You see, no matter what mood Mr. Market is in, and no matter what he throws at me, I’m technically winning.
If the market’s mood sours and stocks tank, then the stocks I’m purchasing with new capital become cheaper. So the future dividends I’m purchasing with today’s dollars are larger.
Cheaper stock prices mean higher yield, and as such when prices on stocks take a dive my dividend income is actually being built faster. Although some people might claim I’ve been fortunate to start investing as this massive bull market started really taking off in early 2010, the truth is I wish prices were the same as they were back then. Party like it’s 2010?
See, a depressive Mr. Market surely puts me in a great mood!
However, what if Mr. Market is exuberant? He certainly appears to be in wonderful spirit these days.
Well, I still can’t lose. And I’ll tell you why.
Higher Stock Prices Naturally Make Us Feel Better
Higher stock prices means it’s psychologically easier to keep playing the game. After all, I’m only human, and it certainly reinforces keeping to a strategy when you’re seeing your net worth climb by leaps and bounds every single month.
And this is basically what I’ve experienced since I started investing in high-quality equities back in early 2010. The market’s almost unchecked move north has meant that my stakes in these businesses are worth more than ever. Due to this, I’m all smiles.
I don’t know if Charlie Sheen is winning any more, but I know I am. And I’ll show you how this works in real-life.
Building A Position Over Time And Using Pullbacks As Buying Opportunities
For instance, Philip Morris International Inc. (PM) is one of my largest equity investments right now. With 115 shares of this tobacco giant currently valued at $9,863.55, it’s my second largest investment by dollar value – second only to my first-ever $10,000 investment in Johnson & Johnson (JNJ).
And this investment was built slowly over time with five separate purchases of stock in the company: My first purchase was in January 2011 for 35 shares at $56.22 per share; the second purchase was in October 2011 for 25 shares at $62.51 per share; the third purchase was in January 2012 for 20 shares at $74.43 per share; the fourth purchase was in December 2012 for 20 shares at $84.67 per share; the final purchase was in January 2014 for 15 shares at $79.14 per share.
So you can see I kept buying as the share price rose, watching my net worth rise as Mr. Market continued to value my equity stake in the company higher and higher. Until all of the sudden Mr. Market didn’t.
My purchase in December 2012 at just under $85 per share seemed like a can’t-lose investment as shares in PM continued to rise – peaking at over $96 per share in April 2013. And then the slow descent started. Shares finally rested at $75.28 in early February 2014.
Watching shares fall from that $96 price tag all the way down to below $80 per share in early 2014 might weaken the knees of some investors. After all, I had owned 100 shares at the time, and so that means my investment’s value fell by more than $1,500 in the course of less than a year.
But I realized I couldn’t lose.
This decimation in the share price was simply an opportunity for me.
Ignore Mr. Market’s Emotions – Focus On Core Business Growth And Dividend Growth
Philip Morris was paying $0.85 per share in dividends to investors in April 2013. At $96 per share that equates to a yield of 3.54% And, of course, this dividend was at this level only after the company continued to raise it like clockwork in the fall since being spun-off from Altria Group Inc. (MO) in 2008. My first purchase of shares in January 2011 were paying $0.64 quarterly per share in dividends, so you can see how lucrative this investment was becoming for me. Obviously, it’s easy to keep buying in when the dividend is being increased, and such is the life of a dividend growth investor. And management was able to keep increasing the dividend due to growth in core operations of the business. Earnings per share rose from $3.92 in 2010 when I first started researching the company to $5.26 in 2013 – a compound annual growth rate of 10.3% over this period of four years.
So after the fall from $96 per share to below $80 I decided to use this opportunity to increase my stake in the company. And I did so at a great time, because the future dividend income I was buying with current capital was larger. And because Philip Morris is committed to growing their dividend, they did so again in the fall of 2013 – from $0.85 quarterly per share to $0.94 quarterly per share. That means the yield on my new purchase of shares in the company rose to 4.75%. So while I was looking at unrealized paper losses that meant nothing unless I sold shares in the company (why would I do that?) my future dividend income was rising significantly because I was reinvesting back into the company at a much more advantageous price, and, therefore, at a more advantageous yield. And the larger yield meant my future dividend income was larger, and financial independence – where I exceed my expenses via totally passive dividend income – was that much closer.
A Cheaper Stock Price Means I Can Buy More Future Dividend Income With Today’s Available Capital
By purchasing 15 shares at $79.14 per share in January 2014, I was investing $1,187.10 in the company. And that $1,187.10 was buying me $56.40 in future annual dividend income at the quarterly $0.94 per share dividend the company was paying.
If I would have instead bought more shares in April 2013 when shares were peaking at $96, I would have only been able to purchase 12 whole shares paying out $0.85 per share in quarterly dividends – for a total of $40.80 in future annual dividend income. And $16 per year might not seem like much until you’re repeating this over and over and over again.
Of course, because Philip Morris is fundamentally fine as a company and Mr. Market has a history of being irrationally emotional, shares in the company are now priced at $85.77 each as of this writing. As such, I’m winning yet again! The investment I made with the company in early 2014 as shares were plummeting is now up 7.7% on paper, before factoring in dividends. And I’ve already received a $14.10 dividend from these shares in April. If the share price rises from here, my investment value goes up and my psyche feels pretty good. However, if the share price falls significantly from here, it just makes it that much easier to increase my stake in the company as I try to pick up shares on the cheap.
It’s important to note here that it’s imperative to focus on the fundamentals of a company. Because Philip Morris is doing fine as a company, continues to raise the dividend, the dividend is appropriately covered, the future earnings growth looks strong, and the company has a pipeline of new products coming out to ensure that future growth, I’m perfectly fine increasing my stake. And because my stake in the company wasn’t overwhelmingly large at the time, there was room in my portfolio for me to up my exposure.
Shares on sale? Shopping time! Shares expensive? Business is good, but I’ll buy shares elsewhere. All shares in every company expensive? Unlikely, but business must be really good and/or Mr. Market is extremely euphoric. I’ll collect my rising dividend income with a smile and renew my shopping list. No matter what situation I might find myself in, as a dividend growth investor I’m winning.
So when we’re talking about high-quality companies that have a history of regularly paying dividends and reliably raising those payouts, it’s important to remember to focus on the fundamentals and less the share price, because you’re winning either way. When Mr. Market irrationally slashes the prices on these stocks, it’s time to go shopping for discounts because the future dividend income you can buy with today’s dollars is larger. And how is that losing?
And when your investment thesis turns out to be correct and the value of your equity stake rises over time, don’t fret. Your net worth is increasing, and it’s easy to psychologically ride that high as you continue to invest regularly into other, more attractively valued selections which will, of course, raise your future dividend income even faster.
Charlie Sheen may have won headlines screaming out “Winning!”, but I think it’s us dividend growth investors that focus on valuation and fundamentals over stock prices that are really the ones who are winning. I know I certainly feel like a winner as I’m going to collect more than $5,000 in completely passive dividend income this year. It’s not the millions Charlie was paid from his work on popular sitcoms, but it’s a nice start!
Full Disclosure: Long PM, MO, and JNJ.
How about you? Do you feel like you’re winning?
Thanks for reading.