There are more than enough Tortoise and Hare investment products to choose from, and even more investment analogies drawn from this great race.
Is it Time to Invest for Growth or Income?
A more un-crowded question is what animal do you think runs the fastest for the longest?
It’s YOU and ME!
“All animals are equal, but some animals are more equal than others.” - George Orwell
Humans’ secret weapon is sweat. We have a couple million more sweat glands than other animals. Plus, our IT bands hold elastic energy unlike any other animal, reducing the amount of energy to take the next big step forward.
Consider a third competitor, which is often overlooked in the investment races between Tortoises and Hares. Rather than choosing between fast Growth or slow Income, the steps forward that will last the longest is Growth OF Income.
Growth OF Income: Hiding in Plain Sight
It is extremely hard to see this third sweaty choice, capable of outrunning the Tortoises and Hares.
Look at this example of two household products companies over the past decade, paying dividends to shareholders.
The first is one of the Dividend Kings, the name given to stocks which have increased dividends for more than 50 years in a row. Its rich history and high yield attract a convinced crowd.
The King’s shareholders were rewarded with a consistent dividend yield that was never challenged by this second one, the Dividend Proletariat – which is our own very non-branded, un-indexed name for the sweaty working class of dividend payers. Look at the big difference in dividend yields between these two stocks over the past ten years:
At no time during the past decade did the lower yield ever come close to catching or passing the understandably more beloved higher yield of the Dividend King. At last count this King is owned inside investment products at 3,696 institutions. Our Dividend Proletariat is owned at 1,494, by comparison.
Agreement is expensive. Despite the company’s much slower operating growth, the Dividend King is priced currently at an Enterprise Value / EBITDA that is 50% more expensive than the Dividend Proletariat.
“What everybody else knows, is not worth knowing.” - Gerald Loeb
Follow the Money to YOUR Mailbox
Investors looking at the racetrack of current dividend yields to compare stocks every day are missing a better competition -- the growth of dividend payments.
In our example, the Dividend King is paying out the majority of its Free Cash Flow that is barely growing. The Dividend Proletariat paid out less than one-third of its Free Cash Flow, which more than tripled.
As a result, the Dividend Proletariat was able to comfortably sweat out dividend increases more than 10 times greater than the Dividend King.
Lower current dividend yields can be misleading, which is why we stick with mailbox math shown above, on top of the original chart of the same two stocks.
The size of the dividend payments being delivered to your mailbox is how investing can become most real -- to hold in your hands.
Look what happened to annual dividend payments if the same $1 million was invested in shares of each company. The always lower yielder caught the high yielder and passed it in mailbox money delivered.
When you look out at the next ten years, we always think it is a good idea to stress test your Investment Plan with this question: what if the Stock Market provided you zero price growth? That stress test is why no total return is shown in our simple mailbox money math of Dividend Yield on Cost.
Rather than counting on more growth to later invest in more income, we prefer to find Growth OF Income.
We invite you to subscribe to our email newsletter (sign-up form below) to answer more of your questions about growth OF income. We are here to help you on your journey to Financial Freedom!