Dividend Investing with Anne Scheiber

A retired IRS agent, Anne Scheiber turned $5000 into a personal fortune of $22 million.

If that sounds amazing, you’d be right.

Some publicly traded companies pay profit distributions to shareholders in the form of dividends, which can be paid in cash or company stock. These dividends provide investors with a steady income stream, essentially spendable cash that can either be reinvested or used.

So for example, imagine IBM earned $250 million dollars in profits. The company might make the decision to return $50 million of those profits to their shareholders and reinvest the rest – using the money to finance research and development, or paying off debt.

Anne’s story

Anne Scheiber had a bad experiences with stock brokers in the 1930s and resolved that she would never rely on someone else when it came to her financials. When she retired in the mid-1940s she had a small sum of money that she’d saved: $5000.

Remember, $5000 in 1945 is worth roughly $68,000 today.

Anne decided she would invest the money her way. So she combed through financial statements, balance sheets and annual reports to try and figure out if a company was worth investing in.

Over a fifty year period, she turned that $5000 into $22 million. As she neared the end of her life, Anne arranged for her fortune to be donated to Yeshiva University – intended to fund a scholarship for women.

It’s wonderful story, and it goes to show that if anyone can do well in the stock market – if they’re just willing to put time and effort into understanding what they’re buying.

The Rules of Dividend Investing

There are a few rules of thumb that anyone interested in dividend investing should follow.

  • Buy Quality

A successful dividend investor wants to invest in high quality businesses with a proven track record of success. If you think about it, owning a stock represents ownership in a business. Even if you own a single share of Microsoft, you are part-owner of the tech giant.

Wouldn’t you only want to own the best?

A common strategy investors take is to allocate their money into blue-chip stocks that pay dividends. Blue-chip stocks are kind of like the royalty of stocks. They are large and well-established companies with sound financials. They have market capitalizations in the billions and are typically the market leader in their sector or industry.

It’s not hard to throw out the names of a few blue-chip stocks: IBM, Proctor & Gamble, Johnson & Johnson, Coca-Cola, JP Morgan, the list goes on. More often than not, blue-chip stocks tend to be household names.

Anne Scheiber had the same strategy; she invested only in quality companies – painstakingly vetting their financials herself and focused on increasing her stake in these companies every year. She found the companies she wanted to be associated with, and relentlessly held on to the shares.

One way for an investor to invest in quality dividend-paying businesses is to invent in the Dividend Aristocrats. These are the companies in the S&P 500 that have increased their dividend payouts for 25 consecutive years. As a group, the Aristocrats have outperformed the overall market, and then some.

In the last 10 years, the Dividend Aristocrats returned 2.88% over the broad market benchmark.

  • Use the magic of compounding

If you’ve invested in quality companies then you want to hold on to those businesses for dear life.

Remember how the Dividend Aristocrats returned 2.88% over the S&P 500?

It doesn’t sound like a lot but over a long time frame, you’d be astonished at what 2.88% can do. If you invested in the Dividend Aristocrats for as long as Anne Scheiber was investing in dividend-paying companies then you’d be extremely wealthy.

$10,000 invested at 7% over 50 years would be worth around $330,000 at the end of the holding period.

Add 2.88% to that return, compounded every year for 50 years, and that same $10,000 would have grown to nearly $1.4 million. That’s 400% more!

  • Search for Growth

When you invest in the Dividend Aristocrats, there’s a lot going for you right from the start. You’re invested in quality but in a way, you’re also invested in growth.

That’s because the Dividend Aristocrats are companies that have raised their dividend payout for 25 consecutive years.

You don’t have to stop there. You could also evaluate the business you invest in by looking the growth rate of their earnings. A company that raises their dividend for 25 years in a row most likely has been growing their earnings in that same time but it may not always be the case.

That’s because cutting dividends is extremely unpopular among investors.

It’s fairly simple to examine the earnings growth rate of a list of companies in Buycel.

scheiber_eps

Simply use the STOCK_LATEST() function in Buycel to fetch the latest earnings data for any company you like. All you need to do is supply the ticker, or insert a list of companies from an entire industry or sector using Buycel’s built-in list insert capability

Buycel also has historical data, which can be brought into your spreadsheet using the STOCK() function. Use it get an idea of how a company has grown its earnings over time.

scheiber

Over the last three years, the average earnings per share growth rate for Ford Motor Company was -26.90% per year.

Ouch!

  • Be Qualified

There’s such a thing as a qualified dividend; these are types of dividends to which capital gains tax rates are applied. That’s extremely attractive because other dividends are taxed at an individual’s regular income tax rate – generally much higher than the capital gains rate.

In order for a dividend to register as a “qualified dividend” it has to meet three criteria:

  1. The dividend has to be paid out by an American company or a qualifying foreign company.
  2. The dividend must be held for a minimum holding period, which varies from 60 and 90 days with a lot of stipulations.
  3. Most not be on the “Does-not-qualify” list maintained by the IRS.

Even the government is encouraging you to have a long-term focus when it comes to dividend investing!

  • Ditch the overpriced ones

A common strategy amongst dividend investors is to sell their stocks once they get too overpriced. The rule: sell when the normalized P/E ratio is over 40.

There’s research which suggests that the highest decile of stocks by P/E ratio tends to underperform the lowest decile of stocks.

In other words, more expensive stocks tend to underperform cheaper stocks. Intuitively it’s easy to understand why. If a stock is overpriced, then the price is closer to its ultimate ceiling than an underpriced stock.

  • If they downsize, so do you

If a company reduces its dividend, you should get rid of the company. A business that reduces its dividend payout is now paying you less over time. That doesn’t bode well for you, the shareholder. Sell off your holdings and reinvest in a business that will return more to its shareholders over time.

Studies show that stocks that reduced, or completely eliminated their dividends had a 0% return from 1972 to 2013. In comparison, dividend growers and initiators returned 10.1% over the same time frame, the most of any other group reported in the study.

  • SPPs and DRIPs

Share Purchase Plans (SPP) and Dividend Reinvestment Plans (DRIP) are two ways dividend investors can get an advantage over other investors, and in the world of finance any advantage is a good advantage.

Dividend Reinvestment Plans are services offered by businesses where dividends are automatically used to purchase more shares of the company. What’s great about this service is that you can often buy fractional shares, so even if the dividend can’t buy a full share – it’s still being utilized. For someone who is buying ownership of a company and intends on holding it for the long haul, automatic reinvestment is a powerful tactic.

Share Purchase Plans are similar, as they allow investors to buy shares directly from the issuer without incurring any transaction fees. Combine SPPs and DRIPs, and you have two very powerful forces working in your favor. Add in the fact that DRIPs often sweeten the deal by offering discounts (usually 5%) to investors and these two plans can really turbo-charge your returns.

We saw how 2.88% compounded over a long time frame can 4x your results. Imagine how buying shares at a 5% discount over 50 years could further improve that result.

  • Be a value investor

A good dividend investor should, at heart, be a value investor.

Value investors are obsessed with buying businesses at a discount and making sure they have a margin of safety on any investment. This is a great strategy because it helps an investor limit their downside risk. After all, if you buy a $100 watch for $25 then it’s pretty easy to make money should you decide to sell that watch to someone else.

Look for high-quality businesses with a strong track record of increasing dividend payments and buy them when their share prices dip below their intrinsic value. Combining quality and value in this way can go a long way in ensuring amazing long-term returns.

Dividend investing is extremely popular. Many people love its reliability and ability to throw off a regular income stream. Follow the rules of dividend investing outlined above and who knows, you might even be able to build a personal fortune to rival Anne Scheiber’s.

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