As a quick note, and not mentioned by the author, 1971 was long before Exxon merged with Mobil and back then I think it was Esso not Exxon but please correct me if I have that wrong.
The 100% dividend idea is something I have mentioned before talking about what is now Altria (MO) for anyone who bought in the 1980s. Some clients own MO.
That a dividend eventually exceeds the cost basis is certainly a positive and makes a good argument for long term investing but the idea of XOM now yielding 100% for the person who bought in 1971 seems like incorrect mental accounting. Someone who bought 1000 shares in 1971 at $2.30 (remember that is split adjusted) obviously invested $2300. Assuming no dividend reinvestment (I don't think that was an option in 1971) this person now has 1000 shares worth $87,240. The dividend paid on this position is $2,280 which works out to 2.61%. The amount available for withdrawal, without selling any shares is the $2,280.
From the perspective of the investor, hopefully both the price and the dividend continue to go up but if two years from now the position is worth $100,000 and the dividends go up to $2700 then the yield will be 2.7% not 117%.
Obviously every investor who even thinks about this at all will apply whatever thought process they want to this but the 100% yield idea makes no sense to me.
There were only four comments on the article and the tone surprised me. This seemed like a good candidate for a dividend war to break out but that was not the case. A couple of the comments expressed doubt about being able to build an entire portfolio of names that can last more than 40 years and grow their dividends that long.
That is a valid question but I would come at trying to address it in a different manner than what I think I was reading. Many times in the past I have mentioned hoping to hold every name in the portfolio forever. It would be great to be so correct with each name that it could be held forever, it would mean less trading, less commission paid, fewer tax consequences and less work (work meaning time spent finding replacement holdings).
Long time readers will know that while I hope to hold every name forever, of course that is not how things work out and when something needs to be sold (or just reduced) I sell it. But it is possible to hold some names forever. We have 33 holdings under the hood of the RRGR fund that we subadvise and 11 of them have been client holdings since 2004 and a few more were added in 2005 and are still owned now. Eight years is not 40 but of the eleven it is not crazy to think that some of them are on their way to the dividend exceeding the cost and will be 40 year holds. But again if something changes I would not hesitate on selling any of them. RRGR is obviously a personal and client holding.
10 comments:
Roger, just a thought here. You speak of dividends and you speak of yield. I for one look at this the way Warren Buffett looks at it. The real issue is what is the return on "invested capital". Clearly the return is 100% and it happens every year and likely to get even better. This seems like a worthy goal on the way to greater wealth.
Your comment reads like you are viewing it as a measuring stick for the success (or not) of a particular holding which does make sense--this is not what the linked article was doing IMO.
What if the investment had been farmland purchased for $500 per acre that is currently netting $500 per acre. Would you need a real estate appraisal to tell you what your return is?
Is the cost of a farm purchased 20 or 30 years ago relevant to the running of the farm today?
To dovetail on 8:21, Buffett has consistently said investing in a stock should viewed as becoming an owner in a business. I think that is a good prism to view the investment decision through.
The dividend phenomena is why the price level of the SP500 is such a poor benchmark to measure investment success since it excludes reinvested dividends. The compounded return of reinvested dividends explains the majority of the stock market's long term real rate of return. Total return should always be the measure, and only then on an after tax basis IMO.
IMO, the only difference between owning stock in a publicly traded company and investment in a farm is mainly liquidity. I would ask the same question to you, how is the purchase price of Exxon relevant to today?
My answer to your question would be no, if the owner does not plan to sell his farm investment. If the owner is contemplating another investment with the proceeds from a farm sale or analyzing whether or not an alternative investment is superior, then of course yes the purchase price is relevant.
So I guess the answer is...it depends.
BTW, not being arguementative, I'm here to learn. The Socratic method if you will. Ha Ha
The current value of farm or stock prices is relevant when deciding what to do with current farm profits and dividends.
"price back then was $2.30 split adjusted." How about adjusting for inflation and taxes? That 100% dividend would be more like 5%.
Speaking of farmland and given that farmland as an investment frequently comes up here, WSJ has an interesting article today,
"...researchers find that over the next 50 years people are likely to release from farming a land area 1 1/2 times the size of Egypt, 2 1/2 times the area of France, or 10 Iowas, and possibly multiples of this amount."
http://on.wsj.com/Tfo8uP
thanks for leaving the link
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