Over my many years of investing, I’ve been frequently regaled by tales of investing glory. After a particularly successful run, investors simply can’t help but boast of “beating the market” – usually the S&P 500 or Dow Jones Industrial Average.
My preference is to downplay the notion of “beating the market,” because the broader-market measures are composed of many investments that don’t adhere to my investing style and my investing mandate, which is to seek higher-yield income and focus on building wealth with market-tested investments.
Because my investing style involves a different level of risk acceptance compared to the broader market, comparisons are frequently meaningless. For example, the broader market is composed of many non-income-paying investments: Google (NASDAQ: GOOG), Facebook (NASDAQ: FB), Tesla Motors (NASDAQ: TSLA), and even Berkshire Hathaway (NYSE: BRK.a), which fail to meet my income criteria.
Comparisons are usually based on straight price appreciation; income is frequently ignored. This handicaps high-yield income investment, such as Prospect Capital Corp. (NASDAQ: PSEC), a business development company whose share price tends to stay muted, but that nevertheless pays income that yields over 12% year after year. (Prospect’s average income return alone is greater than the long-term average return on the S&P 500.)
What’s more, investing styles are cyclical, which is why I keep chest-pounding to a minimum. Google, Facebook, Tesla, and other leading social media and tech companies can display impressive pyrotechnics. But the impressive pyrotechnics come with daunting risk. Yes, you can experience a spectacular display of price performance, but like with any pyrotechnic, the display is frequently ephemeral.
A personal anecdote amplifies my point: Back in the late 1990s, when Internet stocks were at full throttle, a colleague of mine found it impossible not to let the world in on his good fortune. He had invested in JDS Uniphase (NASDAQ: JDSU), possibly the hottest of all Internet stocks. In six months, JDSU shares increased fivefold, peaking at over $1,100 in March 2000. My colleague frequently updated me on JDS’s remarkably ascent, whether I wanted the updates or not.
But then, the updates came less frequently. JDS soon rolled over. By the end of 2000, its shares descended to $330. By the end of 2001, they traded down to $70, and the updates disappeared. Today, JDS shares languish below $12. Best to keep your soaring successes and spiraling failures to yourself (though most investors find the latter to be quite easy).
Tips for Building Wealth Over the Long Haul
In some years, my conservative, value-driven income strategy will beat the market; in others, it won’t. But that doesn’t matter. What matters is that the strategy can build wealth over time. Investing is marathon, not a sprint.
Below is a sampling of how my strategy works over time with a few recommendations in the High Yield Wealth portfolio.
|Recommendation||Reference Purchase Date||Current Yield||Cost Basis Yield||Income Received||Total Return|
|McDonald’s Corp. (NYSE: MCD)||Jan. 26, 2011||3.7%||4.3%||10.14||37.4%|
|Altria Group (NYSE: MO)||Sept. 7, 2011||4.5%||7.6%||$5.32||92.8%|
|Omega Healthcare Investors (NYSE: OHI)*||Dec. 6, 2011||5.5%||11.2%||$4.54||130.6%|
|Dr Pepper Snapple Group (NYSE: DPS)||Sept. 4, 2013||2.9%||3.7%||$1.99||49.3%|
* Closed Position
A couple points are worth highlighting. Note the current yield and the cost basis yield. The former is the yield based on the current market price; the latter is the yield on the initial recommendation. The cost basis yield is higher for two reasons: share-price appreciation and dividend increases. As the dividend increases, the share price is bid up, but the cost basis remains the same; hence the higher yield.
The income-received column is also worth highlighting. Over time, the income received continues to grow, and in the case of dividend growers, it grows at an accelerating rate.
Of course, no investing strategy – mine included – works perfectly. My strategy will fall out favor, and performance will lag. But that’s OK, because my focus is the distant horizon, and I have faith in my strategy to get me there with more wealth than when I started.
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