Income Investing in 2019 and Beyond
A Little Motivation
With 2018 coming to an end, people have started to make their New Year’s resolutions. Given what happened to the stock market in the past several months, why not add disciplined income investing to the list?
Why is discipline so important?
Well, because if you have patience and don’t panic when other market participants do, the return from income investing can be quite substantial.
Meet Mr. and Mrs. Z, who purchased 100 shares of PepsiCo, Inc. (NASDAQ:PEP) stock back in October 1958. At the time, 100 shares cost the couple $2,413.44.
Over the years, Mr. and Mrs. Z held onto their shares and collected dividends. When PEP stock split, they did not sell. When the stock market crashed—and that happened quite a few times, they did not sell.
Decades later, the couple’s original investment was worth a staggering $1.27 million, translating to a return of over 52,680%.
How did I know this story?
Well, as it turned out, the returns were so impressive that Mr. and Mrs. Z’s financial advisor decided to write to the beverage company. PepsiCo’s Chairman and Chief Executive Officer Indra Nooyi then shared the story at the company’s annual shareholders’ meeting in 2017.
“By focusing on the business and the value of the stock, [Mr. and Mrs. Z’s] grandchildren have their college and future education secured,” the letter read. (Source: “Edited Transcript,” PepsiCo, Inc., May 3, 2017.)
Boring is Good
What I really like about this story is that it did not involve any complicated trading strategy. The couple simply bought and held a dividend-paying stock. And because they didn’t even bother signing up for a dividend reinvestment program, they have collected all the dividends along the way.
Mind you, PepsiCo has raised its dividend for 46 consecutive years. So for decades, Mr. and Mrs. Z received bigger dividend checks from the company every single year.
Furthermore, you didn’t have to be a stock-picking wizard to find PepsiCo. Sure, the company wasn’t as big back then as it is today. But by the 1950s, PepsiCo was already an established player in the beverage industry. Its iconic drink “Pepsi-Cola” was so successful that the company was already establishing bottling plants in Europe and Asia.
What I’m saying is, even with a boring dividend-paying company and a boring buy-and-hold strategy, the return over time might surprise you.
The best part is that with this strategy, there’s no need to constantly check your portfolio. When a company has a durable competitive advantage in a slow-changing industry, it will likely have the ability to pay dividends through thick and thin. So when other people are panicking in a market-wide sell-off (like what happened recently), you can just sit back, relax, and enjoy the dividend checks rolling in.
Of course, I’m not saying that you should invest all your savings in one stock. No matter how good a company is, it’s worthwhile to have a diversified portfolio.
You see, we did recommend PEP stock to readers of our Income for Life advisory back in December 2009, and that position has returned over 160%. But we also have about two dozen other stocks in the model portfolio.
The reason is simple. Each company has a set of risk factors. The same can be said about each industry. For instance, if consumers decide to move away from sugary sodas, a company that makes soda could see its business slowing down (I should point out that PepsiCo has done a good job offering a portfolio that includes healthier options).
In fact, the whole beverage industry could enter a downturn. Therefore, it’s important to have a portfolio diversified not just across companies, but across different industries as well.
Given the current circumstances, 2019 is set to be a year filled with uncertainty for the markets. That’s why a seemingly boring portfolio of solid dividend stocks just might provide the peace of mind investors desperately need.