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truthisntstupid (92.30)

Dividend Growth, Time, And Cherry Picking

Recs

41

February 24, 2010 – Comments (26) | RELATED TICKERS: PEP , CVX , CLX

It was embarassing.  In response to a debate about the value of dividend growth, I used PG as an example of how long-term, persistent dividend growth benefits a long term dividend investor.  I wanted to go back an even 20 years, so I went to Yahoo!Finance and looked up the price of PG at the close of Feb 1990.  Using that share price as a starting point, I then scrolled back up through PG's history and determined there had since Feb 1990 been 3 share splits.  Those 100 shares bought for $6388 had over time become 800 shares paying $1408 in dividends annually today, for a yield on cost of 22%. 

I missed something.  I was accused of picking 52-week lows to support my point.  I went back and looked.  Sure enough, going back to exactly 20 years from the end of this month, landed me right smack dab on the 52-week low.  The 52-week high for PG, on the other hand, was around $120.  Quite a bit higher than $63.88.  I felt like an idiot.  But let's look again. 

This is obviously a worst-case result for buying PG in 1990.  The high was almost twice the price of the low.  So a person buying PG for $120 a share in 1990 would, if they had held it, be collecting $1408 in dividends today...a yield on cost of 11%.  In the meantime, his 100 shares he paid $12,000 for had split 3 times, becoming 800 shares worth over $48,000 today. 

Worst-case results of purchasing shares in a well-run company that possesses strong competitive advantages that persistently raises dividends every year, year in and year out....doesn't seem all that bad.

So I decided to do some cherry-picking on purpose.  No need to be embarassed this time, though.

 

In June 1990 PEP hit a 4-year high of $77.62. So in Jun 1990 100 shares of PEP cost $7762 and paid $20 in dividends.

In Sep1990 those 100 shares became 300 shares after a 3:1 split.  Now those 300 shares paid $60 in dividends.

In may 1996 those 300 shares became 600 shares after another share split, now paying $276 in dividends.

Today those 600 shares pay $1080 a year in dividends.  The shares are worth $37,034 now.  So those 100 shares that cost $7762 in June 1990 have become 600 shares paying $1080 a year in dividends today.  In spite of buying at the 4-year high in June of 1990, this represents a yield on cost of 13.9%.

  

In July 1990 Clorox hit a 3-year high of $43.88.  So in June 1990 100 shares of CLX cost $4388 and paid $36 in dividends.

In Sep 1997 those 100 shares of CLX became 200 shares, paying $128 in dividends.

In Aug1999 those 200 shares of CLX became 400 shares paying $320 in dividends.

Today those 400 shares with an initial cost basis of $4388 are paying $800 in dividends and are worth $24,400.  In spite of buying at the 3-year high in July 1990, that's a yield on cost of 18.2%.

 

I couldn't use any 1990 prices for Kimberly-Clark.  I wanted horrible high worst-case prices.  So I had to go forward to Dec 1991.  That's when Kimberly-Clark hit a 3-year high of $82.07.   So 100 shares of KMB cost $8207 in Dec 1991, and paid $82 in dividends. 

In Jan 1992 those 100 shares of KMB became 200 shares, now paying $164 in dividends.

In Mar 1997 those 200 shares became 400 shares, paying $384 in dividends.

Today those those 400 shares of KMB with an initial cost of $8207 are paying $960 a year in dividends and are worth $24,220.  In spite of buying KMB at its 3-year high in Dec 1991, that's a yield on cost of 11.69%.

 

When Chevron hit $79.37 in July 1990, it was an all-time high.  So 100 shares of CVX in July 1990 cost $7937 and paid $77.50 in dividends.

In June 1994 those 100 shares of CVX became 200 shares, paying $184.80 in dividends.

In Sep 2004 those 200 shares of CVX became 400 shares, paying $640 in dividends.

Today those 400 shares of CVX that initially cost $7937 in July 1990 are worth $28,904 and paying $1,088 in dividends.  That's a yield on cost of 13.7% in spite of buying CVX at what was then its all-time high in JUly 1990.

 

There.  Anybody for some more cherry-picking?  These are easy to look up.  The fact is, persistent dividend growth and time took these purchases at market highs and 20 years or less later, they're still providing yields on cost of upwards of 11%...not to mention the growth in value.  And if you go back and look, hey!  Would you have bought all your shares at these prices?  If you're like me, and invest periodically, you would also have made many of your purchases during the parts of 1990 and 1991 that the prices were way lower, too.  These numbers are assuming worst case lump-sum purchases at the most horrible of times.  Further, they're assuming no reinvestment of dividends.

The fact is, the very things a well-read dividend investor looks closely at to assure him/herself that a dividend is secure and the company's rock-solid financially and the payout isn't too high, leaving a payout margin of safety so that the company can probably make it through 1 or 2 bad years and still maintain the dividend, are the very same things that make a company strong financially.  The compound annual growth rate of revenues, cash from operations, capex, free cash flow, net margin, debt coverage, are all important to any dividend investor.  We want stability and security - a dividend is only as good as the company's ability to maintain it and regularly increase it.  Return on equity should be broken down and examined component by component using the DuPont system of analysis.  Also, we like to believe a company we want to hold for the long term has a significant moat, or durable competitive advantage.

When properly researched, an investment in a company that maintains and grows its dividend annually will probably turn out to be a good investment.  People don't buy at the very worst times on purpose anywhere but on paper to prove a point. 

26 Comments – Post Your Own

#1) On February 24, 2010 at 8:05 PM, dudemonkey (37.36) wrote:

This was probably one of the best posts I've seen in CAPS.  It really backs up Charlie Munger's "it's better to buy a great company at a good price than to buy a good company at a great price."

 

+1 Rec, wish I could Rec more than once

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#2) On February 24, 2010 at 8:12 PM, truthisntstupid (92.30) wrote:

dudemonkey

Thanks!  I have a feeling any favorite dividend growth stocks will yield the same results.   The very things we look for in a dividend growth stock are the exact same things that enable a company to succeeed.

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#3) On February 24, 2010 at 8:41 PM, HarryCaraysGhost (99.70) wrote:

Truth,

So your saying you cost that poor soul $5,612 on initial purchase price.

How do you sleep at night :)

Just Kidding, another excellant post. Thank you for sharing. 

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#4) On February 24, 2010 at 9:28 PM, truthisntstupid (92.30) wrote:

msftgev

Thanks!

Been awhile since I heard from you!   Thought maybe you were upset with me for something but didn't know what.  Sure glad to hear from you again.

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#5) On February 24, 2010 at 11:21 PM, HarryCaraysGhost (99.70) wrote:

no, I just did'nt catch your last blog,I went back and rec'ed it.

A worldwide deleveraging?  Tom owes John $5.  John owes Bob $5.  Bob owes Dick $5.  Dick owes Jerry $5.  Jerry owes Tom $5.  They can't work this out? 

Can you tell me the specific name for this, I remember learning the concept from econ 101 in H.S 

For the life of me I cannot remember the investment term.

Thanx

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#6) On February 24, 2010 at 11:28 PM, truthisntstupid (92.30) wrote:

msftgev

Ha ha  that was just something out of my own head.  It has a name? 

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#7) On February 24, 2010 at 11:38 PM, TMFUltraLong (99.95) wrote:

A worldwide deleveraging?  Tom owes John $5.  John owes Bob $5.  Bob owes Dick $5.  Dick owes Jerry $5.  Jerry owes Tom $5.  They can't work this out? 

Can you tell me the specific name for this?

It's called the European Union =)

UltraLong

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#8) On February 24, 2010 at 11:47 PM, truthisntstupid (92.30) wrote:

Hi, Ultralong. 

That's funny.  I don't keep up much on macroeconomics but I bet there's some truth to that?

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#9) On February 24, 2010 at 11:52 PM, GenericInvestor (90.02) wrote:

truthisntstupid, i enjoy your well-thought posts. i'm a young novice investor who began investing back in summer of 2008 right before the crash. put in about 10k total right now i have about 12k... i'm not good at finance, nor at math, but i do understand dividend investing.


Right now my portfolio is made up of Altria, Philip Morris, and Exxon Mobile. I'm not wealthy but I think overtime, I'll beat the market based on dividends alone! I may reduce my Exxon holdings though...but sorry... Tobacco is here to stay. I don't smoke but I don't see people quitting anytime soon and the government needs the tobacco taxes too much for it to end. 

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#10) On February 25, 2010 at 12:25 AM, truthisntstupid (92.30) wrote:

GenericInvestor

Thank you!  I don't think we have to worry about tobacco for a little while yet. 

Got be be offline for awhile right now...I'm getting an eyestrain headache from this monitor.  I'll be back in a while!

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#11) On February 25, 2010 at 11:44 AM, truthisntstupid (92.30) wrote:

genericinvestor

In my opinion a dividend investor will eventually beat the market with dividends alone.  But beating the market isn't something I care about.   I think trying to beat the market might cause a dividend investor to want to chase higher current yields, which may not be wise in the long run.  I doubt if I'll beat the market this year...but I don't care.  Shares I buy this year will most certainly be beating the market a few years down the road by more every year from then on. 

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#12) On February 25, 2010 at 1:11 PM, truthisntstupid (92.30) wrote:

Here's another thought on this obsession with "beating the market."    Probably  none of the investments made at market highs that I presented would have  "beat the market"  the year they were made. 

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#13) On February 25, 2010 at 8:07 PM, truthisntstupid (92.30) wrote:

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=344638&t=01007007794901831104

I'm kind of disappointed that this related blog just seems to have disappeared into oblivion once it left the main blog page...maybe someday I'll repost it.

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#14) On February 25, 2010 at 9:19 PM, vgaymer (< 20) wrote:

I don't think this is correct,  companies don't triple their dividend payments when they do a 3:1 stock split.  I think the dividends shown on yahoo are already split-adjusted.  $20 on 7762 would yield 0.25 % for Pepsi.  6x20= 120/7762 would be 1.5% which seems much more reasonable.

 

G

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#15) On February 25, 2010 at 9:38 PM, HarryCaraysGhost (99.70) wrote:

I was thinking about something today.

How the hell does UltraLong find the time to answer my stupid questions on this blog

Ask A Blunt Man - The Secret Stash

While also finding the time to answer my stupid questions on other peoples blog. I mean HOLY CRAP! That is Damn Impressive.

Truth, did'nt mean to threadjack but I am utterly amazed. 

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#16) On February 26, 2010 at 2:58 AM, truthisntstupid (92.30) wrote:

vgaymer

I think you're right.  So I had to find a way to check my other information.  I dug out an old book on dividend investing that was published in 1995 that showed CVX's prices and dividends for 1990.  CVX started out the year with a dividend rate of $2.80 and a dividend increase halfway through the year caused CVX to pay out a total dividend in 1990 of $2.95.

I can't for the life of me figure out how Yahoo!Finance came up with the figures they show for the historical dividend prices, but they're apparently split-adjusted somehow.  CVX only split twice since 1990, once in 6/94 and once in 9/04, but simply multiplying the figure they show by 4 leaves me mystified. 

BUT - One thing we can trust is the end results I came up with.  The 13.7%  yield on cost is still true.  This old book on dividend investing that was published in 1995 I just told you about also lists the actual opening and closing prices for 1990, which for CVX was $69.13 at  the beginning of 1990 and $72.38 at the end of 1990.  At the close of July 1990 CVX  indeed trade at $79.37/share.   And we know those 100 shares did go on to become 400 shares today paying $1,088 a year in dividends at the current rate. 

Apparently the Yahoo!Finance price history doesn't just show the  "split-adjusted closing price"  in the last column split-adjusted, but they're using some split factor for the dividends too, even though they don't say so. 

I have used this old book (The Dividend Investor, by Harvey C Knowles & Damon J. Petty)  to confirm that the other historical price information is actual unadjusted numbers.  (The historical open, high, low, and close prices are un-split-adjusted).

All by way of saying I have been able to confirm that my yield on cost  information in this blog is correct in spite of my error on the historical dividends. 

Thank you for helping me learn something. 

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#17) On February 26, 2010 at 9:21 AM, TMFCHarris (99.61) wrote:

truthisntstupid,

I've been trying to respond to your CAPS feedback, but the email address associated with your account is not active, and is bouncing my responses. Please drop me a line (charris@fool.com) when you get a chance.

Fool on,
Chris

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#18) On February 26, 2010 at 8:36 PM, neskolf (29.83) wrote:

tis-

Another great post regarding dividend investor.  Your informative and well reasoned posts have served reaffirm my confidence in my own investing philosophy.  Fool on!

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#19) On March 03, 2010 at 10:52 PM, ease1 (90.70) wrote:

Truth - what are the chances that big blue co's like pep and pg do splits anymore.  Seems I read an article here that in the last few years, splitting is no longer the rage it once was (last two years excluding).

PG for example has not split in about 5 years, then again their average number of splits over the past 40 years seem to be about 5 to 7 years just eyeballing it...

Like the article by the way.  Some really good information.

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#20) On March 08, 2010 at 6:54 PM, truthisntstupid (92.30) wrote:

Neskolf

Thanks.  I enjoy trying to find and put words to concepts I consider timeless.

ease1

I don't know if splits are infrequent or seem to be in vogue at times, or if its pure coincidence when a quantity of them happen in the space of a few years.  But I think sometimes companies will split their stock to bring the price back down to keep it attractive to small individual investors.  This may be even more true if they are offerring a direct stock purchase plan and occasionally issuing new shares to be sold through the plan, which can provide a direct source of new capital for them, eliminating the usual middlemen..  I don't remember where I read this, but I think it was in my last DripInvestor newsletter.

 

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#21) On March 09, 2010 at 3:35 PM, djshagggyd (74.21) wrote:

Another great post! Thanks for pointing it out to me. Btw... if you get bored, I posted another blog in an attempt to organize my thoughts and fish for advice. The link is below... thanks again!

http://caps.fool.com/Blogs/ViewBlog.aspx?t=01006331234524984841

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#22) On March 09, 2010 at 8:50 PM, ease1 (90.70) wrote:

Thanks for the info.  I'm going to post a dividends question to the blog (my first) tonight.  Having you weigh in on that would be great, if you happen to catch it.

ease-

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#23) On March 09, 2010 at 8:59 PM, truthisntstupid (92.30) wrote:

ease1

If I'm still up I will.  I have to get up at  4:30 AM.  But if I don't see it tonight, I'll look for it tomorrow!

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#24) On March 09, 2010 at 11:08 PM, ease1 (90.70) wrote:

Whoa, I'm so asleep at 4:30.  Get some sleep man...

Here is the link for tomorrow when you get the chance.

http://caps.fool.com/Blogs/ViewPost.aspx?bpid=351811&t=01000921134640672466

Thanks..

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#25) On February 15, 2011 at 2:09 PM, rdtuck02 (32.38) wrote:

Excellent post...I happened to come across this in a link from Seeking Alpha today.

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#26) On May 16, 2011 at 7:16 PM, truthisntstupid (92.30) wrote:

 Re: Comments # 14 and # 16.

 

I will still get around to figuring out how Yahoo!Finance adjusts the dividend information one of these days. 

One thing I have figured out is how Yahoo!Finance adjusts the Adj. Close price every time a dividend is paid out.

Go here for more.

http://caps.fool.com/Blogs/dividends-and-capsand-how/591837

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