It sure feels good to make money in the stock market.
And if you’ve been invested for at least a year in the stocks I’ve labeled World Dominating Dividend Growers (WDDGs), you’ve made a bundle.
Since last July, our WDDGs have outperformed the general stock market by more than 12 percentage points — a huge difference in returns.
1-year total return
|Altria Group Inc.|
|Wal-Mart Stores Inc.|
|The Coca-Cola Company|
|Johnson & Johnson|
|Procter & Gamble Co.|
|Average 1-year return|
|Standard & Poor’s 500 return|
Many investors don’t like investing in these large, blue-chip stocks because their share prices don’t move much from one year to the next. And they’re usually right. WDDGs are the biggest, most stable companies in the world. It takes a lot to move their share prices.
But over the past year, investors have been catching on to my WDDG mantra. In a world of extremely low interest rates and plenty of “big picture” risks, collecting cash dividends with the world’s biggest, best, safest companies is a powerful idea.
As my colleague Brian Hunt predicted in January, owning WDDG stocks is becoming the “fashionable” thing to do on Wall Street. You can see that idea at work by looking at the extraordinary returns in Altria Group Inc. (maker of Marlboro cigarettes), Wal-Mart Stores Inc. and Abbott Laboratories (a dominating drug company).
So the next time someone rolls his eyes at the mention of giant, dominating businesses, show him the table above — and feel free to gloat a little. After all, it sure feels good to make money in the stock market.
But be careful, too. Many investors make the simple, but fatal, mistake of letting their emotions make their investing decisions. They see a stock that is racing higher (like Wal-Mart) and chase after it without caring about getting value for their money.
If you’re a short-term trader, buying stocks based on share-price momentum can work. But for long-term investors, buying at high valuations and hoping stocks will go higher is a mistake. Long-term investors have to focus on buying great values.
After all, the price you pay for a stock is an incredibly important factor in determining how much you’ll make on an investment. The more you pay, the lower your investment return. The less you pay, the higher your return.
Consider a small business that makes $100,000 a year in net profit.
Suppose you buy the business for $1 million, or 10 times the earnings. Every year, you take $100,000 in net profit out of the business. So you’re earning a 10 percent yield on your original investment. It would only take you 10 years to recoup your initial investment.
Now suppose you paid $2 million for the same business. You’d earn only a 5 percent yield, and it would take you 20 years to get your initial money back.
Price You Pay
The trouble is: That’s logic, and humans aren’t always logical. They’re highly emotional. So when stock prices go up, they tend to get happy and want to buy. That is the wrong tactic.
If the success of WDDGs over the past year leaves you desperate to increase your stake in the stocks, I urge you to keep one thing in mind: Make sure any new stock you buy represents a great value. Don’t allow the “good feelings” from making money in stocks make you forget how you made it in the first place: by buying great businesses at great prices.
In summary, if you’ve made a pile of money in the stocks I’ve been urging you for years to buy, congratulate yourself. But don’t rush into buying more stocks without giving careful thought to the value you are getting for your money.
And don’t be afraid to do nothing for a while. That’s a huge part of your job as an investor. Be smart. Be patient. While you are patiently looking for another good stock to buy, let your winners compound and pay you higher dividends every year.
P.S. In my latest issue of The 12% Letter (published just a few weeks ago), I detailed exactly what price I think investors should pay for these WDDGs right now. With a $39 subscription to The 12% Letter, you can access this issue — and all my materials on WDDG stocks. If you decide this information is not for you, we’ll refund 100 percent of your subscription. You can take us up on our offer here without watching a long promotional video.
Editor’s note: The returns listed in the table above were originally published in DailyWealth on July 23.