The merits of doing nothing... How Buffett will make $100 million this quarter... Beefy 'new highs' list... Dan on dividend-growers... Apple hits a new high... The true cost of Obamacare...
Today's Digest will celebrate the merits of doing nothing.
It's true, doing nothing is the best and safest way to get rich in the stock market... To be fair, "doing nothing" may be a bit of a misnomer... You will have to call your broker once and place an order. But after that, you can sit idly and watch your wealth grow...
We're talking about buying and holding great businesses. And after you choose which business you want to buy, the most difficult thing you'll have to do is ignore the market noise and continue holding. As legendary investor Warren Buffett says, "time is the friend of the wonderful business."
Before you tune out on such a "boring" topic, consider this... Berkshire Hathaway, Buffett's holding company, has owned Coca-Cola stock for 24 years. The next quarterly dividend check Berkshire Hathaway receives from its Coca-Cola stake will exceed $100 million...
Yes, Berkshire will make $100 million this quarter simply because it bought Coca-Cola in the 1980s and waited. We've discussed Buffett and his Coke position several times in our various advisory services, but it's worth repeating. The lesson is that important. From Buffett's 2010 shareholder letter...
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Coca-Cola paid us $88 million in 1995, the year after we finished purchasing the stock. Every year since, Coke has increased its dividend. In 2011, we will almost certainly receive $376 million from Coke, up $24 million from last year. Within ten years, I would expect that $376 million to double. By the end of that period, I wouldn't be surprised to see our share of Coke's annual earnings exceed 100% of what we paid for the investment. Time is the friend of the wonderful business. |
Of his investments in the public equity of Coke and other companies, Buffett said (in his 2011 shareholders letter), "We view these holdings as partnership interests in wonderful businesses, not as marketable securities to be bought or sold based on their near-term prospects."
True to his word, Buffett didn't sell Coke, even when the company was trading for 50 times earnings in 1998 (a decade after he started buying). He didn't care how overvalued the shares were... He only cared that the company continued raising its dividend. In 2011, Coke paid out $1.88 in dividends per share. Adjusted for splits and past dividends, Buffett paid $3.75 per share of Coke in 1988.
So Coke's annual dividend, 24 years later, is 50% of his initial investment. And he'll make that 50%, regardless of how the stock performs.
If you look at today's "new highs list," you'll see a lot of Warren Buffett-type companies, or what our value-investing colleague Dan Ferris calls World Dominators. Anheuser-Busch InBev, Procter & Gamble, Intel, Microsoft, and Philip Morris International are a few of the names that hit a 52-week high yesterday. All of these companies are leaders in their sectors. And they all pay healthy and increasing dividends... The average yield of these five stocks is 2.74% (besting the S&P 500's yield of 2.39%).
In today's DailyWealth, Dan wrote about another World Dominator absent from the new highs list (though it's only a few percent away from its 52-week high). This stock pays a 2.6% dividend.
And it's raised that dividend every year for 38 years. On March 1, the company increased its payout from $1.46 per share to $1.59, a 9% increase. It raised the dividend 21% the year before and 11% the year before that. Take a look at this company's dividend history over the past 10 years...
The company in question is one of Dan's favorites, the world's largest retailer, Wal-Mart.
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Over the past five years, Wal-Mart hasn't paid out less than 30% of its earnings in dividends. So it could double the current dividend and still have more room to grow it. |
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But you might think Wal-Mart's current dividend yield of 2.6% means this news isn't worth your time. |
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You'd be wrong. |
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For one thing, the same qualities that have allowed the company to increase its dividend every year for decades – the steady, cash-gushing nature of Wal-Mart's business – means it's much less vulnerable to broad market drops than your typical stock. |
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You can see that quality at work in its August performance. While the benchmark S&P 500 stock index lost 17% of its value, Wal-Mart fell less than 10%... and had fully recovered by early October. The S&P took another four months. |
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For another thing, the safe, growing dividend acts as a "magnet" to pull the share price higher. |
To access all of Dan's favorite companies that are paying strong and increasing dividends, you should sign up for Extreme Value and The 12% Letter. You can do so here and here...
Another stock hitting a new high is Apple. On the back of its latest iPad announcement, shares of the computer and consumer-electronics company stock is up more than 3% today to $586 a share. It's up 43% so far this year (versus 10.8% for the S&P 500). Take a look at this one-year chart comparing Apple to the S&P 500...
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Now, look at its outperformance over the past 10 years...
Apple now has a market cap of $542 billion, making it the largest publicly traded company in the world. Last year, it surpassed ExxonMobil, whose market cap is a measly $406 billion. It's only the sixth company in history to build a $500 billion-plus market cap (the others are GE, Microsoft, Cisco, ExxonMobil, and Intel). And lots of people think the stock is going higher...
As I write this, CNBC is featuring a segment called "Dialing Up the Apple Bull Case." It quotes analysts saying Apple could hit $900 a share.
We're not saying Apple couldn't go higher from here. Naysayers in the past have been crushed. However, it's difficult for a stock to soar when it's already so popular. The Wall Street Journal reported that 400 of the 465 funds tracked by the mutual-fund rating firm Morningstar own Apple. And 320 of them have put at least 4% of the fund's total holdings in the stock. It seems everybody already owns Apple.
And according to the "cocktail party indicator," the stock is toppy... I haven't had a casual conversation about the markets without someone mentioning Apple. At a happy hour a few weeks ago, a young securities lawyer told me, "Apple will never go down." He was a self-professed Apple geek, who's been following the company for years. Proceed with caution...
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New 52-week highs (as of 3/13/12): BlackRock Corporate High Yield Fund (HYV), iShares Dow Jones U.S. Home Construction Fund (ITB), PowerShares Buyback Achievers (PKW), ProShares Ultra Technology Fund (ROM), ProShares Ultra Health Care Fund (RXL), V.F. Corp. (VFC), Anheuser-Busch InBev (BUD), Abbott Labs (ABT), Exact Sciences (EXAS), Prestige Brands Holdings (PBH), Dun & Bradstreet (DNB), BLADEX (BLX), Chevron (CVX), Procter & Gamble (PG), Target (TGT), Intel (INTC), Microsoft (MSFT), and Philip Morris International (PM).
Have you shared the secret of the World Dominator with your kids? Did it stick? Let us know here... feedback@stansberryresearch.com.
"When my son was a junior in college my employer went bankrupt, I had been paying his tuition out of pocket even though I had purchased several stocks for his college fund. Instead of selling his KO stock in his college fund, he took out a student loan. I told him later, as a business major, that was his smartest move, his student loan stayed the same price and a few years later his KO stock was worth triple the price it was when he got the student loan, a wise decision.
"And the best part was he did it on his own, makes me proud that through the years he was learning about money management and putting it to good use. I feel when it comes time for an inheritance, it will also be used wisely, which I think is every parents wish.
"Proverbs 13:22 'A good man leaveth an inheritance to his children's children.' It helps me believe I have taught my children financial responsibility and hopefully he will pass this on to his children." – Paid-up subscriber Don
"Porter Stansberry; I want to thank you for giving me back my sanity. I have read the December newsletter 4 or 5 times and it will remain in my collection forever. I agree with your observations and I have made the same observations and have been accused of being anti -country.
"I am not an investor. I just own a small subsistence ranch in arid New Mexico. I hardly watch TV but I read an awful lot. My favorite hobby is business news. I was drafted in 1962 and gladly served, no questions asked.
"Two observations: During the '60s budgets were balanced by 10% reductions in spending in every government agency; 10% less employees , 10% less vehicles etc. No exceptions. President Reagan proved it could be done when the air traffic controllers thought they were indispensable, just like the government union members believe. Observation No. 2: As long as there are forward thinking people like you I may get to love my country again." – Paid-up subscriber Anthony Sanchez
Regards,
Sean Goldsmith
New York, New York
March 14, 2012