Think Like An Owner

thinkingI currently own 49 equity positions in high-quality businesses across multiple industries and geographies. These are little, tiny slivers of ownership in real businesses out there making real money by selling real products and/or services to people and/or other businesses.

These aren’t just pieces of stock paper. Or, translated for modern times, digital stock tickers that show up in a brokerage account with a number next to them, indicating how many shares you own.

These are real businesses that I own a real piece of. And the same goes for you readers – every share you own is a small piece of a real business. As such, I always think like an owner. When analyzing a potential investment, I look at the entire business as if I’m buying the whole company. After all, why would I want to own a slice of a business if I wouldn’t want to own the whole thing?

A Holistic Approach

When you buy stock in a company, you’re buying more than just the future stream of rising dividends that will (hopefully) come your way on the back of rising profitability. You’re buying a piece of that company’s stores, factories, plants, distribution centers, goodwill, trademarks, products, services, reputation, history, technology, etc.

I take this into account with every investment I make. If I don’t comfortably and reasonably understand the totality of the business, how they make money, and how I’ll receive rising dividends for the remainder of my ownership experience then I’m likely to take a pass.

And the reason for this is risk. My main objective as an investor is to limit risk whenever and wherever possible, while seeking attractive risk-adjusted returns and growing dividend income. I’m not out to beat the market or swing for the fences. I want to get on first and eventually round the bases in due time, collecting rising income all along the way. Reducing risk means I’m reducing the chance of permanent capital destruction. I work hard for every dime that comes into my possession, so I’m not interested in seeing my hard-earned capital evaporate because I didn’t know what I was investing in.

And I say that because permanent capital destruction therefore means I have less capital which I can use to generate rising dividend income. I always remember a 20% price drop requires a 25% appreciation just to break even. Now, we have no control over the stock market. Furthermore, a price drop is something I look forward to so as to average down and buy more stock for a cheaper price.

However, it’s difficult to be excited about a stock’s depreciation when you don’t really know what you own. After all, how can you get excited about buying more of something when it’s cheaper when you’re unsure as to what you’re buying?

Know What You Own

I remember getting a lot of flak back when I first started blogging because I was avoiding mortgage real estate investment trusts (mREITs), like Annaly Capital Management, Inc. (NLY) , that invest in mortgage-backed securities. These were fairly popular stocks when I first started blogging back in early 2011, but I didn’t really get how exactly they made money and how I could be assured they’d not only be paying dividends 10 or 20 years from now, but be paying more than they were at the time.

For instance, this is an excerpt of NLY’s business description, per Google Finance:

Annaly Capital Management, Inc. (Annaly) owns, manage, and finance a portfolio of real estate related investments, including mortgage pass-through certificates, collateralized mortgage obligations (CMOs), Agency callable debentures, and other securities representing interests in or obligations backed by pools of mortgage loans.

Now, I understand most of that. But some I don’t. And after taking a look at NLY, among other mREITs, I just didn’t really get how they create value and can pay out those big dividends. They seemed to be shuffling money and assets around, and worse – using leverage to do so. This seemed to reek of some of the issues that led to the financial crisis in the first place.

I’m not saying NLY is a bad investment today, or won’t make you a ton of money. But I will say this: NLY was paying a $0.65 quarterly dividend per share in the middle part of 2011, when I first started hearing how crazy I was to avoid these investments. They are now paying $0.30 quarterly per share. The dividend is seemingly cut every few months, and the share price has been decimated with the dividend. High yield typically equates with high risk, which is important to remember.

Owning an mREIT like NLY appears to be a bet on interest rates and mortgages, which is something I’ve never felt comfortable with.

I’d rather make a bet on more people being alive in 20 or 30 years from now, consuming more products from companies like The Coca-Cola Company (KO). I’d also feel comfortable betting that energy will continue to be in high demand as middle classes around the globe spring up on the back of economic growth, meaning companies like Chevron Corporation (CVX) or BP Plc (BP) should continue to profit and pay me rising dividends. I also think healthcare is a great area to be in, and businesses like Johnson & Johnson (JNJ) will continue to sell more products in this space, meaning I’ll continue to collect more and more dividend income.

But bet on which way interest rates are going? Nah, I’ll pass.

While it’s not necessarily realistic to know and understand every iota of a business, you should have a basic grip on what they do and how they do it. Know what you own. Know why you own it. If you can’t explain in a short paragraph what the company does, how it makes money, and why you think you’ll be collecting more income 10 or 20 years from now, then you may want to consider whether you should own a piece of the company at all.

Collect A “Paycheck”

Imagine you own a local pizza shop. You work 40 or 50 hours down at the shop, making sure the ingredients get delivered, the dough is fresh, pizzas get made and delivered, and customers remain happy.

You love your job. You feel like you’re part of the community, and you’re providing a quality product at an attractive price point. Plus, who doesn’t love pizza?

But would you do all of this if you weren’t making any money? Would you want to spend the next 20 or 30 years of your life turning out great-tasting pizza if you didn’t make a dime doing it?

If the business isn’t profitable then how do you expect to make any money? And if a business is profitable, shouldn’t you be collecting a portion of that? 

This concept is exactly why I invest only in companies that regularly and reliably pay and raise dividends to shareholders. I would expect to receive some income if I wholly owned and operated a business, so why should I think any differently as a shareholder?

There are plenty of stocks out there that don’t pay any dividends. And you can buy these anytime you’d like. But that would be like working at the pizza shop for free, hoping that someone will come down the line and offer you more for your business than you paid for it. If I would expect to run a profitable enterprise which can afford to pay me as an owner, then I expect the same as a shareholder. Because as a shareholder I’m a part-owner in a business.

Conclusion

I don’t know everything about every business I’m invested in. But I know enough information about each of the businesses I’m a part-owner of to where I’m comfortable putting hard-earned capital to work. I look to reduce risk while maximizing the opportunities to collect more dividend income for the next two or three decades of my life, and beyond.

If I don’t have a pretty good idea what it is I’m investing in then I’m likely to pass. It would be just the same as owning a business. If I’m in the corner office but can’t explain to visitors exactly what we do and how we make money, then why am I even in the corner office? Higher-yielding securities may look attractive now, but stocks typically have a higher yield for a reason: risk. And risk can surely create opportunity, but it can also lead to permanent destruction of wealth. I aim to limit it where and when possible.

And a dividend is “proof in the pudding”. Profitable? Show me. Pay me a dividend. The business is more profitable today than it was 10 years ago? Well, then I should be collecting even more dividend income. If a business is profitable I expect to collect a portion of the profits as a shareholder because I own a part of the business. It’s no different than if I owned the entire business. I don’t work for free, and I don’t put my capital to work as such either. Whether I’m working or my money is working there should be a paycheck waiting.

Full Disclosure: Long KO, CVX, BP, and JNJ.

Do you think like an owner? Understand your investments? Expect to get paid? 

Thanks for reading.

Photo Credit: iaodesign/FreeDigitalPhotos.net

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121 Comments

  1. Nice article. Right now I consider my Dividend income as my “Partime Job”. I own 3 out 4 stocks mentioned, and consider them long term holds! Seems market sediment has changed somewhat and values will be had. Looking @ KMI, DE, BP, MCD all seem like good buys. Hopefully we see some Bargains.

    Best of Luck,

  2. Great post, Jason. Once I started investing and realized what it was all about – this is what hit me closest. That companies are not just the stocks and a piece of paper. As Peter Lynch put it well (paraphrasing) – Theres a company behind every stock. Get to know it.

    I am in the same boat as you – I do not want to be invested in a company where the business isnt profitable and the profits arent shared with the owners.

    Keep up the great work
    R2R

  3. j-harr22,

    I’m with you. I consider my portfolio as my little part-time worker out there making cash for me and sending it my way. 🙂

    I also hope we see some bargains. I think all four of those stocks offer value and growth, to varying degrees. KMI seems like a no-brainer right now, but it’s already one of my largest positions.

    Best regards!

  4. Jason:
    I agree completely. I’m guilty at times of not delving deeply enough into a company before I buy it. I’m working on changing that. Now that I’m retiring, I’ll have no excuse and won’t be able to say that I’m too busy.

    I do tend to be shy about stocks that have a current yield above 6%. In this interest rate environment, those kinds of yields should be drawing in buyers left and right. When a yield gets high and stays there, it would seem that the “smart” money doesn’t want the stock. There’s usually a reason for that.

    Being an old guy, I tend to focus on the stalwarts. They give me a warm and fuzzy feeling when the div payments come in and/or when the dividend is raised.

    Steve

  5. Great mindset, this is exactly what I do as well.

    We own RioCan REIT in our dividend portfolio. RioCan owns and manages portfolio of shopping centers. They just recently started putting up sign “Managed by RioCan” on the shopping centers & buildings. I always tell my wife about it when I see this sign. It’s kinda neat to know that you own part of the shopping center. 🙂

  6. You’re in great company Jason! Warren Buffett shares this particular mindset, and I think is one that should be emphasized for all investors, no matter how they invest, from bogleheads to DGI folks.

    I too operate under this mentality, and think it applies to investing, as well as other aspects in life. For most folks, it will leave them much further along than if they didn’t have this mindset.

  7. Changing your mindset to truly think like an owner is probably one of the biggest hurdles to get over and truly become an investor. Plus if you don’t know how the company makes money you won’t know if a drop in share price is Mr. Market or something to be concerned about. As a thought exercise I sometimes try to figure out what areas of growth or new markets could be beneficial to my ownership claims.

  8. Keep it simple and invest in what you understand. Two of the core principles I first read when I started researching investments and from the sounds of it; you’re applying the principles yourself. Unfortunately I don’t have the time or experience as you to handpick my stocks so stick to the index tracking which automatic dividend reinvestment. I’m hopeing however that once I reach FI I can turn decent stock picking into a nice side hobby.

  9. Health care and energy are areas that I think have potential. Let’s say interest rates go up, do you think some dividend paying companies will increase their dividend in order to keep investors from moving to the bond funds?

  10. Hey Jason, I really like this concept and it is an important one to remember. Each purchase of stock I make is in a company that creates real products or services. It is important that you understand what it is they do and I ask myself would I buy their product or use their service? Some aren’t necessarily applicable, I am not a farmer, so I wouldn’t be buying any of their products. So the next question could be, do I know people who DO use their products? It is a great way to keep things in perspective and realize that there are people out there who actively choose the company you are investing in.

  11. R2R,

    Thanks! Glad you liked it. 🙂

    That’s a great paraphrase there. Lynch was one of the best. I use the term stocks a lot as shorthand, but I’m really talking about businesses. And not just any businesses, but those that are profitable and sharing the wealth.

    Thanks for stopping by!

    Best regards.

  12. Steve,

    I’m with you. Most of my portfolio is invested in the stalwarts as well. There’s a reason why a company can amass 30, 40, or 50+ years of rising dividend payments. It’s because the business is high-quality and profits continue to go up. What’s not to like there?

    I was guilty of not doing enough due diligence when I first started. But we all grow and learn as investors, and I now take considerably more time. I consider it part of the fun! 🙂

    Thanks for sharing.

    Cheers.

  13. Tawcan,

    That’s awesome.

    I would sometimes drive my girlfriend crazy with that stuff. I would constantly look at labels at the grocery store to see who was manufacturing what, trying to support the companies I’m invested in. I’d also try to make sure to get gas at a BP or Chevron station, etc. I’m kind of weird about it, but I love supporting businesses I own a piece of. Going back to the pizza example, would you buy pizza from Domino’s if you owned a local joint? Absolutely not. So why not do the same when you own pieces of businesses? 🙂

    Enjoy owning a piece of those shopping centers!

    Take care.

  14. W2R,

    The more aspects of investing we can share with Buffett, the better. 🙂

    And I agree. This doesn’t just apply to dividend growth investors, but all investing. Of course, I would recommend investing only when there’s some type of payment, but you should always know what you own and why.

    Cheers!

  15. JC,

    Absolutely. I always look forward to averaging down. But it would be tough to look forward to cheaper stock prices if I didn’t have conviction. Lack of knowledge about exactly what you own and why would likely lead to panic in the case of a drop in share price. And that might lead to selling. You can see where that goes.

    Thinking like an owner is imperative to investing success, in my view.

    Thanks for taking the time to pop in! Hope all is well over there with the family. 🙂

    Best wishes.

  16. ERG,

    Nothing wrong with index investing. You’re broadly diversified and generally paying low fees. Of course, tough to know what you own when you probably own a piece of 500 or more companies, but the whole point of index investing is catching the good with the bad and averaging in. And it’s a lot less time consuming. But I find all of this pretty intriguing and enjoyable. 🙂

    Thanks for stopping by!

    Best regards.

  17. Debs,

    I’ve read a lot of empirical data on how stocks perform during rising interest rates, and it’s hard to say. It appears that there is no evidence that dividends will be raised more or less when interest rates rise. Furthermore, I’ve read that stocks do well when interest rates are modestly increasing. It’s when they increase rapidly that stocks can perform badly. Same goes with inflation.

    Of course, some reports may show other data. You know what they say about statistics. But the above is my general knowledge on it.

    Cheers!

  18. Kipp,

    I’m with you. If I think a company’s products and/or services are crappy and nobody likes what they make then I’m likely not going to invest there. I don’t need to personally use the products and/or services of every company I own a piece of (I don’t smoke, for instance), but if NOBODY likes their stuff then that’s another story. However, it is nice when I can personally contribute to the bottom line, which eventually feeds my own dividends! 🙂

    Best wishes.

  19. Jason

    Totally agree that it’s essential to know how a company makes it’s profit, if you don’t then you will not be able to judge if a fall in the share price is Mr Market being irrational or something to be really worried about.

    I like to think I understand the way my companies make their money, so I am generally comfortable riding out market drops and still raking in the share of profits

    FI UK

  20. Another solid entry. I think people get lost in stock ownership sometimes, and people fear it like losing money in a casino or some other sort of catastrophic incident. Really, it is simple. Do you understand the business – what it sells, how it works, etc.? If yes, and it turns a profit and as an investor they pay you for owning; clearly it is a good business.

    Dividends are as you say, the proof in the pudding.

    – Gremlin

  21. FI UK,

    I’m with you. Market drops are just an opportunity to add ownership positions in the companies I own and track, rather than a fearful event. Knowing what you own and why means Mr. Market is no longer the boogeyman. 🙂

    Cheers!

  22. Gremlin,

    Thanks for the compliment!

    I agree. Those that view the stock market as some type of casino are simply not taking the time to really look at the businesses behind the stocks. I can see how people think stocks are scary, until they take the time to really think about what these companies do and how they make money. Once you realize you can own a little, tiny piece of a money machine it becomes much less scary. And dividends are the output of those money machines. 🙂

    Best regards.

  23. Love the pizza shop analogy. I too look at labels at the market, etc. and see who manufactures the product. And like you, I am much more inclined to buy an item from a company I “own.” I only invest in dividend stocks and enjoy the “getting paid to wait” mantra as, like you mentioned, I’m collecting a portion of a profitable business every quarter. What’s not to love? Thanks for sharing this article and reminding us all that these are real businesses we are investing in that serve and produce real things.

  24. Very nice article, you beautifully articulate many of the tenets of the DGI strategy. I think you hit the nail in the head when mentioned having a -reasonable- understanding of how a company makes money and conducts business. I use my former employer as a gauge of how well I understand a business: while I understand many aspects of how it makes money, I don’t know every single thing there is to know, and that’s OK.

    I think -pride of ownership- is another important thing to have. I love it when I see a Sysco truck make its deliveries around the city, and I love it when I spot an Air Products truck in the freeway. I get a warm fuzzy feeling, which compels me to understand the business and keep an eye on it.

  25. If a company that I own is near by when I feel hungry, for example, I would choose to eat there over another place. The company that I own makes money and eventually shares some of those profits with me.. The more money the company makes, the more percentage of that money I will receive in the way of dividends..

  26. I think that healthcare will make lots of money once all the baby boomers start getting to that age where they rely on medication and medical procedures. Also, our population keeps growing, so naturally the need for healthcare will also rise. It’s good to buy these stocks now.

  27. DivHut,

    I’m totally with you. Why buy a competitor’s product? I wouldn’t do that if I owned an entire company, so I try to avoid it whenever possible. In fact, I’m at a McDonald’s right now using their Wi-Fi to do some writing. And I’m drinking a Coke while doing it. Nothing like contributing to my own bottom line twice over. 🙂

    Appreciate the support!

    Best regards.

  28. Spoonman,

    That’s a great point there. Pride of ownership is huge. I love using my Aio cell phone knowing that its a service provided by AT&T. I love drinking a Coca-Cola knowing that the product coming out of that can is the same as every other can. I love seeing a Chevron gas station full of people putting gas in their car. I should have added that!! 🙂

    And, yes, it’s not necessary, realistic, or possible to know every single aspect of a business. But if you got a good grip on things you’ll be fine. The worst thing possible is not to know ANYTHING about a business. And I cringe when I hear investors talk about high-yielding securities without discussing the fundamentals. I still remember the comments and emails I would get back in the day over mREITs. I just didn’t get it.

    Hope you’re enjoying freedom thus far!! 🙂

    Cheers.

  29. IP,

    I’m with you all the way. I actually stopped at a local McDonald’s today to grab a bite and do some writing. Of course, I’ve got a Coke by my side. Nothing like contributing to the bottom line of two companies I’m invested in with one transaction. Mmm, dividends. 🙂

    Take care!

  30. Joel,

    I’m with you. I’m trying to increase my exposure to that sector as it makes sense. JNJ is currently my largest holding, and I’m very happy about that. I wish I would have bought BDX back in the day, but you can’t win them all.

    But there are many different excellent companies in this sector. Looking forward to seeing all these bay boomers retire and my dividend checks getting bigger. 🙂

    Take care!

  31. Interesting as usual.

    I buy what I understand. No natural resources, no mining, no military stuff. If I don’t like or don’t understand, then I stay away.

  32. There’s a lot of chicken-and-egg involved in trying to explain the relation… In a simple world where the only investment options are stocks and bonds – when investors are selling bonds to buy stocks then bond prices fall (which means bond yields rise) while stock prices rise. When investors are selling stocks to buy bonds stock prices fall while bond prices rise (meaning bond yields fall).
    Of course its all messed up and impossible to judge a ‘fair’ value of bonds when the market is dominated by ‘non-investors'(central banks) who can buy without having to sell some other asset, or stop buying whenever they decide. And when its impossible to judge the fair value of bonds its we can’t make a very good judgement on the relative value of stocks to bonds.

    In response to the original question, I don’t think you should expect (or even hope for) companies to raise dividends in an attempt to ‘compete’ with higher bond yields. Dividend raises should be a result of earnings growth, a raise beyond that as an attempt to keep investors from leaving for bonds means they’re expanding payout ratio leaving less room for future div growth. IMO a move like that might support share price short term, but isn’t really in the long term shareholder’s best interest (as an aside this is sort of how I felt about TGT’s last raise). Probably the best you can hope for is that rates don’t rise significantly until economic and earnings growth are strong enough to provide solid dividend raises.

    Its certainly an interesting question to think about…imagine you woke up tomorrow and people could get 4% on a 3-yr bank CD – what kind of a frenzy of stock selling would that cause?

  33. Great post and great point on the importance of knowing exactly how a business makes its money. I tend to think if you can’t explain it to a 5 year old, you either don’t know it well enough or you’re hiding something. Take care!

  34. IMO another important part of “thinking like an owner” is getting comfortable with/confident in current management…Before you invest read earnings calls going back several quarters and prior annual reports, get the perspective of what the company has planned/promised and what they’ve delivered over the last few years. Confidence in what management is telling you about future plans/expectations makes it a lot easier to hold on (and buy) through price declines or analyst downgrades etc. If you look back at those and see where it looks like they were misleading or significantly over promising etc that’s not a stock I care to own.

  35. There is a line in a Lewis Black routine that goes something like this: “If a company can’t explain in one sentence, what it does…it’s illegal! He was of course referencing the early 2000’s and ENRON, Tyco, Global Crossing, and all the other companies with shady business practices and ridiculously overcompensated management.

    While the point of his routine is to make people laugh at how ridiculous people can become when given unlimited capital and power, he makes a similar point to yours in this post: a good company (and investment) should be easy to understand, and easy to EXPLAIN. What do they “create” and how will they do more of this in the future? If it’s not that easy, than there is a good chance you are looking at a higher risk investment.

    Let’s compare “O” to your mREIT from above (from Google Finance):

    The Company is engaged in acquiring and owning freestanding retail and other properties that generate rental revenue under long-term lease agreements (primarily 10 to 20 years).

    1 sentence. So they are landlords to long-term business tenants, and generate revenue through rental income. It stands to reason that they will increase profits by acquiring more property and by raising rental rates over time. Easy to understand.

    Anyway, your post made me think of this, as that line sticks in the back of my mind every time I consider investing in a new company. I’m not trying to suggest that all companies with complicated ways of generating revenue are doing things that are illegal, just that most of the worlds best DG investments make their money performing fairly straightforward and easy to understand processes.

  36. Ah – you jogged my memory with this post: I overheard a discussion recently between two people about mutual funds that guaranteed a high return (something around 30% per year or something.) They didn’t even know what a mutual fund was or what it consisted of, and all they talked about was how much money they could potentially make.

    It makes me shake my head in wonder. Why would anyone shovel thousands of dollars into something that he/she doesn’t understand, and without taking into account the risk involved?

  37. I hear yah Mantra. When lookin at new stocks, I first read the bio, then I look at the chart, Then I look at dividend history, then reports, then analytics. Mortgage Reits are pretty risky even for me especially with the mortgage crisis of the past and being somewhat new to the market. Twice leveraged Reits and on top of mortgage reits with no consitant history is scary. But this is coming from a guy that bought a whack of reits on margin lol.

    The get rich slowly method is one of discipline and patience. Love the dividend growth strategy but sometimes I find I dont have the patience and mix various strategies .

  38. I like to have a chance to show you my investments someday. It will take a while to explain. Somebody wrote article on my type of investments. He said “only sophisticated investors invest in this” I took it as a compliment, got to be on the sunny side, right?. I’m happy with my investments anyway. This is under “invest in what you know” category. NLY is not even worth to mention(never own it, never will) I have read your today’s writing somewhere else too–you rock–you’re everywhere(like a ghost). Good for you Mr. Mantra.

  39. Excellent post Jason. Adopting the owner mindset rather than a speculators is the only way to build a solid portfolio of stocks to hold indefintely. It could be considered an important tool to remove emotional reactions to price drops. The owner who understands the company well might see a burying opportunity, but a speculator would see a sell signal. I wear both hats, so it gets a little tricky switching gears to and from dividend growth investing and momentum investing.

  40. DM,
    In your opinion are insurance companies the same as mREITs? Both use float and make their money from it. I think I am missing something that differentiates between the two but can’t put my finger on it (probably from lack of sleep 🙂
    -DFG

  41. Another great post! I think it’s really important to understand the fundamentals behind a company before buying into their company via shares. I guess the tricky thing is to know when to cut and run, should the going get tough, or to hopefully ride out the storm. That’s where the test as the owner, so to speak, would come into play.

  42. I totally agree with your assessment regarding Annaly Capital Management, Inc. (NLY). I trusted my financial advisor (read “salesperson”) at RBC Dominion Securities, and went along with his recommendation to by NLY for my retirement account *RSP). I sold it this year and lost a lot of money. It was a very bad piece of supposedly professional advice. Now, I have transferred my assets to a discount brokerage, and am a do-it-yourself investor. Your site is one of my favorites.

  43. pacer45,
    Your last question is interesting. My wife and I just moved our emergency funds out of BoA and into a money market account at Lake Michigan Credit Union. This increased our interest all the way up to 0.4%. 5 year CDs are only paying 2% interest. So, a 3 year CD paying 4% interest (twice the rate of inflation) would be enticing for any extra funds we could pull together.
    KeithX

  44. Jason,
    For some reason, I thought that you bought BAX a while back. I picked up JNJ, PFE, BDX, and BAX, in that order, last year when I moved into dividend growth investing from index funds. All except PFE have higher stock prices, and all except PFE are paying approximately 6% more in dividends this year than last (PFE is up 8%).

    I see MDT mentioned a lot in the dividend growth blogs, but don’t own that. Your thoughts would be appreciated.
    KeithX

  45. Jason,
    I agree wholeheartedly that there would be no reason to own a business that doesn’t pay you to do so. But I do own stock in 3 companies that pay no dividend (CMG, GOOGL, PNRA), another 3 that pay less than 1% (DIS, MA, V), and 7 more that pay less than 2% (AAPL, BDX, COST, MDLZ, NKE, SBUX, WFM). Since inflation has been running around 2%, you can make an argument that these stocks do not belong in our portfolio. However, most businesses that start-up lose money for the first few years before they become profitable. As long as the management is effectively using capital to increase shareholders wealth, especially if the long term prospects are for high growth, then my wife and I will take positions.

    For example, we hold MCD stock, but we never eat there. Not literally, but we haven’t been to one in at least 2 or 3 years. CMG, on the other hand, we end up at every other month because it’s our youngest daughter’s favorite restaurant. So CMG ends up being the “buy what you know and love” stock, while MCD is a “buy what you understand” stock. Both should do fine over the long run, but I expect we will see much higher returns with CMG. That said, our stake in MCD is 4 times higher than in CMG since it is much more established and (hopefully) carries less risk.

    I guess I’m trying to say that there might be room in some portfolios for high growth stocks, or stocks that pay small dividends that are growing nicely. DIS, MA, V, NKE and SBUX may pay a higher yield on cost in 10 or 20 years than KO, CVX, or JNJ for purchases made today.
    Thanks for another great article.
    KeithX

  46. Hemgi,

    That’s the way to do it. If I ever feel uncomfortable about a company, either in the way it does business or my basic understanding of it, I walk away.

    You’re making a great choice there.

    Best regards.

  47. pacer45,

    That’s a great point there.

    I do try to learn what I can about management and look into their actions. But I’ve also learned over the last few years that management can change rather abruptly, and activist investors can come in and wipe out years of change in a second. So it’s hard to put a lot of faith in a certain management team when things can change from quarter to quarter.

    But if a longtime management team is in place and is constantly making the wrong moves/deceiving investors then I’m also likely to stay far away. However, I always try to concentrate on the business over the management team.

    Reminds of me Procter & Gamble. At one point, I read this really long piece of McDonald and some of the changes he was implementing. PG was lagging quite a bit, and I was trying to find out more about the guy and what he thought about the business. Not long after I read all about the guy they brought back Lafley, so I kind of wasted my time.

    I guess I always think about Buffett’s paraphrase about investing in a business even an idiot can run.

    Cheers!

  48. Thirsty Investor,

    Yeah, exactly. And your Realty Income example highlights how different equity REITs can be from mortgage REITs. One’s pretty easy to explain and understand, and one is not.

    Illegal or not, the harder it is for a business to explain what it does, how it makes money, and how it can ensure me I’ll collect rising income for the rest of my life, the higher the risk likely is and the more likely I am to stay far away.

    Being able to understand the basic gist of what a company does is at the foundation of successful investing. Investing in a business that you don’t understand is speculation, at best. Not that you can’t make money, but that’s not true investing.

    Thanks for sharing that story. Lewis Black can be pretty funny. 🙂

    Best regards.

  49. Seraph,

    Yeah, that’s crazy. For me, it’s just plain common sense.

    It reminds me of a time back in 2008-2009 when stocks were getting really cheap. I didn’t have any money back then, but investing just seemed like a no-brainer. However, I started looking at stock tickers and poking around and really had no idea what I was doing. So I quickly backed out.

    Of course, I did make a mistake when I first started investing back in early 2010 where I bought shares in a mutual fund. Luckily, I sold out very quickly and started seriously studying this subject. Haven’t looked back since.

    It would be the same as anything else. You wouldn’t order food off a menu without knowing what it is. You wouldn’t work at a job without knowing how to do your job. And so you shouldn’t invest hard-earned capital without having some idea as to what you’re investing in.

    Thanks for stopping by!

    Cheers.

  50. A-G,

    This strategy definitely takes patience. But I’d rather get rich slowly than get poor quickly. 🙂

    Besides, you only have to get rich once!

    Best wishes.

  51. Young,

    Haha. I wasn’t aware my writing could be found in many other spots. I was just informed by another reader that my story was featured in a UK magazine. I honestly have no idea about some of this stuff, but I’m so glad to be able to spread the message and inspire others. 🙂

    As long as you’re comfortable with your investments, that’s all that matters. I like to keep things very simple, but others can amplify risk and do quite well. All individual decisions.

    Cheers!

  52. Arizona Trader,

    Exactly. Speculation can lead to excellent returns, but it can also lead to permanent destruction of capital. I work too hard for my money to risk it like that, so I choose to be an investor.

    An owner knows what he’s got and has a good idea of what it’s worth. Therefore, drops below that worth are just opportunities, provided capital and room for the position is available. Those who don’t know what they got see price drops as a “moment of truth”. And you might not like what you discover.

    Best regards!

  53. DM, what a great article! I try to think the same way. I own 48 businesses that ALL pay me dividends so I’m right there with you. We have a lot of overlap in the businesses we own so we have many partnerships.
    Best, DD

  54. DFG,

    Insurance companies are very different. Insurance companies collect a premium and later pay out claims. The spread in time allows them to build up that float and invest it, which generates a return for them. They typically invest this money quite conservatively.

    mREITs are real estate investment trusts that typically use leverage to invest in mortgage-backed securities.

    One has a real business model that provides a real service. The other is just shuffling around money, in my opinion. Can the world do without insurance companies? Probably not. Can the world do without mREITs? Probably.

    Cheers!

  55. Nicola,

    Exactly. If you know what you’ve got and what it’s worth then cutting and running would only likely occur when the fundamentals deteriorate. Stock prices matter little to a real business owner. Going back to the pizza shop example, would it matter to you if your “stock” was down 5% today all of the sudden, even though you’re doing business as usual? Would that make you want to sell the entire business? Probably not.

    Thanks for the support. Hope all is well over there. Almost the weekend. 🙂

    Best regards!

  56. helen777,

    Thanks! I’m really glad you enjoy the blog. 🙂

    Terribly sorry to hear of your losses there. But this was a good lesson to learn. I’m the type of person that doesn’t get burned twice, and it doesn’t sound like you are either, based on your recent actions. You’ll be a better investor because of this. Onward and upward!

    Best of luck with your new DIY investing. I’m sure you’ll do fine.

    Best wishes!

  57. KeithX,

    I did buy BAX…a few times, actually. But I was referring to BDX in the above comment. 🙂

    I think BDX is a fantastic company. I wrote about it not long ago for Daily Trade Alert. They have a really solid business based on the old “razor blade” model where they sell quite a bit of disposable medical products. I regret not buying them in the $70s when I first looked.

    I love MDT. Great business. I personally prefer medical device companies over pharma companies because the former is much more stable and predictable. And MDT is poised to be a monster after the Covidien acquisition. However, I’m not a real big fan of the inversion because I hold MDT in a taxable account, and that transaction will trigger a sale of my current MDT shares to be reinvested in the new pro forma company.

    But MDT as it stands is a wonderfully diversified company as it stands with exposure to cardiovascular, diabetes, spinal, etc.

    I’m anxious to see what the new company will look like, but I might be interested in increasing my position there after the transaction is completed.

    Best wishes!

  58. In concept, yes.

    The key differentiation with mREITs is leverage… often lots of it. Insurance companies typically have low leverage (both financial and operating).

  59. KeithX,

    Oh, absolutely. I definitely think there’s room in a portfolio for stocks with a lower yield and higher growth rate. However, I would never invest in a company that pays no dividend at all. Just goes against what I believe in. But that doesn’t make them bad investments. Many can do quite well, and many great companies out there, like Google and Berkshire, pay no dividend. Doesn’t make them any less great, but I want cash flow without selling off business stakes. Goes back to my paycheck example.

    As far as higher yield on cost for the likes of DIS, V, NKE, and the like, over, say, a JNJ or KO, it’s likely when we’re talking multiple decades. However, some people don’t have that time frame. And cumulative dividends are another story. That being said, I like exposure to all of these companies because I like my cake and want to eat it too. The current dividend income that a PM or KMI can provide me allows me flexibility now, while a company like V can eventually propel my income later down the road. I want income and growth, which is why I try to have broad exposure. 🙂

    Thanks for stopping by!

    Best regards.

  60. Current 3-YR CD rates are 1.36%. To get to 4% you’d need to see upward volatility (historically) in the range of about 4 year magnitude to reach that 4% number. Are you taking into account the opportunity cost of the 4 years of missing dividend income waiting for that hypothetical event?

    http://www.bankrate.com/finance/cd-rates-history-0112.aspx

    Are rates going to go higher? Absolutely, they can’t stay this low. Are they going to shoot up overnight? Sorry, no, not that fast.

  61. Hi Jason. I agree completely with the “ownership” aproach to DGI and also think it would be imposible to know everything about each and everyone of 49 stocks. I once asked you how you can manage to deal with such a big portfolio and still wonder how you get up to date with it… I just aim to own around 30 stocks (now I own 22).

    Keep up the good job here at your blog and try to combine your personal goals with your enviroment requirements (family&friends). Sometimes it pays off sharing with others and I know (by experience) that one can get completely focused on a personal goal and forget about others. Don’t get me wrong, I think you are absolutely right but somehow giving turns into receiving in the long run most of the times.

    I’ve just published my august dividend income:

    http://www.dividendogma.com/dividendos-agosto-2014/

  62. Yes, nice, DM, think like a farmer and don’t sell the farm because the weather is unpredictable.

    I agree with you that dividends is the ultimate proof that they earn real money. As to high yielding companies, I mostly try to avoid. When something is too good to be true, then it must be so.

    Well, we all are farmers that harvest dividends regularly. The only time to sell the farm would be if part of the harvest (dividends) diminish too much or are cut.

    Good harvests to all dividend growth investors !

  63. Hi Dm,
    Luckily a lot of people don’t think they are business owners and panic when Mr Market is depressive which is good for the business owners because they get a larger piece for the same money.

    I like contributing to the stocks I own too, Last sunday I went to the movie theater and some of my friends did complain that it was so expensive and they didn’t have much money left and I was thinking of my dividend cheque I would get from the movie theater( and KO) and how they could increase profits by placing some of the candy on another place. Ofcourse I did go in stealth mode and did agree with my friends that it was expensive:D.

    http://www.beursduivel.be/aandeel-Kinepolis.koersen I aquired the stock in 2010, so you can see why I like going to see a movie, stock price and dividend keeps going up 😀

    Cheers,

    Geblin

  64. jguerrero71,

    Absolutely. It would be impossible to know everything about all 49 companies that I’m invested in. In fact, it would likely be impossible to know everything about just one of these companies. But the good thing is that we don’t have to know everything. We must just have a good handle on what they do, how they make money, and how they’ll be able to afford rising dividends for the foreseeable future. A reasonable understanding of these fundamentals is all that’s necessary. Of course, the more you understand, the better. However, problems arise when you don’t really know what a company does and how they make money. If you can’t explain it off the top of your head then you probably shouldn’t be invested.

    As far as sharing goes, I believe in sharing. But giving out money to others that aren’t responsible with it will likely do nothing good. Just my opinion on it. And that comes from experiences with my mother. She was given incredible sums of money, especially later in her life. And she wasted it all away. Those that truly want wealth will find a way to get it for themselves. I’m not a fan of wealth re-distribution, either in my own life or on a broader scale. Those responsible with money will naturally accumulate it. Those irresponsible with money will naturally waste it. Just part of life.

    Best regards!

  65. Aspenhawk,

    I’m with you. Good harvests are what we’re after. But to sell the farm simply because there’s a storm on a Tuesday would be foolish and shortsighted. Much like a farmer, we must plant our seeds early on and wait for the harvest to come later. Patience goes a long way! 🙂

    Cheers.

  66. Geblin,

    Unfortunately, you’re correct. Fear creates the inefficiency that us long-term owners take advantage of. Such is life.

    Haha. That’s a funny story there. Pretty much every single time I see someone consume a product and/or service from a company I’m invested in I smile just a bit. The small pleasures in life. 🙂

    Thanks for stopping by!

    Best regards.

  67. Zol, not sure if your question regarding opportunity costs is for me, but we use the money market instead of CDs for that reason. Plus, emergency funds need to be able to be accessed immediately when something happens and the credit union penalties are steep for early withdrawal. If CDs hit 4% for a 3 year CD, we would be buyers, but not with emergency funds.

  68. Jason,
    You must have sore fingers by now. I saw this article over on Seeking Alpha, but with a whole different cast of characters discussing. I recently subscribed to SA to read DGI’s analyses and have found a couple other writers to follow, including you. DGI posts different topics on the blog versus SA. Will your SA posts be the same as the blog or different?
    Thanks,
    KeithX

  69. I worked for BDX when I was in my twenties. However, I was asking about BAX because I thought (correctly) that you were a share holder and you only mentioned JNJ in your comments to Joel.

    Thanks for the thoughts on MDT. It would be a great addition to the portfolio if I can pick up shares at a good price.

  70. KeithX,

    Haha. My fingers are made of steel by now! 🙂

    SA republishes some of my articles. They choose when to do so and what articles. So you won’t find different content from me over there, but you will probably find different discussions/commentary.

    I hope that helps.

    Cheers!

  71. I guess i will have to stand up for NLY, if no one else will.

    NLY has the smartest people in that space. They will try to make money given the cards they are dealt. Also, they invest in only government backed securities ( agency securities , fannie/ freddie ) and do not have an excess amount of leverage.

    But being the smartest guy in the room doesn’t mitigate the fact that they are navigating treacherous waters because afterall they are dealing with mortgages and interest rates.

    You need to look long term, over perhaps one or two business cycles. When rates become normalized they will have more opportunity to make money. Who knows when that will happen, but i am reinvesting the 10% yield. It will take time.

    I dont recommend this for new investors.

  72. Oh jeez, you’re just like me with that. That is how I learned half of the brands that Unilever and Procter & Gamble own.

  73. Even Warren Buffett recommends the Vanguard S&P 500 Index Fund to investors who don’t know how to properly invest in stocks. I had been thinking of getting into ETFs as well (only a small amount, and no adding fresh capital as that would be reserved for my dividend stocks), but I’m not really sure when I can directly own the best companies. Plus with THAT much diversification, there would be so many companies in the fund that you own that you would never invest in individually.

  74. Sfi,

    NLY could be a great investment, but their history doesn’t give me much confidence. It seems like they were cutting the dividend every six months or so there for quite a while, and the share price went with it. Could be a great speculative vehicle, but I don’t see how it’s a great long-term investment. Just my take.

    Cheers!

  75. Joey Batz,

    Yeah, I remember my girlfriend buying some dish soap a while ago. And she was looking for the cheapest one she could find, and stumbled upon Fabuloso. I wanted to find out who made it, and sure enough it was Colgate-Palmolive. Just can’t escape these great companies sometimes. 🙂

    Cheers!

  76. Joey Batz,

    Buying index funds is a great way to go, mainly if you lack the time or inclination to invest in individual stocks. But I think for anyone who has the time and/or interest to do this they’re better off buying individual stocks. After all, I don’t need to pay a fund a percentage of my assets to go out and buy the same exact stuff I can.

    But indexing is far better than buying mutual funds…or buying individual stocks when you don’t really know what you’re doing.

    Best regards.

  77. Hi Jason and thank you for the article!

    I like to apply Pareto principle (80 – 20 rule) on my company research. So I will get 80% results with 20 % input. With the limited time I have this is a good remainder on what is important when you look at the company (cash flow, growth rates, debt, ROE, moats, etc.). If I had the time, I would of course research deeper but value of that time used will not benefit me as much as the first 20%.

    – JJK

  78. It just goes to show that you can’t lose with companies that compete against themselves. Colgate-Palmolive makes Fabuloso dish soap. People might hate Fabuloso and instead go for Palmolive dish soap…….made by the same people. You can’t lose.

    Oh, I sent you an email (through the contact page) a couple weeks ago in regards to an article I wrote. I was just curious if you ever got it.

  79. Jason,

    In paragraph 6 you touch on risk. Could you explain how diversifying reduces away risk. What if I bought 49 risky dividend paying stocks? Does diversification reduce or eliminate the risk?

  80. JJK,

    That’s a great way to look at it. And you’re probably correct there. Looking at the basics – including financial statements – will probably tell you most of what you need to know about a company. You could delve into it much further, of course. But there’s a limit to what we retail investors can really research. It’s not like we have the time and/or resources to go visit factories and what not.

    Thanks for sharing!

    Take care.

  81. mikeschn,

    Good question.

    Buying 49 crappy companies will not put you in a great position, but I think that’s an unrealistic expectation. Of course, that still reduces your risk compared to someone who owns, say, five or six crappy companies. The odds of 49 companies going bankrupt compared to five are probably much less, though it would really depend on the quality of the companies in question. Furthermore, you’re likely diversifying across industries. So whereas one industry – call it finance – might have a problem and sweep away some losers, you’d have your exposure to consumer defensive, energy, healthcare, etc. to keep you as whole as possible.

    The whole point of diversification is to limit risk and broaden your exposure. So investing in 49 low-quality and/or high-risk companies would be counterproductive and counterintuitive, but I still think you’d catch some of the benefits.

    Cheers!

  82. Great post Jason! and truly reflect the way I think and the way big boy from Omaha thinks alike 🙂 However, I do own REITs as strategic assets for high dividends to be re-invested in other great companies. Its my way of thinking that I’m getting rental income that I’m free to invest the way I choose.

    Ownership is an excellent way of thinking anything be they securities, not just pieces of paper to be traded.

    Best wishes.

  83. Thanks for the article Jason. Always appreciate your perspective.

    My investments however are a mix.

    In my HSA portfolio, I have to be a pure indexer right now because of trading costs for a stock are like $50 to $60 round trip, while a mutual fund is only $6 each way. So I went with Fidelity Four in One Index which gives me instant excellent diversification. 48% S&P500, 12% extended Russell Stocks, 25% International, and 15% Bonds.

    In my 401k, I have to go mutual funds as that is the only thing offered. I have about the same kinda weights as above.

    In my Roth IRA, I have a mix of a few dividend stocks, some dividend ETF’s (which I am dripping) including a core holding in NOBL (dividend aristocrats), smaller holdings in DIV and SDIV, and another core holding in a world ETF in ONEF, and a tiny position in a Middle East ETF, GULF.

    I just recently started a Loyal3 account which I am to coin my own term “Dribbing and Drabbing” into 11 stocks. (aka, just dollar cost averaging with $10 or so per stock each month).

    I am still working thru a decision whether to be a mix of stock picker of quality companies or pure indexer.

    And I love this quote, “And a dividend is “proof in the pudding”. Profitable? Show me. Pay me a dividend.”

  84. Great post. I had bought what I could understand and even if I did understand the business but had a dislike of their practices I would stay away from them. If you are a part owner, like what they do and how they do it. Since retiring early I stopped investing in single stocks and went the way of mutual/index funds but sometimes I think I would like to start buying company stocks again. Your article gives me something to think about as I ponder my next moves. Thanks.
    Prost!

  85. Great post, DM. It’s all too easy to get caught up in checking the prices of “ticket symbols” and forget that what we actually own are quality businesses. It’s important to remember this foundation when hard earned dollars are at stake!

  86. PIM,

    Haha, I try to think along the same lines as Buffett any time I can. 🙂

    Nothing wrong with owning REITs. I do as well. But remember that mortgage REITs and equity REITs are very different animals.

    And I couldn’t agree more. These aren’t just stock tickers you’re trading around. Stocks represent actual slivers of ownership in real businesses. I always try to remember that.

    Thanks for stopping by!

    Cheers.

  87. The Aiki Trader,

    Thanks for stopping by! Appreciate the support.

    Nothing wrong with going the index route. I’ve chosen this route for a number of reasons, but investing in high-quality index funds that track some of the larger indexes is a great way to achieve broad diversification with an attractive fee structure.

    And that “dribbing and drabbing” account will turn into a snowball of its own one day. You just wait and see! 🙂

    Keep up the great work.

    Best regards.

  88. Hey Jason. Another great article for lively discussion. I’m definitely an owner, not a trader. My plan is to buy and hold forever unless something changes with the company like earnings sink for several quarters and they cut the dividend. I like to research stocks I’m interested in by reading Seeking Alpha and maintaining watch lists on Morningstar and FAST Graphs. My September purchase will probably be one of these five companies; VZ, T, RDS.B, TD, and ETN. But, I also like PG, AFL, TSX:RY, BAX, CSX, RTN, VTR, OHI, O, and IBM right now, so I’m having fun trying to decide which one to buy. I’m amazed at all of the quality companies still available at fair or even undervalued prices when the S&P 500 is setting record highs.

    Happy Labor Day Weekend!

  89. LeisureFreak Tommy,

    That’s definitely not a bad approach. I don’t mix ethics and morality with investing too often, but I know many who do. Nothing wrong with either approach, in my opinion. Ultimately, I wouldn’t recommend investing if you’re not comfortable with the investment. Sleeping well at night pays dividends as well.

    Cheers!

  90. Get Rich Brothers,

    Absolutely. That’s probably a difficult concept to get when you’re first starting out. But I think it’s important to recognize that when we’re talking about stocks we’re talking about real pieces of ownership in real businesses. That perspective really opens ones eyes. 🙂

    Thanks for stopping by!

    Best wishes.

  91. luckydog17,

    That’s a great shopping list there. It’s fun to go shopping for stocks, isn’t it? Much better than any mall out there!

    I’m personally looking at VZ, GE, and T. I might, just might, have enough for two stocks. We’ll see. Hoping to keep this train rolling. 🙂

    Best of luck narrowing down that list. Nothing like owning a chunk or two of high-quality businesses.

    Have a great holiday weekend!

    Take care.

  92. Joey Batz,

    I’m sorry. I’m still not receiving any email. I also checked my spam folder, and there’s nothing from around this time. I’m still receiving email, so I’m not sure what the issue is?

    Cheers.

  93. That’s strange. I’m sending you messages through your contact page, not through an actual email address, just so you know. I figured that would be the best way to contact you.

  94. I’ve gotten “yelled” at by others for not wanting to invest in companies based on a philosophical reason.

    I personally won’t invest in certain companies based on their policies towards employees: MCD, WMT, etc. Companies that I feel are a cancer on society: PM, LO, MO, RAI, etc. Companies that I feel are heartless towards the earth/world: MON, NSRGY, DUK, etc.

    The dividends I receive from owning the stock are a direct result of the way they run their business, and I have to be ok with that. Some people don’t care and just want to make money, but to me it matters. Others are fine with these companies, and that’s fine with me as well, it’s a personal choice that I have made and I fault no one for wanting to own stock in these companies, I just need to look harder and deeper for hidden gems 🙂

  95. Check if you 401k has something similar to BrokerageLink (what Fidelity’s is called). Apparently mine has had it for years, but I never really looked into it. I’ve just diverted 50% of my 401k into individual stocks, the other 50% is sitting in very low cost index tracking mutual finds.

    I still have an E*Trade account leftover from when my ESPP went there in the late 90s, just to have access to some of the commission free ETFs they have, and GULF is one I’m in as well for some additional international exposure, the 3.2% dividend doesn’t hurt either 🙂

  96. I manage my son’s portfolio, getting him started on the DG path at an early age, and when I tell him he owns part of a car company (F) or train company (UNP), he get’s excited: “You mean I own part of that company?” When a 7 year old can understand what’s going on, you know it’s working.

  97. Certainly agree with that timeless piece of wisdom from Warren Buffet to know what you own. Even if you are a financial wiz and do a full analysis of a company’s balance sheet/income statements etc, if you have no clue what that company does and how they make those numbers ‘appear’ on the balance sheet than you are opening yourself up to risk.

    And as you put it DM, as an owner I always smile when I go by one of the stores/branches of a company I own, or use a product of theirs or better yet see other people buying their stuff! Even better when they get in the news for record breaking quarters and dividend increases like Royal Bank of Canada(RY) did!

  98. Lucky, my money is on BAX even at this price. S&P just updated BAX fair value at $86 which is $11 cheaper than at currently prices. I don’t think Bax is going back down anytime soon

  99. Dividend Wisp,

    I’m with you. I have a lot of pride in the companies I’m an investor in. Do I agree with everything they do? No. But every company does things that most people wouldn’t necessarily agree with. Furthermore, most people do things that other people don’t always agree with. Hard to avoid that in our imperfect world.

    I always try to contribute to my own bottom line by purchasing products and/or services from companies I own a stake in. Why buy from the competition? 🙂

    Thanks for stopping by!

    Cheers.

  100. For me, if I have information that the company has screwed over its employees or raided a conquered company’s pension plan through a merger I can’t in good faith, regardless of returns support them. I am not some far left liberal, I am a moderate but I do know what it is like to be a powerless employee of corporate America.

  101. Tommy,

    And that’s one thing that’s great about being a direct investor in companies. You can vote with your shares/money by selling out. You can’t do that when you buy index funds or ETFs. Owning a fund means you might be investing in companies that do just that, or do other things you might not necessarily agree with.

    Cheers!

  102. A good way to think is that the dividends from the stocks in a mobile operator pays your cost for your cellphone, the dividens from the bank stock pays your interst for your loans (house) and the dividends from mcdonalds pay your restaurant bills (even if you eat elsewhere ;).
    Thans for your blog and wishes from Sweden.
    /Frosofrasse

  103. Frosofrasse,

    Absolutely. Every dividend that comes in from a specific company in a specific industry can be thought of as income to pay a corresponding bill from that same company. Gotta love that!

    Cover enough such bills and you’re home free. 🙂

    Thanks for adding that!

    Best regards.

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