To be an iconoclast is the quick route to raise one's profile. Devise a novel theory, toss in a few data-mined graphs to support a point and then stand back and watch accolades flow in.
In recent years, buy-and-hold has suffered its share of slings and arrows by those with novel theories. Just cobble together the right array of market-timing indicators and any investor can put buy-and-hold to shame, so the detractors sneer.
As an income investor, I bristle at the impertinence, because timing the market is far, far more difficult than the data-mined graphs lead you to believe. Sure, if you could go back in time, you could time your purchases and sells to perfection.
Unfortunately, the same luxury doesn't exist going forward – never has and never will.
I'm an income investor. I'm also a buy-and-hold investor. My focus is to buy and then hold an investment over time – measured in years, in most cases. I approach an investment as an investment. And an investment, like a garden, requires time to bear fruit.
Don't misunderstand. I'm not denigrating market-timing traders; they serve a worthwhile function, not the least of which is as liquidity providers. It's just that trading isn't my bailiwick. I prefer to build wealth over time by investing in cash-generating assets. It's no coincidence, therefore, that the High Yield Wealth portfolio is a low-turnover portfolio.
Buy-and-hold might be antiquated, but it's hardly inferior. Buy-and-hold instills a number of advantages, especially for income investors.
Taxes are an obvious advantage. Hold an investment longer than a year and the tax rate on a subsequent sale drops to the capital gains rate of 15% for 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 15% 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.
That said, 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. But to maximize the wonders, you have to extend your holding period to years, if not decades.
Altria (NYSE: MO), the maker of Marlboro cigarettes, is underscores the power of buy-and-hold when combined with dividend growth.
Altria has paid a dividend for decades, and has raised that dividend faithfully and annually for the past 45 years. Rising dividends, in turn, have reliably powered Altria's share price higher.
In 2005, Wharton School finance professor Jeremy Siegel wrote an insightful essay titled “Ben Bernanke's Favorite Stock.” That stock was Altria. Siegel wrote that from 1957 – when the S&P 500 Index was founded – to 2005, Altria produced an average 20% return annually, handily beating the other 499 members of the index.
The record continues to this day, and I can bear witness firsthand. Since Altria was added to the High Yield Wealth portfolio in March 2012, it has produced a 43% total return, which runs well ahead of the 20% historically average annual return Siegel refers to.
The return generated by Altria in High Yield Wealth isn't predicated on reinvesting dividends, though Siegel's example is.
By reinvesting Altria's dividends into shares, investors have been able to generate exceptional return over the years, due in large part to those times when Altria came under government attack or new regulation, which invariable lowered the share price. Altria investors were the beneficiary of a continually rising dividend, which could then be used to purchase lower-priced shares, which always recovered.
Altria's extraordinary long-term wealth creation simply couldn't have been replicated in a trading strategy. An investor had to have bought and then held through thick and thin over many years.
So don't believe the detractors. Buy-and-hold isn't dead. It's alive and well, and benefiting many investors with the patience and skill to employ it. I know, because I'm one of them.