8 Lessons From 'The Single Best Investment'
Something special is happening on June 23rd that you won’t want to miss.
If you want behind-the-scenes updates and early access to our upcoming high-yield reports, join the High-Yield VIP List, and you’ll get the following immediately when you join for free:
My high-yield stock watchlist
A Checklist of Dividend Investing Mistakes
The Highest Yielding Dividend Aristocrats
Get on the list by leaving your email here.
Some of the best investing strategies are the simplest.
Lowell Miller’s The Single Best Investment boils investing down to three things that really matter: quality, cash flow, and time.
Here are 8 lessons from the book to help you build a compounding machine.
1. The Single Best Formula
Compounding wealth over time boils down to a simple equation:
High Quality + High Current Yield + High Dividend Growth = High Total Returns.
When you can find a company with all three, you have three engines working to build your wealth.
This kind of situation usually happens when Mr. Market gets very depressed about a temporary problem at a great company.
An Example:
In 2019 Mr. Market got very depressed about AbbVie’s top-selling drug, Humira, losing its patent protection.
The stock price went down and the yield went up to 6.5%.
Management replaced the revenue with new drugs, and investors who bought then now have:
Total returns of around 375%
A yield on cost of nearly 11%
A Dividend CAGR of more than 7%
2. Dividends Don’t Lie
Earnings are always an estimate, but to pay dividends, a business needs cash in the bank.
There are lots of ways for accountants to make a business look more (or in some cases, less) profitable on paper.
But Miller says that “Dividends are the only thing you can truly know about a stock.”
3. Rising Dividends Pull Prices Higher
In the short term, the stock market is a voting machine driven by emotion.
In the long term, a stock’s price is tied to its dividend.
For a company to consistently raise the dividend, it has to be generating more and more cash.
That rising cash flow is like a magnet that pulls the value of the business higher too.
4. Bonds Aren’t As Safe As They Look
Fixed income feels safe.
But when you’re getting the same interest payment in 10 years, inflation reduces the purchasing power of that money.
High-quality companies that pay growing dividends compound your real purchasing power over the long run.
5. Financial Strength is Non-Negotiable
A dividend is only as safe as the balance sheet that supports it.
Never compromise on financial strength.
Make sure to have low debt levels and high free cash flow.
Strong balance sheets let your companies keep paying dividends, and take market share from weaker competitors when times get tough.
6. Embrace Volatility
Volatility isn’t risk.
It’s the price you pay for the higher returns of equites.
Stock prices are guaranteed to fluctuate wildly.
Focusing on the income stream and not the stock price makes it much easier to hold great companies through market ups and downs.
7. Time is the Most Powerful Force
The magic of dividend reinvestment is heavily back-loaded.
Remember that it’s exponential growth, so it doesn’t look like much is happening…at first.
But when compounding takes off, it does so quickly.
For those of you who like math, here’s a reminder of the exponential growth formula.
The amount of time invested is the exponent in the formula, meaning that it’s the most powerful driver of your returns.
8. Boring is Beautiful
The greatest compounding machines are usually boring and predictable.
Look for companies with products or services that customers are forced to buy no matter what the economy is doing.
Here are the Dividend Kings that have raised their dividends for at least 50 years in a row:
It’s full of industries with predictable, repeating sales that create predictable, rising dividends.
That’s It For Today!
Building a compounding machine takes time, but the rules are simple.
Here are the 8 lessons from The Single Best Investment we went over today:
The Single Best Formula: High Quality + High Starting Yield + High Dividend Growth = High Total Returns
Dividends Don’t Lie: Earnings are estimates, but it takes real cash in the bank to pay a dividend.
Rising Dividends Pull Prices Higher: Steadily growing cash flows (and dividends) pulls the value of the business up over the long run.
Bonds Aren’t As Safe As They Look: Fixed interest payments lose their purchasing power to inflation, growing dividends protect it.
Financial Strength is Non-Negotiable: A reliable dividend needs a solid balance sheet with low debt and high free cash flow.
Embrace Volatility: Price swings are normal, focusing on your growing income stream makes it easy to ignore Mr. Market’s mood swings.
Time is the Most Powerful Force: Compounding is exponential. The longer you leave your money alone, the faster it multiplies.
Boring is Beautiful: Predictable businesses selling essential products often make the most reliable wealth-building machines.
One Dividend At A Time
-TJ
P.S.
On June 23rd, we are kicking off a series all about high yield investing.
If you want to maximize your portfolio’s income without sacrificing business quality, jump on the VIP Waitlist.
You’ll get behind-the-scenes updates and the very first invite to download our brand-new high-yield special reports the minute we go live.
Don’t forget that you’ll also get the following just for joining the VIP list:
My high-yield stock watchlist
A Checklist of Dividend Investing Mistakes
The Highest Yielding Dividend Aristocrats
Used sources
Interactive Brokers: Portfolio data and executing all transactions
Fiscal.ai: Financial data
Disclaimer
As a reader of Compounding Dividends, you agree with our disclaimer. You can read the full disclaimer here.
Bonds are not a good idea. Over the long run stocks are less risky and offer a higher return.