When you Google “How not to invest profitably for the long term,” a picture of Mohammed Islam does not come up. It should.
Mohammed Islam is a New York City teenager who recently claimed to have made $72 million in profits buying and selling securities during recess.
Of little surprise to any mature investor, glory was fleeting for young Mr. Islam. Not only is Islam not old enough to have his own brokerage account, a pretty good tell right from the start. His “tactics” and “strategy” were truisms and clichés that offered absolutely no insight into the quality of the company, and thus its worth as an investment.
What does satisfy a great deal of due diligence is the dividend history of a publicly traded company, especially those that are “Dividend Aristocrats” such as Coca-Cola (NYSE: KO), McDonald’s (NYSE: MCD), Nucor Corporation (NYSE: NUE), and Wal-Mart (NYSE: WMT).
A “Dividend Aristocrat” is a publicly traded company that has increased its dividend annually for at least the last quarter century.
Just paying a dividend is a show of strength for any asset. To increase it is another robust indicator for all, especially income investors, that this company is not only well-managed, but respects the rights of all shareholders, even those in the minority. Raising it every year for over a quarter century evinces that this is a very desirable long-term investment.
While Mohammed Islam could not tell us much about how he invested due to the simple fact that he didn’t know how, the payment of a dividend speaks volumes about a company’s worth.
About the management, it demonstrates a respect for the rights of all shareholders in sharing revenues. High-tech giants such as Apple (NASDAQ: AAPL) and Microsoft (NASDAQ: MSFT) previously did not pay a dividend as company management felt that shareholders were better served by investing the funds in research and development, or acquiring other entities.
Microsoft, Apple, and other high-tech firms now have very generous dividend and share buyback programs that will probably improve in the coming years due to the stated intent of management to reward shareholders with more income.
The ability to pay and increase a dividend demonstrates how solid the business model is of the publicly traded company. When a dividend is declared, the board of directors is stating that is the best use of the company’s funds. To increase it annually shows that executive management anticipates that business will be better in the future, which is the essence of all long-term investing.
For long-term investors, owning a Dividend Aristocrat means an increase in shares or income (depending on whether or not you enroll in the company’s Dividend Reinvestment Plan, or DRIP) every year simply for not selling the stock, as the chart below shows:
|Dividend Yield at Present
|Dividend Growth in Consecutive Years
It also results in better investing in better companies. In an interview with the AAII Journal, Jesper Madsen, a manager of two Asian income mutual funds, noted that none of the Chinese stocks found to be fraudulent had ever paid a dividend. Another portfolio manager, Bruce Brewington, like Madsen only invests in Asia stocks that pay a dividend.
As Madsen noted in a CNN Money interview, “If companies pay out dividends, that means they are generating earnings.”
It was a short ride for Mohammed Islam. By investing in Dividend Aristocrats, your success should be far more sustained.
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