I’m Not Buying Stocks, I’m Buying Ownership In High Quality Companies

I’ve been investing surplus capital from carefully saving over 50% of my net income for over three years now. I’ve done this month in and month out, building up my Freedom Fund to a respectable six-figure portfolio that has equity ownership stakes with 35 different high quality companies that pay out dividends, and raise them on a regular basis.

Did you notice that not one time in the above paragraph did I mention the word “stocks”?

The longer I do this, the more I learn. And one thing I’ve learned along the way is that I’ve almost come to the point where I don’t really like the word “stocks” any longer. I think there are certain connotations with the word, and people somehow associate stocks with gambling or day trading, like the stock market is some kind of casino.

I’ve never looked at the stock market like that. I don’t do any kind of day trading, and I’ve always associated myself as a long-term investor. The stock market, to me, is a way to access a portion of the large capital markets. It’s a way for me to invest my excess capital in wonderful businesses that have a habit of growing earnings by 6-10% or more annually, and likewise growing dividends in a similar manner.

Whenever I invest my hard-earned capital with a company I look at myself as a partial owner of that company, because that’s exactly what I’ve become. I’m not just buying some paper certificate (digital certificate these days), I’m buying an actual ownership stake with the business.  I look at all parts of the company. I look at the fundamentals (income statement, balance sheet, cash flow statement), the long-term earning power, the products or services they provide and whether or not I anticipate demand for the aforementioned to continue well into the future, geographical representation and growth of such, diversification, high quality brand names, economies of scale, supply chains and logistics, management and even historical acquisitions. I like to take a look at the complete business, and ask myself one important question: would I feel comfortable having my entire net worth in this one company? If the answer is no, why would I want even 5% of my net worth invested?

While I believe diversification is extremely important (I do have investments with 35 companies, after all), there’s not one company I’m invested with that I wouldn’t be a proud owner of if I owned 100% of the entire company. Even some of my smaller ownership positions have the same love.

Take Medtronic, Inc. (MDT) for instance. I currently own just 37 shares of this wonderful medical devices business. Would I love to own all 1.02 billion shares all to myself if I could own no other businesses? Of course! Take a look at the last four years. We just went through one of the worst economic downturns this country has ever seen, and yet MDT has seen EPS grow from $1.97 in 2008 to $3.43 in 2012. Not bad, huh? And this isn’t some recent phenomenon. They have been growing dividends for over 35 years on the back of growing earnings, with a 10-year dividend growth rate of 15.5%. Medtronic also has very little debt on the balance sheet, with a debt/equity ratio right about 0.4 right now. And they have worldwide exposure, currently serving customers in over 120 countries. I’d definitely give up every other investment I have to cast my fate alone with MDT.

Now, as a private small-time investor this is only a dream, and luckily so. I don’t have to own just one business. I can own pieces of as many high quality business as I feel appropriate. Currently, I’m targeting my Freedom Fund to eventually own stakes in about 45 or so high quality businesses. But that’s just it. I’m not buying stock certificates here. I’m buying actual ownership stakes in these businesses. Every time Medtronic sells a pacemaker or insulin pump I earn a very (very!) small portion of the profits they earn from that sale. I earn that portion via the dividends that company, and all the other companies I have ownership stakes in, send me as a portion of the profits I’m entitled to as a part-owner. It’s simply fantastic!

And that’s what’s so wonderful. It’s not just pacemakers and insulin pumps that my Freedom Fund is invested in. Another one of my equity stakes is in McDonald’s Corporation (MCD). Whenever McDonald’s sells a Big Mac or a Premium McWrap I earn a wee tiny percentage of the profits from those sales. Somebody just purchased a bag of Tostito’s (PEP)? Money in my pocket. You need some Crest toothpaste (PG) to brush your teeth? You see where this is going.

I have hand crafted my portfolio into a dividend-churning machine by focusing on the fact that I’m a part-owner in these companies. I don’t look to make a buck by buying something cheaply and then trying to sell it to someone else down the line for more money. That’s too hard. Why would I want to do a bunch of guesswork and hoping and preying that someone will pay more for something that I bought for less? Makes no sense to me. I’d much rather focus on an almost guaranteed way to build wealth over the long-term, and that’s to think and act like an owner. And when you’re enamored with a business at $50 per share, you’re absolutely in love at $40 per share. That’s why I enjoy averaging down. I don’t look at it like I’m losing money. I look at cheaper share prices as an opportunity to own an even larger percentage of a great business at a cheaper price. Even better, the dividends that I’m receiving as a portion of the profits are even larger because I now own a bigger portion of the company. Who doesn’t love a good sale?

My advice is to stop thinking about your investments like stocks that you can buy and sell at a whim. In this day and age, with instant ticker prices and cheap transaction costs, it’s easy to get caught up in the excitement of buying and selling and thinking of your stocks like little casino chips. But this isn’t really all that exciting. It’s stressful. What is exciting is being an owner of a high quality business that’s going to make you a lot of money over many decades, compounding your investment many times over. People hear of these stories where someone turns $180 into $7 million and wonder how they did it, when the answer is very, very simple. They invested in a great business, reinvested the dividends and let compounding work its magic. And this works, if you just stay out of the way and allow great businesses to do what they do best: make lots of money and share that money with you. And why would they share that money with you? Because you co-own the company!

How about you? Do you think of your investments as ownership stakes?

Full Disclosure: Long MTD, PEP, MCD, PG

Thanks for reading.

Photo Credit: thephotoholic/FreeDigitalPhotos.net

Comments

  1. Spoonman says

    Excellent post! This should be required reading for new DG investors. It pretty much sums up my investing philosophy.

    For the longest time as a young man I had this image of the stock market as a scandalous, risky place where people wearing suspenders like Gordon Gekko go around wreaking financial havoc. I wish I had discovered DG investing when I was in my teens. But hey, I’m happy that discovered it a young age anyway!

    Sometimes I feel like high frequency trading should just be outlawed. Whatever semblance of “liquidity” HFT provides would hardly be missed by investors like ourselves.

    One of the nice things about DG investing is that you don’t even have to think at all about selling assets in order to get income. We don’t have to waste our time with silly measures like “Safe Withdrawal Rates” and the like.

    I feel proud when I see a Waste Management truck roll around the neighborhood and tell myself “keep up the good work guys, keep hauling trash for me!” =).

    • says

      Spoonman,

      Thanks! I’m really glad you liked it. I’ve been wanting to write a post like this for a long time. :)

      I hear you on the HFT. Although investors like ourselves would be much better off without it, the exchanges wouldn’t. I read or seen somewhere that HFT now accounts for somewhere around 70% of the market’s volume? It’s just crazy. So it’s gotten to the point where it’s this monster that nobody wants to really tame because there is so much money involved. Buy-and-hold investors like us offer no real money because our activity is limited.

      I also love it when I see the companies I’m invested in doing well. For instance, I stop by McDonald’s once or twice a month for lunch. They’re always packed. Packed. It ALWAYS puts a smile on my face to see that. I pay attention to what people are ordering, wait times, cleanliness and everything else. I know it’s just one location, but I take it seriously. :)

      Best wishes!

    • says

      I completely agree – I always look for strong brand value and ask myself “Do I want to own this company?” before I invest. I also love visiting companies I own, seeing how well they do. My favorite is going to The Keg. I hate the long waits to get a table, but am always reassured that the people in front of me are basically giving me money…plus the food is great.

      Cheers,
      Michael

    • says

      Michael,

      Great thoughts there. I always ask myself the same. I don’t just look at the stock price and valuation and fundamentals, but really take the time to ask myself if I’d feel comfortable owning a piece of the enterprise.

      Best regards.

  2. Anonymous says

    I enjoy following your blog (check it daily). It is clearly evident you put a lot of time and energy into this project so “hats off” to you. Job well done.

    I have submitted a couple of comments before, one of which was several months ago when I recommended to invest in some of the Canadian banks. Glad to see you pulled the trigger on BNS. RY and TD are two others you should seriously consider (BMO and CIBC (symbol CM) to a lesser extent).

    We’re on the same page when it comes to day trading! I have never been lured by the possibility of quick riches through day trading since, like you, I view investing as owning pieces (however small) of great companies.

    My target dividend income level for 2013 is between $37,000 – $38,000, an increase of about $6,000 from 2012 (currently on track to reach this range). I have not made any significant additional investments this calendar year other than the DRIPing of all my dividends and small increases in existing holdings. Rightly, or wrongly, I am accumulating cash which I hope to deploy come the next inevitable market downturn (I have been hoping for one for the past several months to no avail)!! Should we get a downturn this year, I hope to increase my investments to the extent where I will generate between $45,000 – $48,000 in dividend income in 2014; I have actually written down the level of dividends I want to earn in each of the next several years.

    Like you, in addition to increasing the number of shares in companies in which I am currently invested, I also have a list of companies in which I would like to invest. The run up in stock prices, however, has decimated the dividend yields so I will patiently wait and hope that the right pitch comes sooner rather than later.

    Here’s hoping to a nice correction!!

    Cheers.

    Chuck

    • says

      Chuck,

      Wow! You’ve got some fantastic dividend income there!! That’s fantastic. It’ll be many, many years before I see passive income like that.

      Sounds like you have a great system there! Dividend income like that doesn’t get built over night, so I’m sure you’ve been doing this for quite a while.

      As far as the Canadian banks go, I own both BNS and TD. RY is also on my watch list. :)

      I’m hoping for a nice correction as well! Let’s keep our fingers crossed.

      Best wishes!

  3. Anonymous says

    Love the way you have set a plan in progress & follow that plan. I get that you have not been through market corrections such as we had in 2008 but I believe if you had have and followed the disciplined approach you are taking now, you would have come out of it in great shape. There is no substitute for quality. Now if I may, I am going to ask you & your readers a hypothetical question. Rather than 35 stocks & growing, what if you had to pick only your top 10 greatest companies you could own & never sell, what would they be? I’m sure there will be some overlap with your readers but I would love to see the Dividend Mantra Top Ten All Stars of All Time.

    • says

      Anonymous,

      Thanks so much! Appreciate the support. Glad you enjoy the blog.

      You’re right, I haven’t been through a severe correction/downturn like we seen in 2008 and 2009, but I’d like to see how I’d do. I believe with my mentality I’d be able to control my emotions, but hindsight is always 20/20.

      Hmm, 10 greatest stocks to hold forever? Hard to say. I believe in holding forever if possible, but it’s always prudent to monitor companies. If I had to come up with a list off the top of my head it would probably look like this:

      KO
      PG
      PEP
      XOM
      CVX
      AFL
      JNJ
      MCD
      PM
      CL

      I left out a lot of names, which is exactly why I couldn’t hold just 10! :)

      Take care!

  4. Anonymous says

    I guess I should be upfront on my Top 10, all of which I own & will never sell. PG, KO, JNJ, PM, CL, TD, BNS, CNR, BCE, TRP

    • gibor says

      Both, yours and DM’s , are great lists. The only stock I wouldn’t include in this list – AFL, don’t trust insurance companies. Would replace AFL with (as an example) KMB or BCE ,RCI or even FTS-T… I hold all 6 big Canadian banks on different accounts and also don’t have intention of selling.

  5. says

    DM, this is a great point of view. Not many people look at the stocks this way. Although every dictionary will tell you that by buying a stock you are buying a portion of the company, people tend not to associate it that way anymore. I think it is because everyone wants to get rich quick and believes by trading stocks they can do it and Wall Street and brokers support this view because they get fat fees and commissions. It’s time reminding this to myself and other on everyday basis. Maybe if more people will look at it that way the stock market will no longer be that volatile as it is these days.

    • says

      Martin,

      I agree. Wall Street supports the trading, and so do the brokers because that’s what generates traffic and fees. I’m their worst enemy! :)

      Glad to hear you share my view.

      Best wishes!

  6. says

    Interesting you brought up the Abbott story of 180 to 7million. I stumbled across that story and one thing led to the next during research and that’s how I got into dgi.

    Currently thinking of selling calls in current market environment. For instance I can sell a Jan 2014 call on Cisco at strike 27 for 0.95. Cisco has two dividends between now and then for an additional 0.34 cents. Cisco is currently trading at $24.89. If it gets called at 27 I would get about 12.59% return over just under 6 months. If it doesn’t get called I get my 0.34 in dividends which is my main goal plus an additional 0.95. Seems like a no brainer thing to do, especially in a market as frothy as this one.

    • says

      Took2Summit,

      Glad to hear the Grace Groner story led you to DGI. It’s certainly an inspirational tale!

      A lot of people are into options. I haven’t stepped into the foray yet. I keep things simple, even if it might lead to slightly less returns. We’ll see. I may change my mind on that. :)

      Good luck out there!

      Best regards.

  7. says

    Thanks again to remind us that we are part-owners of great companies. The wisdom itself shines in this post. I totally approve that we should never ever use the Word “stocks) anymore. Good to you

    • says

      Aspenhawk,

      No problem. Glad you enjoyed the post!!

      I’ll still keep using the word “stocks” if only because it’s so common and it’s easy terminology. However, I’ll avoid it when I can! :)

      Best wishes.

  8. says

    I absolutely think of my investments in ownership stakes. Every share I buy represents some amount of money that I’ve now put to work in the important business of making more money. Just like I would try to hire the best employee that I could if I was running a business, as an investor I try to buy into the best quality businesses that I can. And just like I would love to hold onto a great employee for as long as possible, I want to hold onto a great company for just as long. Thankfully stocks rarely turn in two week notices telling you that they’re taking a new job with your competitor.

    • says

      MFIJ,

      I’m completely with you. Don’t fix what isn’t broken. If the company is humming along and churning out 6-10% earnings growth and dividend growth and you’re a happy shareholder, why change?

      I’ve sold ownership stakes rarely in the last couple years and I hope to taper that even further.

      Take care!

  9. says

    It’s really good to get an occasional reminder of what you’re buying. It’s not just numbers on paper, it’s a real business with all the problems and opportunities and it pays to know what you’re buying.

    • says

      Nick,

      Absolutely. You’re buying the good and bad parts of a business. When you’re buying a stake in a supermajor oil company you’re taking on the risk of a major spill (like BP), and so you always have to keep that in mind. You’re not just buying a ticker symbol, but a company with thousands of employees, pipelines, refineries, wells in production, etc. etc. It’s amazing when you really sit down and think about it.

      Best wishes!

  10. says

    This is a great way to think about it. Even though I call them “stocks”, I definitely think about them as “ownership stakes”. I only buy stocks (or mutual funds) of companies that I use or who have a long track record of success. Nice post, DM!

    • says

      Jake,

      Glad you liked it!

      Great way to think about it. You are, in fact, buying stocks, but I encourage you to think beyond that. It sounds like you already are, so keep it up!

      Best regards.

  11. says

    I tend to be cognizant of this idea most when I am on vacation, partly because I have time to reflect, but also because I see that my money is still working for me even when I am not. Every time I drive buy a Shell gas station, a McDonald’s restaurant, or a Walmart store, I see my investments at work. Even at the beach, I see people with their AT&T phones, their Johnson & Johnson band-aids, and their Kimberly Clark kleenex.

    • says

      S.B.,

      Great thoughts there. I’m a bit OCD with some of the things I do, and investing is no different. I often go out of my way to buy products that I have investments in and I’m even thinking of changing my bank account over to Wells Fargo. I’m always aware of the products of these companies and I think about it way too much.

      I even do it on a vacation, like you mention. Maybe I need my head checked? :)

      Great thoughts there. Thanks for stopping by!

      Best wishes.

    • says

      I think I have posted this before, but I like to find ‘chains’ of how I can make dividends (profits) off of just one item being bought (of course this is multiplied many times when you consider the basketfull of goods being purchased). Consider if a family purchases a 12 pack of Pepsi at Walmart and pays with their Wells Fargo Visa card…
      You could potentially get profit from PEP (product), WMT (store where bought), O (REIT who leases to WMT), WFC (bank where consumer has their account, even Wal-Mart might bank there locally), V (credit card processing fees), IBM (cash register where it was rung up at), PAYX (provide payroll services for WMT).

      I haven’t verified that the local WMT goes through O, KIM, or NNN, or if the paychecks are via PayChex or IBM does their cash regisers, but you get the idea a potential 7 different dividends from one product, that doesn’t include the gasoline processing for the trucks to get there or the consumer to drive there, etc.

    • says

      me myself and I,

      Great thoughts there. I think much along the same lines. Every time I see someone using a product or a service that is provided or manufactured by a company I’m invested in it makes me smile. Especially when the transaction is compounded via many different companies. It’s quite wonderful!

      Thanks for stopping by!

      Take care.

    • gibor says

      I was thinking of buying MCD, PG, CAT, JNJ, SO (with tempting 4.8% yield), but got too scary… looks like markets in free-fall , even though no any fundamentals got changed

    • Anonymous says

      I think if you practice a little patience you will see much better buying opportunities. My hunch tells me we’ll see more down days like we experienced today.

      Chuck

    • Will says

      My stop-loss order on MO kicked in today (locked in a $2,800 profit), will be buying back in at a lower price at some point this summer. I think we will be heading a little lower. As of this morning, the S&P 500 was up 15% for the year and we’ll probably go down below 10% before we head up again.

      Looking to buy into some great DGSs like WFC, JPM, LO, LEG, OHI, O, CVX and others over the next few months.

    • says

      Will,

      Nice profit there on MO. Altria was one of the first companies I invested in after adopting the DGI strategy in early 2010 and I’ve held my original investment ever since. It’s been a steady, quite stalwart for me. I only wish I would have doubled my investment to about 100 shares and then I’d be a bit happier!

      I like that list there. I’m eying O, as it’s down heavily since I initiated my position at the end of last month. If it continues down to $40 or below I’ll likely add to my investment.

      Best wishes!

    • Will says

      MO is probably my favorite stock I own. Slow and steady, beats the S&P 500, and pays very good dividends. I will definitely being buying back in before the next ex-dividend date. I just sold my 200 shares and plan to buy all 200 back again soon. I am also reinvesting the dividends going forward.

  12. Anonymous says

    I’m thinking Friday will be another down day to finish the week, so maybe look to buy in the last hour of trading if downward pressure continues.

    • says

      Anonymous,

      Hard to tell what’s going to happen, but clearly the market does not like the thought of being weaned off of easy money! My only take on it is this – where else do you go besides equities? Certainly even after the modest pullback over the last couple days equities are still just a tad pricey (based on historical valuations), but you can’t go to bonds and certainly cash earns a negative real return. I’ll just keep buying on the dips and leave the endless analysis to others. :)

      Best wishes!

  13. Anonymous says

    Dividend Mantra, I follow your blog and your articles on SA. You have a good perspective on investing and I appreciate all the work you do in helping DG investors like myself.

    I became disabled a couple of years back at age 42 and received a lump sum amount of my retirement 401K account, I liquidated everything to cash since it was all in mutual funds and I want to invest it myself.

    I sat out the rally this year and missed the run-up since the last 2 yrs too. Just nervous after I took a beating in 2008. I invested a third of my account last week and for my luck the markets started going down. I did not panic and sell even though the account went down quite a bit.

    I am listing my portfolio below. I am also attaching a list of the stocks I like to buy as this sell-off continues hopefully. I believe it is better to own a lot of companies with few shares in each so the portfolio is not affected if any one company cuts dividend or earnings goes down and stock takes a beating.

    I will appreciate if you and your blog readers can take a look and advise me if I am on the right track. I apologize for this long post.

    Thanks and Regards – Sam Cassar

    —— CURRENT HOLDINGS —————————————————-

    KO – 25
    JNJ – 25
    VNR – 50
    CSCO – 50
    GIS – 25
    MAT – 25
    MSFT – 25
    MRK – 25
    WFC – 50
    HON – 25
    ABT – 25
    EPD – 25
    GOV – 50
    XOM – 25
    M – 25
    PKG – 50
    RCI – 50
    CLX – 25
    KMB – 25
    NU – 50
    LEG – 50
    CLMT – 50
    AFL – 50
    NUS – 50
    CVRR – 50
    KMP – 50
    HCP – 50
    OHI – 50
    ENB – 50
    LYB – 50
    SHW – 25
    CVS – 100

    —— THINKING OF BUYING ———————————

    PM, PG, MCD, O, K, HSY, COST, WM, CL, RY, INTC, ITW, GPC, SYY, APD, BNS, SO, WEC, OKE, SXL, CVX, PEP, COST, VOD, RCI, WMT

    • says

      Sam,

      Unfortunately you sat out the last two years, letting your fear get the best of you. If there is one thing I can recommend, it’s to invest month in and month out regardless of broader market conditions. Commit yourself to finding the best values you can while balancing your portfolio accordingly as you build it. Try to ignore the noise and forget about short-term fluctuations. The drop in the last few days will be but a distant memory 10 or 20 years from now. Just invest in high quality companies and let them go to work for you, reinvesting the dividends along the way.

      As far as your portfolio goes, it looks great. I’ll be honest there are a few on that list I don’t personally follow but you have a great base built up.

      As for your watch list the only one I don’t really like is WM. HSY is very expensive here. I think PM, PG, MCD, O, BNS, CVX and WMT should be among the top of your list due to quality and valuations. The rest of the names are solid, but some are a tad pricey. CL, for instance, is a wonderful company but a little expensive currently.

      Best of luck to you! Stay focused on the long-term. Paper losses mean nothing until you react to your emotions. Think how much Warren Buffett has probably lost on paper over the last three days. Keep perspective.

      Best wishes!

  14. Anonymous says

    Thanks a lot Jason. Your advice is valuable. I love your blog and will visit daily.

    Wishing you all the best

    Sam

  15. says

    Great article. I’m constantly appreciative of the ability to invest in high quality companies with considerable economic power to help underwrite my own position of less certain economic strength as a factor of production in a business who is an employee at will (read, can be fired at any time without cause!). Being a partner alongside companies with economic power helps to swing the balance of power back toward you, if ever so slightly!.

    • says

      Integrator,

      I’m completely with you. I’m very appreciative of the availability of the capital markets to even common men like myself. It makes it easy to build wealth over the long haul if you focus on quality, value and stay consistent.

      I just hope I have ownership stakes near your level one day! :)

      Take care.

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