This week I held a presentation about Dividend Growth Investment at the Norwegian School of Economics (NHH). Since I know that many of my readers are still in the beginning of their investment career, I’d like to share my slides with you guys!
So I’ve been investing since around 2010. Like many others, I struggled a bit finding my way at first, switching between trading, speculation, long-term investment that turns to speculating, index which turns into speculating and so on. It took about 4-5 years before I understood that dividend investing was my thing, and even further a year before I understood that I wanted to do the “Dividend Growth strategy”
I’ve been fortunate enough to get more and more readers. Something that I highly believe in is that quality matters. This is why you don´t see me writing blog post every day, or maybe not even every week. If I don’t feel that I have something to say, I don´t.
Mark twain has a pretty cool quote about this:
“It’s better to keep your mouth shut and appear stupid than open it and remove all doubt”
As dividend Growth Investors, it’s essential that you understand the effect of compound interest. If you don’t, there is no way to stay long term and you will fail at holding your companies for a long time.
What I like to do is to try to thing like a business owner. What this means is that there isn’t necessarily a strong correlation (=1 or close) to how the stock price move and how the company is doing. In the long-term the stock price should follow the company, but in the short-term, this doesn’t have to be the case.
Real Effect of Compound Interest
The slide above is a illustration of Warren Buffet’s net worth and you can see that in the beginning, it barely moved. Most of his fortune is made in his 70’s and 80’s. Of course, some might say that “what’s the point of having so much money when your old?”. Yes, I get that. The point of this illustration is to show you the effect of compound interest. It’s up to you to choose how you want to spend your money and at what time to do so.
What this table shows it the effect of CAGR (compounded annual growth rate). If you start of by about $850 in annual income, and you hold that for income for 10 years while getting a 10% CAGR, you will get $2292 in annual income. Pretty nice right?
The importance of using Total Return
I’ve stressed this before, but I will do this again. As dividend investors, we should focus on total return and not just price return. Why? Well, in reality, you can have a stock that has no change in price in a whole year, giving 0 %price return. But, when using total return, you see that you have actually earned 5 %, not 0%. I would suggest that you find a way to track your total return ASAP.
Dividend Growth Stock VS High Yield Stock
The slide above shows us the difference between a high yield stock and a DGI stock. HRL is a very nice DGI stock, but has a pretty low yield. SO on the other hand has a pretty high yield but low growth. We can see that in year 15, the compounded returns are even. We also notice that after year 15, HRL really takes of and the returns are amazing. By comparing SO and HRL we see that fater 30 years, HRL has returned 1000 % more than SO.
However, the numbers presented are very unsure because we are talking 30 years head and a lot can happen then. Having 15 % CAGR for 30 years would be amazing, but who knows? The point is that you can see the effect of DGI.
People often ask me how I find stocks, so I thought I should share some thoughts. First, most of the companies that I´m interested are presented in my Watchlist World
Also, these are some of the criteria that I use. (I do more, and I also try to calculate fair value based on different valuation methods, but this is my framework)
About the MOATs
- Apple can charge 15% higher prices that their peers because of a strong Brand MOAT
- Switching Costs
- If you run a company, changing the software from Excel or Word to something else would be so bothersome that you just keep the same software.
- Establishing Costs
- Say that you want to enter the norwegian food market. Competing against the big chains is very though, and most likely, you will fail due to higher marginal cost.
As most of you know, I love REITs. If you don´t know what a REIT is, I suggest you read my post about REITs here:
Every presentions about stocks should include some kind of recommendation. You should know about these companies, but don’t read this as a buy rec. It’s just information about two great companies.
Now that you have an idea about my strategy, it’s time to figure out my goals for my investments. It’s not just about money! It’s about Financial Independence