Robertson Stephens in 1999. It's interesting to note that eToys was out of business 18 months later and BancBoston Robertson Stephens went under about a year after that.
If, in late 1998, you'd invested in Johnson & Johnson, a boring stock with a dividend yield of about 1.7 % at that time, and reinvested the dividends, in mid 2014, you'd have made about 8.6 % per year on your money. A $3,000 investment would have nearly quadrupled.
Johnson & Johnson is a real business, with real products and revenue. It is not as exciting as eToys or Pets.com or any of the hot business-to-business (B2B) dot-coms that took the market by storm.
But 16 years later, are there any investors who would complain about an 8.6 % annual return per year? I doubt there are very many – especially when you consider that the S&P 500s annual return, including reinvested dividends, was just 4.2 % during the same period.
Now, you might have gotten lucky and bought eBay (Nasdaq: EBAY) at $2 per share and made 16 times your money. Or maybe you bought Oracle and made five times your money. But for every eBay and Oracle that became big successful businesses, there were several Webvans that failed and whose stocks went to zero.
In the late 1990s, the stock market became a casino where many investors lost a ton of money and didn't even get a free ticket for the buffet. It doesn't seem that we've ever completely returned to the old way of looking at things.
My grandfather, a certified public accountant
