A dif­fer­ent phi­los­o­phy can re­sult in less-stress­ful wealth

The Oklahoman (Sunday) - - BUSINESS | LIFE -

Dear Mr. Berko: This mar­ket fright­ens the heck out of me, and I’m scared my $263,000 in­di­vid­ual re­tire­ment ac­count will go up in smoke. I’m 42. Is there any way to avoid scary down­turns? — SS, Spring­field, Ill.

Dear SS: No!

It con­cerns me, too, but not nearly so much as it con­cerns you and hun­dreds of thou­sands of oth­ers who’re re­luc­tant to re­view the re­cent car­nage and con­cede the reifi­ca­tion of their port­fo­lios. It doesn’t con­cern me as much as it does you be­cause our philoso­phies are as dif­fer­ent as cheese and chalk.

I don’t stress cap­i­tal gains, be­cause I can’t spend them un­less I sell some­thing, be­cause they’re dif­fi­cult to pre­dict and be­cause they’re of­ten fleet­ing.

I don’t value my port­fo­lio the way most in­vestors do. Most in­vestors mea­sure gains as a per­cent­age of their cost ba­sis, hop­ing to grow wealth via cap­i­tal gains. That’s the old-fash­ioned way.

My def­i­ni­tion of wealth is “how much money you can spend while leav­ing your cap­i­tal alone and main­tain­ing enough funds for im­por­tant life events.”

We don’t spend wealth; we spend the in­come that wealth pro­duces. So the best mea­sure of in­vest­ing suc­cess is the in­come your port­fo­lio earns. An in­vestor with a $3 mil­lion port­fo­lio gen­er­at­ing $70,000 in in­come is less suc­cess­ful than an in­vestor with a $2 mil­lion port­fo­lio gen­er­at­ing $100,000 in in­come. When the Dow Jones in­dus­trial av­er­age be­comes a wreck­ing ball, the lat­ter’s stress level doesn’t pro­voke the nee­dle as much as the for­mer’s.

As­sume you in­vested $10,000 in AT&T 10 years ago and bought 410 shares at $24.40. The div­i­dend then was $1.60 a share, yield­ing 6.5 per­cent, and the an­nual div­i­dend in­come was $656. If you rein­vested the div­i­dends ev­ery quar­ter, you’d have 731 shares to­day, worth $30 each. Be­cause AT&T’s div­i­dend in­creases each year, those 731 shares would now pay a $2 div­i­dend, or $1,462 a year — and that would be a 14.6 per­cent cash-on-cash re­turn on your $10,000 in­vest­ment. That $806 div­i­dend growth rep­re­sents about a 125 per­cent gain in 10 years, an av­er­age in­come boost of about 8.3 per­cent each year. And each year, your in­come should in­crease be­cause AT&T’s board may con­tinue grow­ing its div­i­dend.

If you’d done the same with Omega Health­care In­vestors, your ini­tial div­i­dend on a $10,000 in­vest­ment would’ve been $1,117 10 years ago. How­ever, af­ter rein­vest­ing each quar­terly pay­out, you’d own 1,701 shares with a $2.58 div­i­dend pay­ing $4,388 a year to­day. That’s a 43 per­cent cash-on-cash re­turn on a $10,000 in­vest­ment.

If you’d done the same with Ver­i­zon Com­mu­ni­ca­tions, your div­i­dend would’ve grown from $687 on 394 shares in 2008 to a tad over $1,530 on 635 shares to­day. And no mat­ter how you slice the salami, Sammy, that’s a 15.3 per­cent cashon-cash re­turn that’ll in­crease a bit each year as Ver­i­zon grows earn­ings.

Note that some busi­ness de­vel­op­ment com­pa­nies, such as Main Street Cap­i­tal and Black­Rock Cap­i­tal In­vest­ment Corp., have im­pres­sive 10-year in­come growth records. Ten years ago, $10,000 in­vested in Black­Rock Cap­i­tal In­vest­ment Corp. would’ve pur­chased 80 shares pay­ing $240 in an­nual in­come. If you rein­vested all of Black­Rock’s pay­outs for a decade, you’d have ac­cu­mu­lated 134 shares pay­ing $12.02 a share, to­tal­ing $1,610 in an­nual in­come. That’s a 16.1 per­cent cash-on-cash re­turn. And Black­Rock’s div­i­dend in­creases a lit­tle each year be­cause its grow­ing busi­ness en­ables man­age­ment to raise the div­i­dend an­nu­ally.

There are hun­dreds of good stocks that have at­trac­tive records of an­nual div­i­dend in­creases. Your stock­bro­ker should be able to com­pile a list of good div­i­dend grow­ers.

Fi­nally, I can’t, with a high to mod­est de­gree of cer­tainty, tell you the stock price of John­son & John­son will grow from $142 this year to $157 next year. But that 15-point gain rep­re­sents the con­sen­sus of 24 of Wall Street’s an­a­lysts.

I can tell you with a sig­nif­i­cantly higher de­gree of cer­tainty that John­son & John­son will in­crease its div­i­dend from $3.60 in 2018 to $3.85 in 2019. And when the Dow takes these ex­tended 600and 800-point falls, I’m less un­com­fort­able than you be­cause I know that John­son & John­son’s grow­ing div­i­dend will pur­chase new shares at lower prices. You might con­sider chang­ing your in­vest­ment phi­los­o­phy.

Please ad­dress your fi­nan­cial ques­tions to Mal­colm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]­hoo.com. To find out more about Mal­colm Berko and read fea­tures by other Cre­ators Syn­di­cate writ­ers and car­toon­ists, visit the Cre­ators Syn­di­cate web­site at www.cre­ators.com.

Mal­colm Berko [email protected] ya­hoo.com


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