Thursday, September 24, 2020

The Behavior Gap

 Your portfolio is like a bar of soap...the more you handle it the smaller it gets.

Fidelity Magellan (FMAGX) was one of the top performing mutual funds in the US between 1977 and 1990. It was managed by legendary investor Peter Lynch, who popularized the concept of investing in what you know. His fund generated an annualized return of 29% during his tenure at Fidelity Magellan. 

This means that a $10,000 investment in the Fidelity Magellan at the beginning of 1977 would have been worth $291,782 by June 30, 1990. The same investment in S&P 500 would have been worth $57,524.

His team had calculated that the annualized average return generated by fund shareholders was only 7% during that time period. This means that a similar $10,000 investment would havebeen worth a little less than $25,000 by June 1990.

This is a very big gap between what the investment would have generated, and the actual returns generated by investors. I would refer to that gap as the behavior gap.

You'd think that having a super-star fund manager would have led investors to stick with him through the inevitable ups and downs, and invest for the long term. Of course, we know that today. But investors were not sure at the time.

Perhaps that’s because his investors were not the buy and hold type. They were chasing what is hot, and then selling at the first setback. When he would have a setback, for example, the money would flow out of the fund through redemptions. Then when he got back on track it would flow back in, having missed the recovery.

Perhaps they listened to economists, or perma-bear doom and gloomers, so they could not hold on to their equity fund. Perhaps they traded too much, because they thought they could buy low and sell high. Unfortunately, as a group, investors ended up buying high, selling low, and compounding their mistakes over several corrections.

This is a bad habit to have when you are investing your hard earned money. Noone knows if a stock is about to go up or down in the short-term, which is why it is pointless to even try. Market timing simply does not work, yet people keep jumping in and out of investments, and ultimately doing much worse than if they simple stayed put. Ultimately, it is time in the market, not timing the market that helps you take full advantage of the long-term power of compounding. That’s how you patiently compound dividend income and capital.

I see the same behavior with some dividend growth investors. Notably, they sell too soon at the first time of trouble.

They also sell too soon if the company works in their favor, but gets a little overvalued. In the long-run, I would expect a successful company to grow earnings, dividends and intrinsic value. The stock price of the business would fluctuate above and below that intrinsic value. Since no one can time the markets well enough to make it worthwhile, it is best to just hop on that train and ride for as long as possible. 

If you sell when it is overvalued, you may be making an error. That’s because if the business compounds earnings, dividends and intrinsic value over time, you are missing out on all the future growth by selling.

I read academic research that found how trading too much is hazardous to your wealth. 

I have studied my investment activity and the activity of other investors who publicly post their transactions. I have found that when individual investors sell stocks, the companies they replaced them with end up doing much worse than the companies they sold. In other words, thse investors on average ended up taking a perfectly good situation and making it worse.

I have found in my investing that selling has frequently been a mistake. I would have been better off just doing nothing. Hence, selling quality dividend growth stocks over a long investing career will most likely be a mistake.

All of this brings me to the very important point of this article. 

As an investor, you need to focus on time in the market, not timing the market.

All you have to do it focus on things within your control, such as your savings rate, the strategy you choose to achieve your goals and your temperament. Nobody can time the market, which is why it is fruitless to even try to do it.

Hence, the goal is to diversify, buy quality over time, and patiently wait for the power of compounding to do the heavy lifting for you. Do not strive for perfection, and do not overtrade. When you trade too much, you increase investment costs in terms of commissions, fees and taxes. But even more importantly, you increase your behavioral costs, and ultimately may suffer a behavior gap. That gap is the difference between the return of an asset that a patient buy and hold investor would have achieved, versus the actual return generated by someone with an itchy finger.

Relevant Articles:

Time in the market is your greatest ally in investing

How to improve your investing over time

Should you sell after yield drops below minimum yield requirement?

- Why would I not sell dividend stocks even after a 1000% gain?

Tuesday, September 22, 2020

What if Altria went to zero?

A few months ago I read an article where someone expressed their hope that tobacco giant Altria (MO) goes to zero. I did not link to this controversial opinion, in order to discourage that.

Altria Group, Inc. (MO) manufactures and sells cigarettes, smokeless products, and wine in the United States.

The company last raised its quarterly dividend by 2.40% to 86 cents/share in July 2020. This marked the 51st consecutive year of annual dividend increases for this dividend king. During the past decade, this dividend king has managed to grow distributions at an annualized rate of 9.70%.

Altria earned $1.87/share in 2010 and is expected to earn $4.31/share in 2020.

The stock is cheap at 9 times forward earnings. The stock yields 8.60%. Check my last review of Altria from the time it joined the dividend kings list in 2019.

It was a welcome way to look at some key principles of dividend investing, notably the fact that dividends represent a return of investment and a return on investment. It is also a good refresher on my risk management guidelines.

For example, if you bought a share of Altria today for $40/share, you can expect to earn an annual dividend of $3.44/share. This means that as long as the dividend stays constant, the investor receives 8.60% of their original investment back each year. At this rate, the stock will pay for itself with dividends alone within eleven or twelve years. Assuming that the business is still intact, and generating profits, you would have an ownership stake worth something as well. If history is any guide, Altria will likely continue to grow dividends for the foreseeable future, which could translate into high valuations over time. This will all be driven by slow but steady growth in earnings per share. All this growth would result in an even faster dividend payback.

In other words, dividends represent a return of investment and a return on investment in the case of Altria, because just by dividends alone an investor today would recover their purchase price within 11 - 12 years, if not quicker.

However, assuming the company’s business model continues going on uninterrupted, it is likely that the investor would have received dividends and have something of value as well. Assuming that the share price stays at $40 until September 2021, an investor today would generate a close to 8.60% return merely by collecting their distributions. 

If Altria keeps growing, and earnings per share and dividends double within a decade, I could reasonably expect that the share price would double. Therefore, the total return would be very good for the patient investor who held through thick or thin. Those growing dividend payments would represent a growing portion of their returns over time. If market participants are less gloomy on Altria in a decade, and P/E expands from less than 10 today to 15 in 2030, that would be an added tailwind behind future stock appreciation.

However, if Altria continues stumbling on, it may do the unthinkable and cut dividends. While I believe that most of Altria's issues are self-inflicted wounds ( as discussed here), it is possible that I am not being objective. Sometimes, early success may make us blind to changes. This is why I always plan to sell after a dividend cut, and then reevaluate with a clear head. 

The other notable fact is that dividend investing is almost free, because we do not employ expensive fund managers that charge a percentage of fees under management. We also do not pay money for commissions either. Most dividend investors are the worst clients for brokers, because they buy and hold, and seldom trade actively. 

Imagine that you held Altria in a diversified portfolio of 100 individual companies, and the portfolio is equally weighted and worth $100,000 at its inception. 

If you paid a fund manager a 1% annual fee to manage that portfolio, you are essentially losing one Altria per year in management fees alone. 

But, if you paid someone to buy stocks for you 1%/year, they would earn that 40 cents on a $40 stock each year that you work with them. If the stock stays at $40/year, and you keep holding for 20 years, you would have paid them close to $8/share. 

If that position went to zero, not all is lost in a taxable account. The share that cost $40 can be sold at zero, resulting in a $40 capital loss that can be offset against other gains or against income on the first $3,000 of losses. If you are in the 24% tax bracket, you will save $9.60 in taxes. This means that your loss is never 100%, which is a small consolation. If you managed to collect dividends net of taxes for a sufficient period of time to cover your cost, and sold for a $40 loss, the tax savings alone could have been the determining factor between a gain and a loss.

This is where you need to determine your risk management method. Some investors end up reinvesting dividends back into the same company, which works wonderfully if that company ends up delivering outstanding returns. It doesn't work as well if the company ends up failing.

Other investors take the dividends in cash, and re-deploy them elsewhere. This method works best if the investor deploys the cash into other companies, and the original dividend payer stumbles onto hard times. Redeploying dividends elsewhere doesn't work as well when the original dividend payer is a dividend dynamo, which Altria was between 1926 and 2015.

That being said I am not suggesting that Altria is going to zero anytime soon. However, I view the high dividend yield as a warning sign today. While I like Altria, I would be selling the minute it declares a dividend cut. While I reinvest some of the dividends back in one of my portfolios, I generally get most of my Altria dividends in cash to redeploy elsewhere or to spend.

Relevant Articles:

Analysis of Altria's Recent Deal Activity

Dividend Payback from six quality dividend stocks

Dividends Offer an Instant Rebate on Your Purchase Price

Monday, September 21, 2020

Buffett on ignoring stock price fluctuations and thinking like a business owner

One of my favorite Berkshire Hathaway letters to shareholders is the one from 2013. It left a very big impression on me, mostly because it discussed some important lessons on dealing with market fluctuations. The lessons were illustrated by two investments that Buffett had made.

The investments were in a farm in Nebraska and a New York property adjacent to NYU.

He made these investments at what he believed to be a low price. In the case of the farm, Buffett tried to estimate how much agricultural products like soybeans and corn can be produced. He looked at estimated costs, and calculated the effect on future productivity improvements.  While he knew that there will be disappointing years, he did know that over time, things would be ok. As a result he held on to the farm. It cost $280,000 in 1986 and had an yield of about 10%. By 2013, the farm had increased five times in value, and tripled its earnings. In this deal, he seeked the expertise of his son Howard, who is a farmer.

The other property he invested in 1993 was the one close to NYU. It also had an unlevered yield of 10%, When analyzing the deal, Buffett looked for improvements such as replacing tenants that weren’t charged market rents with new ones as well as leasing vacant stores. He partnered with a couple experienced real estate investors, who knew how to manage the property and unlock value.

As a result of a couple of debt refinancing, expiring leases which were signed at higher rates, and better management of operations, annual distributions increased to 35% of the original equity investment. In addition, he also received several special distributions totaling more than 150% of the original investment. Annual distributions being compared to original cost remind me of the Yield on Cost indicator than many dividend growth investors use. 

Buffett used these investments in order to illustrate several fundamentals of investing:

- You don’t need to be an expert in order to achieve satisfactory investment returns

- Focus on the future productivity of the asset you are considering.

- Think only of what the properties would produce and cared not at all about their daily valuations

- If you instead focus on the prospective price change of a contemplated purchase, you are speculating

- Forming macro opinions or listening to the macro or market predictions of others is a waste of time. What the economy, interest rates, or the stock market might do in the years immediately following is of no importance of making those investments.

There was a big difference between investing in businesses and investing in stocks however. Equities offer minute by minute prices. Yet, his farm or real estate do not produce quotes.

Warren Buffett is famous for saying :

 ‘‘After we buy a stock, consequently, we would not be distrurbed if markets closed for a year or two. We don’t need a daily quote on our 100 percent position in See’s to validate our well being. Why, then, should we need a quote on our 7 percent interest in Coke (KO)?’’

Sometimes Mr Market offers a tremendous bargain and sometimes Mr Market offers a ridiculously high price for an asset. Most of the time, it pays to just ignore Mr Market, unless you want to take advantage of this moody fellow.

People who focus too much on stock price fluctuations, end up being influenced by the manic depressive Mr Market. They feel the urge to do something, which leads to many investors selling low and buying high.

Most of these investors would likely do better by sticking to private businesses and real estate, where they do not get a daily quote. This let’s them focus on the business, its fundamentals and ignore all the noise. For many folks, the instant liquidity that the stock market offers is more of a curse, than a blessing. Perhaps these folks would be better off buying and owning a private business. But if they were to invest in equities, they need to see themselves as partial owners of a business enterprise, and not view stocks as some sort of a lottery ticket. Perhaps that’s why Buffett has stated that you should not buy a business, unless you are willing to hold it for a decade, even if they closed the stock market for ten years.

Thinking like a business owner has a lot of advantages. Mostly, it lets you focus on the business, and ignore noise. Second, it helps you stay patient, when everyone around you is panicking. This was evident during the Global Financial Crisis, and was evident during the Covid-19 crash in 2020. Few investors can sit patiently, when their stocks are going down or even going up. 

This is why I try to tell investors to focus on the dividend stream produced by the companies they own, and try to research to see if the payout is adequate and that earnings can grow over time. This lifehack of focusing on the stability of the dividend stream lets the investor avoid being scared away by share price fluctuations. If you are an investor in the accumulation phase, stock price declines should be viewed with excitement, because lower prices mean that future retirement income can be bought on sale. 

If you are a retired investor, you should ignore price fluctuations. Instead, focus on the income from your investments.

Both groups should care about prices only when they have money to invest.

Relevant Articles:

Wednesday, September 16, 2020

Microsoft Hikes Dividends by 10%

Microsoft Corporation (MSFT) develops, licenses, and supports software, services, devices, and solutions worldwide.

The company just raised its quarterly dividend by 9.80% to 56 cents/share yesterday. Microsoft is a dividend achiever which has managed to increase annual dividends for 16 consecutive years.

Annual dividends increased from 64 cents/share in 2011 to $2.04/share in 2020. At the new rate, the forward dividend is $2.24/share.

Earnings per share have increased from $2.69/share in 2011 to $5.76/share in 2020. Microsoft is expected to generate $6.46/share in 2021 and $7.34/share in 2022.

Future growth would be driven by its cloud based platform Azure, as corporations move to the cloud. It would be driven from Office, as more customers move to use software as a service, rather than buy licenses. Linkedin could help growth too, as would Xbox. Windows is essentially a utility, on which a lot of other applications run.

Earnings per share growth has been aided by share buybacks. Microsoft reduced the number of shares outstanding from 8.593 billion in 2011 to 7.683 billion in 2020.

The dividend payout ratio has increased from 23% to 35% between 2011 and 2020.

The stock is not cheap today at 32.30 times forward earnings and a dividend yield of 1.10%. 

If Microsoft stumbles over the next couple of years, I would be ready to take advantage of this opportunity at a much better entry valuation. 

Relevant Articles:

Monday, September 14, 2020

How Grace Groner Turned $180 in $7 Million by Investing in Dividend Growth Stocks

Grace Groner is one of the most successful dividend investors out there, on par with Anne Scheiber and Ronald Read. She definitely fits the humble origin narrative, and the fact that she managed to generate a large fortune with a simple investing strategy.

Grace and her twin sister were orphaned at the age of 12. They were taken by a rich family, which paid for their college education. She graduated in 1931, and took a job as a secretary in Abbott Laboratories.

She never married, and lived a simple and frugal life. She was willed a home, which she lived for the rest of her life. She got her clothes from rummage sales, walked rather than buy a car. She felt no urge to keep up with her neighbors. Though Groner was frugal, she was no miser. She traveled widely upon her retirement and occasionally funneled anonymous gifts through Marlatt to needy local residents. She had a gregarious personality and plenty of friends. She remained connected to her college, attending football games.

Ms Groner worked as a secretary at Abbott Laboratories for 43 years. She invested $180 in 3 shares of Abbott Laboratories (ABT) in 1935. These shares split multiple times, and paid a dividend throughout her investment journey. She then simply reinvested the dividends for the next 75 years. She never sold, but just held on to her shares.

Abbott Laboratories (ABT) was a dividend aristocrat which had a 38 year track record of annual dividend increases as of 2010. The company has started paying dividends in 1924. Abbott split into two companies in 2012, and they are each continuing the culture of annual dividend raises to this day. The companies are Abbott Laboratories (ABT) and Abbvie (ABBV)

Grace Groner turned that small $180 investment in 1935 into $7 million by the time of her death in 2010. Based on my calculations, this investment was generating $210,000 in annual dividend income.

She left the money to her foundation, which you can read more about here.

Turning $180 in $7 million over a period of 75 years is a very high return on investment over a long period of time. She took full advantage of the power of compounding over long periods of time. As we noticed with the story of Ronald Read, most riches are generated at the tail end of the investing journey.

It looks like Grace retired in 1974 from Abbott, after a 43 year career starting in 1931. This means that when Grace Groner retired in 1974, she was 65 years old. She did not have the $7 million sitting neatly in a bank account for her whole life. Rather, she wasn’t even a millionaire for at least 13- 14 years of her retirement. She didn’t probably even have to think too much about her legacy, until sometime in the 1980s, when Abbott really started compounding at a high pace of return.

Based on my research, it looks like that the Abbott Labs stock price alone jumped 100 times between 1975 and 2010. This means that when she retired at the age of 65, her position in the stock could not have been worth more than $70,000 to $100,000. This was an impressive amount in 1974, but not life changing money. Given Grace’s frugality, she probably lived on Social Security and a corporate pension, with the dividend income from Abbott being a safety net for her just in case.

As she grew older and enjoyed her retirement, travelling, making new friends, and enjoying her life, her modest investment really took off. That’s the nature of long-term compounding – most of the fruits of a long-term compounding are really experienced at the tail end of the journey.

I am just looking at the stock price chart, but it looks that she probably didn’t even become a millionaire until 1987, when she was 78 years old.

Source: Global Financial Data

The success was dependent on several important factors:

1) Invest at a high rate of return for a long period of time
2) Invest in a company with durable competitive advantages with a long runway
3) Stay invested for decades, without selling
4) Keep reinvesting those dividends along the way

There is a large dose of luck involved in this investment of course. After all, it is generally not very good idea to invest money in your employers stock. That’s because if your employer has troubles, you are likely to get laid off at a time when their stock price is lower as well.

In addition, it is generally not a good idea to have most of your net worth in just one stock. While these stories never provide full information about Ms Groner’s portfolio, it does make us believe that it was in just one security – Abbott Labs. If she had worked at Enron for example, there would have been pretty much nothing left. For ordinary investors like you and me, the best course of action is to have a widely diversified portfolio.

She was frugal, having grown up in the depression era, and was the classical millionaire next door type of person who was not interested in keeping up with the Joneses. Grace Groner left her entire fortune to her Alma Mater. Her $7 million donation was generating approximately $210,000 in annual dividend income in 2010.

Abbott sold at $53.99/share on the last day of 2009. This means that the $7 million was split into 129,653 shares. At a quarterly dividend of 40 cents/share, this comes out to $51,861 quarterly dividend check or $207,444 annual dividend check.

Ms Groner left the money to charity, which was to use the income to fund its programs.

I am not sure how the institutions invested the money after 2010.

Abbott has split into Abbvie and Abbott in 2012. For each share of the old Abbott, investors received a share of Abbvie and a share of Abbott Laboratories.

Let’s assume that the institution kept those shares, and just spent the dividend income. I crunched some numbers and came up with the following amount of actual dividend income

The amount of dividend income received would have climbed from $223,000 at the end of 2010 to $798,000 by 2020.

The portfolio would be worth $25.20 million today. Not a bad amount from a single smart investment 85 years ago.

Multi-generational wealth is possible, we just need to get the snowball rolling, and the trust documents filed correctly.

Relevant Articles:

Understanding Compounding and Getting Rich Late in Life
The Most Successful Dividend Investors of all time
Profiles of Successful Dividend Investors
How Anne Scheiber Made $22 Million Investing in Dividend Growth Stocks

Friday, September 11, 2020

Philip Morris International Inc (PM) Dividend Stock Analysis

Philip Morris International Inc (PM) manufactures and sells cigarettes, other nicotine-containing products, smoke-free products, and related electronic devices and accessories.
In 2008 Altria spun-off its international tobacco operations, and thus creating Phillip Morris International (PM).

Phillip Morris International has managed to increase dividends annually since the spin-off. Annual dividends went from $2.24/share in 2009 to $4.62/share in 2019.

The company raised dividends by 2.60% to $1.20/share just yesterday.

The company managed to increase earnings per share from $3.24/share in 2009 to $4.61/share in 2019.

Phillip Morris International is expected to earn $5.08/share in 2020 and $5.61/share in 2021.
The company has been unable to grow earnings per share since 2013. This is unfortunate, because it places a natural limit to how much growth in dividends we can expect. It also puts a natural limit to growth in intrinsic value.

In the future, the company can grow earnings per share through acquisitions, entry into new markets, through price increases that exceed decreases in demand, increase in market shares, through new product offerings (such as e-cigarettes) and through share buybacks. Approximately 40% of the global tobacco market is not accessible easily to PMI. That includes China and India. While PMI decided not to merge or acquire Altria in 2019, this could still happen at some point in the future.
I would be curious to see whether PMI tries to diversify beyond tobacco in the future, into other areas such as packaged food for example or alcoholic beverages. The company is committed to returning 100% of cashflow to shareholders, which it has achieved through dividends and share buybacks.
The tobacco industry is stable, and drowns shareholders in cash. The number of smokers is decreasing in the Developed markets, but staying flat or even slightly increasing in emerging markets. The pace of price increases has historically been enough to compensate for the overall decline in smokers.

While I would not expect high growth for companies like PMI, there are also high barriers to entry. It would be next to impossible to start a new tobacco company in today’s environments.
We also have some competition from alternative sources of nicotine, such as smokeless. PMI is having some success with its IQOS product, which has seen strong growth over the past several years.

There is always the risk of government regulation outright banning the sale of tobacco products or diminishing the brand power of the types of Marlboroughs for example. Given the fact that PMI operates throughout the world, it deals with a lot of governments, which spreads the risk of outright bans. However, it also needs to invest in having the adequate resources to deal with a lot of different governments worldwide as well.

There is also the currency risk, since a lot of developing countries routinely debase their currency against the US dollar. This could be on the headwinds against earnings per share.

PMI generates a third of its revenues from Europe, and a quarter of it comes from Eastern Europe, Middle East and Africa. Asia and Australia account for almost a third of revenues as well, while Canada and Latin America account for about 10% of revenues.

The main positive for PMI is that the company is not dependent on the mercy of a single government and a single market, in terms of unfavorable legislation or bans on tobacco products. For example, the fact that Australia initiated plain packaging laws on cigarettes was not a blow to globally diversified companies like PMI. In addition, even if this plain packaging law spreads to the UK or a few other countries, the diversified nature of PMI’s operations could soften the blow. On the other hand however, it is more cumbersome to deal with 180 governments, which all have different laws and regulations regarding the manufacturing, processing and sale of tobacco products. The fact that a single government entity cannot throw a deadly blow to PMI is a plus. The other positive is that tobacco usage in certain places like emerging markets is actually growing. The downside is that profits per unit are higher in the developed world, and lower in emerging markets. However, consumers in emerging markets may be more likely to trade-up to more premium offerings over the long run, as their income increases over time.

In general, I like PMI because the company has a wide moat. This means that its products have strong brand names, pricing power and loyal customer usage. In addition, PMI usually is number one or number two in most of its major markets in Europe, EMEA, ASIA etc. This strong advantage results in recurring sales and earnings for shareholders for years. This wide moat is the reason why I am willing to sit out any short-term turbulence in Philip Morris International.

Earnings per share growth was aided by share buybacks. Most share buybacks occurred between 2010 and 2014 however, bringing the number of shares outstanding from 1.95 billion to 1.566 billion.
The dividend payout ratio has increased from 69% in 2009 to 100% in 2019. Based on forward earnings estimates, the forward payout ratio is still at a high 94.50%. Most of the dividend growth in the past seven years was accomplished through an increase in the payout ratio. This is unsustainable. A lower payout is definitely a plus, because it provides a margin of safety from short-term turbulence in earnings.

The stock is selling at a forward P/E of 15.82 and yields 5.95%. While the P/E is low and the yield is high, I do not like the lack of earnings growth and the high payout ratio. As a result, I am not interested in adding more to this position.

Relevant Articles:

Rising Earnings – The Source of Future Dividend Growth
Are you ignoring investment risks you know about?
How to get dividend investment ideas
Philip Morris International versus Altria

Tuesday, September 8, 2020

Peter Lynch on Dividend Growth Investing

Peter Lynch is probably one of the best-known stock pickers of our time and certainly among the most successful. He was portfolio manager of Fidelity Investments' Magellan Fund for 13 years, starting out in 1977 with $20 million in assets and winding up his tenure in 1990, with more than 1 million shareholders and assets in excess of $14 billion. During that period, Lynch delivered an average annual return of just over 29 percent.

Lynch has served as executive vice president and director of Fidelity Management & Research Company and managing director of FMR Corp. He has also written three bestselling books on investing: "One Up on Wall Street" "Beating the Street" and his latest, "Learn to Earn: A Beginner's Guide to the Basics of Investing and Business"

I recently uncovered and shared a collection of articles that he wrote for Worth Magazine in the 1990s as well.

Peter Lynch has discussed his fascination with the Handbook of Dividend Achievers. A dividend achiever is a company that has increased dividends for at least ten years in a row. In the 1990s, this list of dividend achievers was printed in a book by Moody’s, and available for sale. I bought a few of these old books for my library. I am still fascinated by the fact how many of these companies from the 1990s are still around and still going strong, rewarding shareholders with strong dividend increases and total returns.

These are the words of Peter Lynch below:

“The reason that stocks do better than bonds is not hard to fathom.

As companies grow larger and more profitable, their shareholders share in the increased profits. The dividend are raised. The dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.

Moody’s Handbook of Dividend Achievers, 1991 edition – one of my favorite bedside thrillers – lists such companies, which is how I know that 134 of them have an unbroken 20-year record of dividend increases, and 362 of them have a 10-year record. Here’s a simple way to succeed on Wall Street: buy stocks from the Moody’s list, and stick with them as long as they stay on the list. A mutual fund run by Putnam, Putnam dividend Growth, adheres to this follow-the-dividend strategy.

Whereas companies routinely reward their shareholders with higher dividends, no company in the history of finance, going back as far as the Medicis, has rewarded its bondholders by raising the interest rate on a bond.”

Those are powerful words in support of the dividend growth investing strategy.

I found an old copy of the 1994 Moody’s Handbook of Dividend Achievers. It listed the companies that were a member at the time, and sorted it by dividend growth.

You can download it from here: Dividend Achievers for 1994

It is fascinating to see how many companies on this list are still going strong.

There is still a booklet from Mergent Inc, which lists the dividend achievers. It is called Mergent Handbook of Dividend Achievers, but costs $82 for the Summer 2020 edition.

There are 286 companies on the list of dividend achievers. You can download an updated list every month from Invesco, which manages the largest ETF on the index.

There is an ETF on the list of dividend achievers, available from Invesco. The Invesco Dividend Achievers ETF (PFM) has 286 holdings, but costs 0.54% per year. At the current yield of 2.30%, this means you are paying close to 15% of dividend income in management fees per year.

These are the ten largest holdings right now:

It looks like holdings are weighted based on market capitalization and free float.

Since the launch of the ETF in 2005, the distribution amounts has generally increased. The exception was during the Global Financial Crisis in 2008 – 2009. Perhaps this year would mark another time for dividend reductions too.

One of the biggest changes since Peter Lynch showed his admiration for the list of Dividend Achievers is the advent of the internet, which increased the access to information to everyday investors. Back in late 2007, David Fish started the list of Dividend Champions, and later expanded it to include all companies in the US which have managed to increase dividends for at least 5 years in a row. This list is still being updated monthly, after David sadly passed away at the age of 68 in 2018.

The list of Dividend Champions, Contenders and Challengers includes 407 companies which have increased dividends for at least ten years in a row, versus only 286 for the list of dividend achievers. While the list of dividend achievers is a good first start, a sort of like a gateway drug into the world of dividend growth investing, few investors actually use it. Most investors that I know if regularly use the list of dividend champions, contenders and challengers. You can read more about the comparisons here.

Of course, the list is just the first step in the process of looking for quality companies. The dividend investor may want to apply some sort of a screening technique for identifying the best ones.

Relevant Articles:

Dividend Achievers versus Dividend Contenders & Champions
Dividend Champions, Contenders & Challengers: The most complete list of US dividend growth stocks available
Dividend Achievers Offer Income Growth and Capital Appreciation
Why do I like Dividend Achievers

Friday, September 4, 2020

Verizon hikes dividends for 14th consecutive year

Verizon Communications Inc. (VZ), through its subsidiaries, offers communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide.

The company is a dividend achiever, which has managed to grow dividends for 14 years in a row.
Verizon just increased quarterly dividends by 2% to 62.75 cents/share yesterday. Source: Verizon press release

Dividends per share rose from $1.65 in 2007 to $2.42 in 2019. At the new rate of 62.75 cents/share, the annualized dividend is $2.51/share. I expect another dividend hike in the 2% - 3% range in September 2021 from this slow and steady eddy.

Between 2007 and 2019, earnings per share grew from $1.90 to $4.65. The company is expected to earn an adjusted $4.77/share in 2020.

The volatility in earnings per share these days is related to accounting pronouncements that require the company to recognize fair value market changes related to the investments of company’s pension plan. This actually makes it harder for investors like me and you to analyze the business performance, because those pension investments will ebb and flow with the ebb and flow of financial markets.

Verizon is a telecommunications company with a stable revenue stream, generated by over 100 million customers. The churn rate is ( the rate at which customers leave), and the company offers a service that is perceived to be of good quality. Both Verizon and AT&T have good scale of operations, due to the fact that they control large portions of the market. This makes the capital spending per customer lower than that for the next competitors. There is a constant need for investment in the network, and for upgrades. However, customers need the service and are likely to stick as long as their basic needs are met. Verizon has been allocating money wisely. This is a slow and steady investment that will pay a good starting yield, which will likely grow at the rate of inflation over time.

The risk behind this dividend includes competition from the newly combined Sprint and T-Mobile. Competition should intensify after their merger. Other risks include making acquisitions that could increase debt amounts.

Shares outstanding have increased over the past decade, but this was mostly due to the fact that in 2013 Verizon acquired the remaining Verizon Wireless stake it didn’t already own from Vodafone. The number of shares outstanding increased in 2018, due to the acquisition of StraightPath Communication.

Dividend payout ratio looks like it is all over the place. Again, this is due to the fluctuations in earnings per share due to one time items. While it is at 52% today, I believe that this is ok, given the stability of cashflows from the company’s business model. Based on forward earnings expectations, the forward payout ratio comes out to be an even more sustainable 50%.

Right now Verizon sells for 12.60 times forward earnings and yields 4.15%.

Relevant Articles:

Dividend Achievers Offer Income Growth and Capital Appreciation
Should I invest in AT&T and Verizon for high dividend income?
- My Portfolio Monitoring Process In a Nutshell
Ten Dividend Growth Stocks For Retirement Income

Thursday, September 3, 2020

Buffett’s Investment in See’s Candy

Warren Buffett is arguably the best investor of our time. He turned a struggling company called Berkshire Hathaway and transformed it into a formidable conglomerate with interests in insurance, transportation, utilities, industrials to name a few. Berkshire also spots an impressive equity portfolio worth over a quarter of a trillion dollars.

One dollar invested in Berkshire Hathaway in 1964 turned into over $28,000 by 2020.

Buffett himself is someone who has worked very hard for decades, spending 70 hours/week studying business, strategy, investing and learning from his mistakes. He has been able to successfully adapt to a variety of conditions, and apply his knowledge in a way that continues to compound his capital. He is a learning machine.

For example, Buffett started investing in companies that were selling at a portion of their asset values and in merger arbitrage situations. That was during the 1950s and 1960s, the days of his Buffett Partnership. These were the cigar butt type companies, where he would buy low and sell high, rinse and repeat. It was difficult to find cheap companies by the late 1960s however, and his asset size was very large, which meant that he had to learn a new method to compound his net worth.

He was able to pivot into investing in quality companies, which seemed optically expensive, but were really compounding machines. Buffett learned the value of investing in quality companies perhaps by accident, perhaps due to his observations or perhaps due to the influence of his long-term business partner Charlie Munger. We would never know, but the focus on purchasing quality businesses transformed him as an investor and put him on the map.

Perhaps the best example of a quality business that he bought was See’s Candy in 1972. He calls See’s Candy his “Dream Business”

The business had a strong brand recognition in the West Coast, particularly California.

There was a stable annual demand for its product, which grew slowly, but sales were consistent.

There was some untapped pricing power, which allowed Buffett to raise prices without affecting sales of the product.

The business was available at an attractive price, albeit it didn’t’ seem that way to Buffett at the time.

In fact, he almost didn’t buy this company. But luckily for Berkshire Hathaway shareholders he did.

The lesson from See’s Candies on brand recognition, pricing power, strong franchises, customer loyalty, have translated into knowledge that inspired Buffett’s investments in Coca-Cola and Apple.
Berkshire Hathaway was able to acquire See’s Candy for $25 million. The business had $31 million in sales in 1972 and made $2.083 million in profits after taxes. The business needed a working capital of $8 million to operate.

As Buffett researched See’s, he realized that the value of the company’s intangibles, things like its brand and customer loyalty, far exceeded the numbers on paper.

If you had "taken a box on Valentine's Day to some girl and she had kissed him … See's Candies means getting kissed," he told business-school students at the University of Florida in 1998. "If we can get that in the minds of people, we can raise prices."

"If you give a box of See's chocolates to your girlfriend on a first date and she kisses you ... we own you," the investor said in "Becoming Warren Buffett," an HBO documentary.

"We could raise the price of the boxes tomorrow and you'll buy the same box," he added. "You aren't going to fool around with success."

See’s sold candies, and was mostly located on the west coast. It was a seasonal business which did most of its sales in the weeks between Thanksgiving and Valentine’s Day.

The business did not grow, and is still mostly located in the West Coast in California. That didn’t stop it from generating more earnings and cash flows for Berkshire Hathaway however.

By 2019 See’s had generated over $2 billion in pretax income, which was used to buy other businesses. Based on numbers I have seen, See’s Candy generated an annual income of $82 million in 2007, which was three times the amount that Berkshire paid for the company 35 years earlier.

Buffett installed managements ,and instructed them not to sacrifice quality:

The business was able to grow very slowly. The number of shops selling See’s Candy grew from 167 in 1972 to 214 in 1984. The number of pounds of product sold grew slowly too, from 17 million in 1972 to almost 25 million in 1984.

Sales rose fivefold from $31 million in 1972 to $136 million in 1984.  After tax profits rose from $2.083 million in 1972 to $13.38 million by 1984.

This was possible because of untapped pricing potential, focus on cost control while maintain quality and careful expansion.

“Long-term competitive advantage in a stable industry is what we seek in a business,” Buffett later wrote. “If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere.”

Buffett’s 2007 Letter to shareholders summarizes his investment in See’s Candy and the lessons for learned:

"Charlie and I look for companies that have:

a) a business we understand;
b) favorable long-term
c) able and trustworthy management; and
d) a sensible price tag.

We like to buy the whole business or, if management is our partner, at least 80%.

A truly great business must have an enduring “moat” that protects excellent returns on invested capital. The dynamics of capitalism guarantee that competitors will repeatedly assault any business “castle” that is earning high returns. Therefore a formidable barrier such as a company’s being the lowcost producer (GEICO, Costco) or possessing a powerful world-wide brand (Coca-Cola, Gillette, American Express) is essential for sustained success.

Our criterion of “enduring” causes us to rule out companies in industries prone to rapid and continuous change. Though capitalism’s “creative destruction” is highly beneficial for society, it precludes investment certainty. A moat that must be continuously rebuilt will eventually be no moat at all. Additionally, this criterion eliminates the business whose success depends on having a great manager.

Long-term competitive advantage in a stable industry is what we seek in a business. If that comes with rapid organic growth, great. But even without organic growth, such a business is rewarding. We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. There’s no rule that you have to invest money where you’ve earned it. Indeed, it’s often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can’t for any extended period reinvest a large portion of their earnings internally at high rates of return.

Let’s look at the prototype of a dream business, our own See’s Candy. The boxed-chocolates industry in which it operates is unexciting: Per-capita consumption in the U.S. is extremely low and doesn’t grow. Many once-important brands have disappeared, and only three companies have earned more than token profits over the last forty years. Indeed, I believe that See’s, though it obtains the bulk of its revenues from only a few states, accounts for nearly half of the entire industry’s earnings.

At See’s, annual sales were 16 million pounds of candy when Blue Chip Stamps purchased the company in 1972. (Charlie and I controlled Blue Chip at the time and later merged it into Berkshire.) Last year See’s sold 31 million pounds, a growth rate of only 2% annually. Yet its durable competitive advantage, built by the See’s family over a 50-year period, and strengthened subsequently by Chuck Huggins and Brad Kinstler, has produced extraordinary results for Berkshire.

We bought See’s for $25 million when its sales were $30 million and pre-tax earnings were less than $5 million. The capital then required to conduct the business was $8 million. (Modest seasonal debt was also needed for a few months each year.) Consequently, the company was earning 60% pre-tax on invested capital. Two factors helped to minimize the funds required for operations. First, the product was sold for cash, and that eliminated accounts receivable. Second, the production and distribution cycle was short, which minimized inventories.

Last year See’s sales were $383 million, and pre-tax profits were $82 million. The capital now required to run the business is $40 million. This means we have had to reinvest only $32 million since 1972 to handle the modest physical growth – and somewhat immodest financial growth – of the business.

In the meantime pre-tax earnings have totaled $1.35 billion. All of that, except for the $32 million, has been sent to Berkshire (or, in the early years, to Blue Chip). After paying corporate taxes on the profits, we have used the rest to buy other attractive businesses. Just as Adam and Eve kick-started an activity that led to six billion humans, See’s has given birth to multiple new streams of cash for us. (The biblical command to “be fruitful and multiply” is one we take seriously at Berkshire.)

 There aren’t many See’s in Corporate America. Typically, companies that increase their earnings from $5 million to $82 million require, say, $400 million or so of capital investment to finance their growth. That’s because growing businesses have both working capital needs that increase in proportion to sales growth and significant requirements for fixed asset investments.

 A company that needs large increases in capital to engender its growth may well prove to be a satisfactory investment. There is, to follow through on our example, nothing shabby about earning $82 million pre-tax on $400 million of net tangible assets. But that equation for the owner is vastly different from the See’s situation. It’s far better to have an ever-increasing stream of earnings with virtually no major capital requirements. Ask Microsoft or Google."

The lesson is to invest in quality companies, with durable competitive advantages. Even if you are a niche product, having a strong competitive position and customer loyalty is a very good position to be in. If you have the ability to raise prices, that is great for returns. Even if growth is slow, that is not a problem, especially if you require little in assets to operate, relative to the amount of free cash flows you will generate over a period of 10 or 20 years. Businesses with strong moats will be able to generate high returns on incremental capital employed, but sadly it is difficult for them to redeploy all capital back at high rates of returns. Therefore, these businesses generate more in free cash flows than they know what to do with – hence they send it back to shareholders in the form of dividends.

Relevant Articles:

Sunday, August 30, 2020

Stocks that leave the Dow tend to outperform after their exit from the average

The Dow Jones Industrials average is the oldest continuously updated stock index in the US. It was launched in 1896 by Charles Dow, who included 12 companies. The number of companies was later increased to 20 and finally in 1928 the number was increased to 30 companies.

It tracks the performance of 30 blue chip companies, which are representative of the US economy. Its holdings are selected by a five-member index committee at Standard & Poor’s/Dow Jones. This committee is basically comprised of the best stock pickers in the world, since they have managed to do better than most mutual fund managers and individual investors. They have done better than Buffett over the past 10 – 15 years as well.

The index made news last week, when it was announced that it would drop three members of the index, following the stock split in Apple’s shares. Since the index is weighted by the share prices of its components, Apple’s stock split would reduce it technology exposure.

As a result, the index committee is replacing Exxon Mobil (XOM), Pfizer (PFE) and Raytheon (RTX) with (CRM), Honeywell International (HON) and Amgen (AMGN).

A lot of investors believe that indices such as Dow Jones do better over time, because of new members. In reality, the opposite has been the case.

I recently read a study that shows how the companies that have been deleted from the Dow Jones Industrials Index between 1929 and 2006 have actually done much better than the companies that were added to the index. The study is titled " The Real Dogs of the Dow"

This study reminded me of the study of the original 500 members of the S&P 500 from 1957. This study had found that if someone had only invested in the original 500 members of the S&P 500 from 1957, they would have done better than the index themselves. That's because the companies that were added did worse than the companies that were removed from the index. You may read more about this study and my analysis here.

This study also reminded me of the Corporate Leaders Trust, a mutual fund that was started in 1935 with a portfolio of blue chip stocks that stayed constant in time. This mutual fund did better than S&P 500 since the 1970s. You can read my review of the Corporate Leaders Trust here.

This is due to the principle of reversion to the mean. The reversion to the mean hypothesis states that companies taken out of the Dow may not be in as bad of a situation as expected. It also suggests that the companies that replace them may not be as great as their current record suggests.

As a result the stock of the deleted company may be too cheap, while the stock of the added companies may turn out to be too expensive. As a result, companies that were deleted from the Dow may deliver better results than companies that were added to the Dow.

This is somewhat counter-intuitive. But it makes sense. The companies that are likely to be deleted are the ones that have suffered for a while, and they are down on their fortunes. As a result, investor expectations are low, which means that these shares are low too, as they are priced for the end of the world. The nice thing about such companies is that if the world doesn’t end, and they do just a little bit better, they can reward their shareholders handsomely. That’s because you will likely experience an expansion in the P/E, at the same time earnings and dividends are rising too.

On the other hand, the companies that are recently added to the index tend to have done very well. They are promising companies of the future. As a result, they sell at premium valuations. However, if these companies fail to live up to their lofty expectations, their returns may suffer, because investors may be willing to pay a lower P/E multiple. If profits do not grow as expected as well, it is likely that investors would also suffer from that as well.

As I mentioned above, I found a study that analyzed the substitutions in the Dow Industrials Index between 1928 and 2005.  The results were in line with what my expectations would be based on my research on the Corporate Leaders Trust and the Performance of the Original Members of S&P 500.

Over this period, there were 50 additions and deletions. In 32 of 50 cases, the deleted stock did better than the added stock.

Figure 1 shows that, with the exception of the 1990s, the Deletion portfolio consistently outperformed the Addition portfolio over the 76-year period.

Figure 2 shows the ratio of the average deletion wealth to the average addition wealth each day over a ten-year horizon. The deleted stocks outpace the added stocks for approximately five years after the substitution date. Then their relative performance stabilizes

Table 4 summarizes the average levels of wealth for the Deletion and Addition stocks at 250- day intervals (approximately 1 year) over the five-year period following the substitution dates.

For example, the deleted stocks showed, on average, a 19.30% increase in value 250 trading days after the publication date, while the added stocks showed an average increase of only 3.37%. The differences in average wealth grow increasingly pronounced as the horizon lengthens.

The study had a fascinating conclusion.

A portfolio consisting of stocks removed from the Dow Jones Industrial Average has outperformed a portfolio containing the stocks that replaced them. This finding contradicts the efficient market hypothesis since changes in the composition of the Dow are widely reported and well known. Our explanation for this anomaly is the market’s insufficient appreciation of the statistical principle of regression to the mean, an error that has been previously identified in a variety of contexts and is no doubt present in a great many other contexts.

This is fascinating research, which spans a period of close to 80 years. The main point behind this research is reversion to the mean. Basically, a trend can only go so far, until it is reversed. It goes in both directions of course.

I went ahead and obtained a listing of all the additions and deletions for Dow Jones since 2004. I then compared the five-year performance for an investor who bought the deletions of the Dow and for an investor who bought the additions to the Dow. For companies that were bought out, I basically stopped the clock at the acquisition date.

I did not calculate anything past 2019, since the information is still new.

I present to you the data below. Again, please understand that I am one person who did this data analysis using free resources, such as My data may be incomplete, or missing fields. I am not pulling it from an academic database, like all the other researchers.

Out of 14 substitutions, the deletions did better on only 4 occasions. The additions did better on 10 occasions. The total wealth for putting $10,000 in each deletion was $180,609 versus $227,540 for putting $10,000 in each of the additions.

The most interesting factor for me however was that since the research was published in 2005, I have found that the opposite has been the case.

In other words, the companies that were deleted did not do as well as the companies that were added to the list. Perhaps this is due to the way that things move faster these days in the globalized economy. The pace of change is faster, and the level of obsolescence is increasing as well. This just goes to show that success in investing is not going to be based on some simple formula that we can copy and paste and generate instant riches.

Another interesting piece of information relates to International Business Machines (IBM). The company was replaced by AT&T on March 14, 1939. I do not believe researchers were even able to find a reason behind the decision.

IBM did not get back into the index until June 29, 1979. At that point, the stock had increased in value by 562 times, which is incredible. AT&T stock had barely tripled over that 40-year period. You may read this excellent article on Dow Jones 22,000 point mistake.

Source: Global Financial Data

I am mentioning this part in order to show that a large portion of the 1939 – 1979 outperformance of deleted companies over the added companies could be attributed to this decision.

By the time IBM was added to the index, it stopped growing. Chrysler was removed because it was very close to going under in 1979. It would have gone bankrupt, had it not been for Lee Iacocca, and a $1.2 billion bailout by the US Government. The stock went as low as $2/share in 1979, before rebounding all the way up to $50/share before the 1987 stock market crash.

This information comes from the book " Beating the Dow".

In conclusion, based on this study, someone who bought the companies that were deleted from Dow Jones Industrials Average between 1928 and 2005 would have done better than Dow Jones Industrials Index. That's because the companies that were deleted ended up delivering a better performance than the companies that were added over this 77 year period. 

However, strategies and edges on Wall Street are not carved in stone. Things do change, either permanently or stay irrational for far longer than a follower of the strategy may remain solvent. 

For example, if you look at performance of US Stocks versus International, US Small versus Large Cap, and Value versus Growth, you can see that they are generally cyclical. Those cycles can last many decades however. These long cycles may fool market participants that they are seeing a trend. Check the charts on this article " Dividends Are The Investors' Friend"

It is also possible that the excellent results of this reversion to the mean strategy may have been due to a fluke in the 1939 removal of IBM, which turned out to be a very successful corporation. It was further compounded by the removal of Chrysler, which turned out to rebound. What happened in 1979 with Chrysler may have caused an investor to buy General Motors in 2009, believing that they would experience the same type of turnaround. However, if you bought General Motors in 2009, you lost your entire nest egg. Again, history does not repeat, it just rhymes. This is why you have to learn from history, but you also have to realize that the same thing happening twice over a span of 30 years may have a totally different outcome. 

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Thursday, August 27, 2020

How Anne Scheiber Made $22 Million Investing in Dividend Growth Stocks

Anne Scheiber worked as an auditor for the IRS. She retired at the age of 51 in 1944, and focused on managing her portfolio for the next 51 years of her life.

I wanted to share with you the story of Anne Scheiber, who died at the age of 101 with a portfolio of dividend stocks worth over $22 million. That portfolio was generating over $750,000 in annual dividend income at the time of her death. Anne Scheiber is one of the most successful dividend investors of all time.

I believe that this story can be inspirational to many. After reviewing it, I can tell you that I understand the blueprint for financial success. One can easily see the steps taken to achieve financial independence, so that they can mold their lifestyle in a way, shape or form that they desire.

There are several lessons that we can all learn from:

1. Invest in leading brands in leading industries
2. Invest in companies with growing earnings
3. Capitalize on your interests to uncover investment opportunities
4. Invest regularly
5. Reinvest your dividends
6. Never sell your stocks
7. Keep informed on current or future investments
8. Invest in a tax efficient manner
9. Give something back to society
10. Be frugal

This set of core principles can help anyone who commits to it to end up with a million dollar dividend portfolio.

Anne was raised by her mother, after her father had passed away after losing money on real-estate investments. She had started working as a bookkeeper at the age of 15, and started working at the IRS 27 years later. At the time, families prioritized higher education for theirs sons. This meant that Anne had to persevere and go to school on her own dime. She invested in herself and graduated from night school, and ultimately passed the Bar. Despite being very well qualified, and despite her excellent job performance, she realized that as a Jewish woman she will not advance much professionally. Because of the discrimination at the time, she was never promoted and never earned more than $3,150/year after 19 years at the IRS. She had a difficult life all her life, where she had to fend for herself, which probably led her to determine that the best way to achieve a mark on this world was through investing. She knew, decades before her death, that her nest egg should be earmarked for charity.

“She’d say, ‘Someday, when I’m long dead, there will be some women who won’t have to fend for themselves.’

Anne Scheiber may not have earned a high salary, or earned promotions, but she learned a lot at her job. She learned that the rich tend to invest in appreciating assets that paid cash flows. If you spend any time reviewing tax returns, you will soon realize that wealthy people tend to own a lot of stocks that pay dividends, real estate that pays rent and businesses that generate income for their owners. This was the a-ha moment that inspired Anne to build her wealth through blue chip investing. The lesson she learned poring over other people's tax returns was that the surest way to get rich in America was to invest in stocks.

According to some stories, her portfolio was valued at $5,000 at the time of her retirement. Other stories discuss older tax returns from the 1930s that showed annual dividend income of $900, which also increased over time. It is possible that her portfolio at the time of retirement in 1944 was close to $18,000 - $20,000, implying a dividend yield of 4.50% - 5%. Never the less, I still find it impressive that she left $22 million to charity at the time of her death 51 years after retirement. All of this initial capital was a result of her savings from a long professional career, at a time when few Americans owned stock. It is even more impressive, given the fact that she lost money investing in the stock market, after a brokerage firm through which it did her business collapsed in the 1930s, taking her money with it. This was before SIPC insurance protections. However, Anne Scheiber bounced back and kept at investing for the rest of her life.

According to her attorney, she had a very high savings rate, which is how she was able to accumulate her starting capital to build her nest egg. She saved something like 80% of her salary, which is impressive.

Her largest positions from 1995 are listed below:

Her portfolio included stakes in over 100 companies, most of them well known names such as Coca-Cola, PepisCo, Schering-Plough, Bristol-Myers, etc. She bought companies in industries what she understood, such as pharmaceuticals, beverages and entertainment.

Anne focused on companies with leading brands that grow earnings over time. This ensured that the business can pay more in dividends and increase intrinsic value.

Her strategy was buying in stock regularly, and holding for decades. This let her take full advantage of the power of compounding. She never sold, because she hated paying commissions. This was another smart move, which let her take full advantage of any outsized gains. Letting winners run for decades is what separates the best investors in the world from those who have mediocre investment careers. Very few people have the patience these days to hold on to stocks for months, let alone decades. But this patience is a trait that separates winners from losers, because it gives companies time to compound profits, dividends and intrinsic values. As you and I are well aware, sometimes companies go nowhere for a while, which causes many investors to give up and sell, right before things start turning around. By becoming a patient long-term investor, you are well positioned to take advantage of the few outsized winners in your well diversified portfolio.

Being a patient long-term buy and hold investor is beneficial during bear markets, when share prices fall by 50% or more. Many get scared by these temporary quotation losses, and sell in a panic. Smart investors hold on tight, and even add to their positions if they have capital available for deployment.
When you never sell your stock, you also never have to pay taxes on long-term capital gains. If you leave your portfolio to charity, there is no estate tax either. I am pretty sure that Anne enjoyed knowing that IRS will see a small fraction of her estate in the form of taxes.

Finally, she reinvested her dividends, which helped further compound her capital and income. In the 1980s, she started investing her sizeable dividend income into municipal bonds, which paid 8% annual tax free interest. Her annual investment income of $750,000 was a mixture of dividends and earnings.

Since Anne didn’t get promotions and raises, she ended up cutting expenses to the bone. She understood the simple math behind early retirement. When I read comments about Anne, they all focus on her extraordinary frugality. She lived in her rent-controlled apartment for 51 years after retirement, wore old clothes, and scrimped on spending for food. Her entertainment involved going to the movies, reading stock reports and researching companies and reading. She never married or had children. While it is a little extreme even to my tastes, I do think that you can learn from everyone and try to apply those lessons to your own life.

When I read about her story, I learn that long-term investing in leading companies that grow earnings is paramount to success. I learned that buying these companies over time, and building a solid diversified portfolio can help soften the blows of the ones that fail. But it also provides the opportunity to discover the next great company as well. Diversification and long-term investing work wonders for those who are patient enough to compound their money for decades. I also like the idea that investing is the only field where if you are good, your race or gender or nationality do not matter, as it is a true meritocracy. And if you keep your money invested long enough, you will be able to end with a lot of money at the end of your life. I also keep learning that many successful investors tend to live to an old age. Perhaps that’s because investing in stocks is a very stimulating activity, because it requires constant research, learning new facts and ideas and discarding old facts and ideas that do not work or are flat out wrong.

A lot of the negative comments towards Anne generally come from people who do not understand the power of compounding and getting rich late in life.

As I mentioned above, Anne was very frugal, and she managed to save 80% of her salary to end up with her investable nest egg. She had to fend for herself all her life, so that little nest egg was her way of regaining her independence from a world that discriminated against her. It was to allow her to live her life on her own terms, which is admirable. If she lived today, she would have likely found a lot of friends in the FIRE community. Her nest egg provided some F.U. money to her, away from a judgmental society and bosses.

It is likely that she compounded money at roughly 14% - 15%/year for a long period of time. As I discussed with the story of Ronald Read, when you compound money for a long period of time, and you compound it at a high rate of return, the initial amount you had is really small relative to the amount end up with.

I ran a simple calculation where I compounded $20,000 at a flat 15% compounded rate of return for 50 years. I also assumed that her portfoolio yielded a flat 3%, just for illustration purposes. In reality, dividend yields were closer to 4% - 5% at the beginning of her journey in the 1940s, and went all the way down to 2% - 3% in the 1990s. She did start reinvesting dividends into municipal bonds in the 1980s, but my calculation is not accounting for it, since it is for illustrative purposes, trying to help you understand the nature of compound returns. You can download my calculations from here. This is a summary of compounding:

This means she had $20,000 in 1944, and earned $600 in annual dividend income
Her portfolio grew to $80,900 by 1954, and earned $2,427 in annual dividend income
Her portfolio was worth $327,330 by 1964, and earned $9,820 in annual dividend income
Her portfolio grew to $1.324,000 by 1974, and generated an annual income of $39,700
By 1984, her portfolio was worth $5,357,000, generating $160,700 in dividends
By 1994/1995, her portfolio was worth $22,000,000, generating $750,000 in dividends

So if we assume she started with $20,000 in 1944, that money may have generated something like $1,000 in annual dividend income for Anne. If she really saved 20% of her salary of $3,150 in 1944, that dividend income was enough for her to live off. But that also meant she had to be frugal to survive. I am not sure if she had a pension or Social Security check, but that was likely to be a small amount that was not accessible until the age of 62.

I am going to make the assumption that she compounded her money at roughly 15%/year, starting from a base of $20,000 in 1944. It is possible that her actual returns were closer to 12%/year, and that she started from a higher base when she retired, due to her high level of savings. It is also possible that she saved money from her pension or social security as well, and added to her investments. Unfortunately, with most of these stories, we do not get the complete accounting, just bits and pieces from which to connect the dots.

If she really compounded money at 15%/year however, that means her nest egg doubled every 5 years or so. Of course, compounded stock market returns are not a linear 15% - sometimes the returns at the beginning of the journey are higher than the returns at the end of the journey. I would assume that Anne’s nest egg didn’t even start producing enough dividends to replace fully her salary until a decade into her retirement. By that time her frugal habits had already been established and she was in her 60s. The average life expectancy for a female in 1943 was 64 years, and by 1960 this had increased to 73 years.

If she had lived to the age of 65 or 70, her nest egg would have been high at around a quarter of a million, but not high enough to even write about.

I would assume that she didn’t even become a millionaire until the early 1970s, when she hit 80. After the 1972- 1974 bear market, she may have lost the millionaire status, only to regain it by the 1980s bull market. It is just pure mathematical fact that if you start with a decent amount of money, compound it at a decent rate of return and you compound it for a long period of time, you will end up with a lot of money. Probably more money than what you know what to do with. But if you have $22 million at the time of your death at 101, that doesn’t mean you had that $22 million when you retired at 51. You probably only had around $20,000 or so. This is a lot of money, especially given that the dollar in 1944 bought more than the dollar in 2020. But it is nothing earth-shattering either.

It is fascinating to me that a lot of people fail to understand the role of compounding for long periods of time, and getting really rich in life. Yet, they are happy to read about Warren Buffett, and praise him. Yet, both Buffett and Anne Scheiber probably had similar money personalities that liked doing what they liked doing, and kept doing it for long periods of time.

To put things in perspective, Warren Buffett was worth around $400 million at the age of 52. At the age of 90 he is worth $78.40 billion. He did have a lot of money at the age of 52, and compounded it at a very high rate of return for almost 40 years.

Anne's insight that the easiest way to get rich in America is through stock ownership is widely supported by research and data that is available to us today. There was little research in the past about the advantages of equity ownership, and this research was not as popular as today.

If you put $1 in US stocks in 1802, and compounded at 8.10% annualized return for the next 211 years, you would have ended up with $13.50 million by 2013. If someone placed a small amount of money in stocks so long ago, and never spent it, they would be very rich. Or rather their descendants.

This brings me to another concept. While a typical career lasts 30 – 40 years, a typical retirement could also last 30 – 40 years. That nest egg has to provide for a retired couple, one of which will likely outlive the other. If we really think about it however, many parents want to provide a solid base for their adult children and even grandchildren. As a result, a typical retiree may have to plan for more than 30 – 40 years. They may have to think about a bullet proof strategy that would deliver dividends for 50 years or more. That may be even more imperative, if you plan to live money in a trust for the use of a charitable cause. Most charitable causes require support in perpetuity.

Today, we learned the story of Anne Scheiber. She was a frugal investor, who built an impressive portfolio worth $22 million and generating $750,000 through a combination of:

- Frugality to save her initial investable capital
- Regular investing over time in companies she understood
- Buying strong brands names that grew earnings and dividends
- Staying the course for the long run, and ignoring stock market fluctuations
- Patiently compounding capital and income for 50 - 60 years

Thank you for reading!

Relevant Articles:

Profiles of Successful Dividend Investors
The Simple Math Behind Early Retirement
This Is How This Successful Dividend Investor Turned $1,000 Into $2 Million
The Most Successful Dividend Investors of all time
How to Become a Millionaire
The million dollar dividend portfolio for retirement

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