Buy-and-hold has suffered its share of slings and arrows in recent years. (Never mind that it serves as the foundation for Warren Buffett’s investment philosophy.)
Buy-and-hold has been supplanted by market timing — an attempt to buy low and sell high.
To be sure, if market timing is flawlessly executed, the results will far exceed buy-and-hold. The problem is that flawless executive is far more difficult to achieve in practice. Most investors fail to time flawlessly
I’m an income investor first. I’m also a buy-and-hold investor.
My focus is to buy and then hold an investment over time – measured in years. I approach an investment as I approach gardening. Both require time to bear ample results.
This is no polemic to degenerate market timing. Market timers are traders. I also trade to buy low to sell high at times. Market timers provide useful functions, not the least of which is as liquidity providers.
That said, the corpus of my portfolio is allocated to buy-and-hold. I prefer to build wealth over time by investing in cash-generating assets.
Buy-and-hold instills a number of advantages, especially for income investors.
Taxes are an advantage. Hold an investment longer than a year and the tax rate on a subsequent sale drops to the lower capital-gains rate most investors. Sell within a year and gains are taxed at the higher marginal income tax rate.
Qualified dividends – those paid by most corporations – are also taxed at the lower capital-gains rate for most investors. But there’s a catch: You must hold the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Trade within that period and you’ll incur a higher tax liability.
The potential to compound wealth is the most appealing aspect of buy-and-hold.
I’ve written frequently on the wonders of dividend-growth investing. To maximize the wonders, you have to extend your holding period to years, if not decades.
Altria Group (NYSE: MO), the company behind Marlboro cigarettes, is the exemplar of the wealth-generating power of buy-and-hold, particularly when it’s combined with dividend growth.
Altria Group has paid a dividend for decades. The dividend has been raised annually, and then some. Altria Group has raised its dividend 53 times over the past 49 years.
The latest increase occurred last week, and not by an inconsequential amount. Altria Group raised its quarterly dividend 14.3% to $0.80 per share. The increase lifts the annual dividend to $3.20 per share.
We first recommended Altria Group’s shares to High Yield Wealth subscribers in September 2011. Altria Group paid per-share dividends of $1.52 at the time. Altria Group shares were priced at $27.26 when we offered our initial recommendation. Altria Group’s dividend offered a 5.6% yield on our cost basis.
Thanks to relentless annual dividend growth, Altria Group pays $3.20 per share in annual dividends today. The dividend today yields 11.7% on our $27.26 cost basis. We’re guaranteed at least an 11.7% annual return.
We expect to get more.
As the dividend goes, so goes the share price. Altria Group shares are priced near $60 as I write. The price has doubled and then some over the past seven years.
Investors who have reinvested Altria Groups dividends into Altria Group stock have likely done better.
In 2005, Wharton School finance professor Jeremy Siegel wrote an insightful essay titled “Ben Bernanke’s Favorite Stock.” The stock was Altria Group.
Siegel found that from 1957, when the S&P 500 Index was founded, to 2005, Altria Group produced an average 20% annually. Altria Group’s return handily beating the other 499 members of the index. The record has been extended to this day.
Altria Group extraordinary long-term wealth creation would be difficult to replicate using a trading strategy.
So ignore detractor. Buy-and-hold isn’t dead; it’s alive and well. It’s benefiting many investors with the patience and skill to employ it. I know, because I’m one of them.