Perfection might be impossible, but this one investment is as close as it gets.
“Do you have a favorite investment? “
I’ve been asked this question on more than one occasion. I’ll confess that when I was pressed for an answer, I was usually slow to respond. An investment could be my favorite because it satisfies my financial needs. But my needs are different from your needs. What’s a favorite of mine would likely not be a favorite of yours.
In recent years, I’ve modified my stance. I assume people who ask invest similarly to me. They buy income-producing assets and seek to build wealth over time.
So now when I’m asked, I invariably answer “the quality dividend-growth stock.” I say that because these stocks satisfy the most needs of most investors. From a utilitarian precept, they are as close to perfection as it gets.
There are many quality dividend-growth stocks from which to choose, but I’ll focus on ExxonMobil (NYSE: XOM) because everyone understands what it does. Despite everyone understanding what it does, ExxonMobil is still a powerful wealth-generating asset.
In 1971, ExxonMobil paid a $0.118 per-share dividend based on a split-adjusted average price of $2.30, which produced a 5.1% yield. Today, ExxonMobil pays a $2.77 in annual dividends per share. ExxonMobil’s annual dividend has increased an average 7.4% over the past 44 years.
ExxonMobil’s dividend growth isn’t spectacular, but it’s good. Sometimes being good is good enough. Anyone who bought and held ExxonMobil shares for the past four decades receives more in dividends than the initial cost of his investment. In other words, each year he realizes a 120% return on his investment on dividends alone.
No fixed-income investment will generate the amount of income over time as a quality dividend-growth stock.
As predictable as night follows day, share price follows income. Investors rationally bid up the share price to capture a rising income stream.
ExxonMobil shares exchange hands at $100 today. ExxonMobil’s shares have appreciated at a roughly 9% average annual rate over the past 44 years. A 1971 share of ExxonMobil share is worth 43 times what it was in 1971. Few income investments will approach ExxonMobil’s historical average.
This is genuine wealth creation when you consider ExxonMobil’s share price has appreciated at more than double the average consumer-price-inflation rate of 4% over the same time frame.
When investors think of consumer-price-inflation hedges, they frequently think of gold, silver, hard commodities, and real estate. They rarely think of a dividend-growth stock. Yet a dividend-growth stock just might be the best inflation hedge.
I chose 1971 as my anchor date for a reason. In 1971, the United States officially abandoned the gold standard – the Federal Reserve was free to print money. That year, you could have bought an ounce of gold for $40. Through 2014, gold has appreciated at an 8.2% average annual rate. Gold has beaten consumer-price inflation, but not as well as a share of ExxonMobil stock.
The perfect investment might be like a unicorn – a fantasy. But when you can combine rising income, price appreciation, and inflation protection in one investment, fantasy approaches reality.
Deepwater Drilling for Dividends
Discover a company that’s drilling into the largest oil reserve in the Western Hemisphere…deep under the Atlantic Ocean. With every barrel of crude oil that it unearths is adds to the massive dividends that it pays its savvy investors. This is the only company that has the high-tech rigs and the sole rights to drill the “Saudi Arabia of the Sea.” And the best thing is…It’s paying out bigger dividend than Exxon and BP. It’s highly profitable and rewards shareholders with unannounced “bonus” dividends. And it pays them out every quarter. That’s on top of its regular, scheduled dividends — meaning shareholders are collecting 8 dividend payments a year, all from this one investment.