Here’s an interview with Marc Lichtenfeld:
Here are my comments on the book:
How do you get RICH with dividends? Marc Lichtenfeld, Chief Income Strategist of The Oxford Club and the Senior Editor of The Oxford Income Letter, states that you should buy stocks in companies that have a historical track record of raising their dividends by 10% annually, has at least a 4% dividend yield, and a payout ratio of less than 75%. In his book, he demonstrates with figures based on conservative historical data that through the power of compounding, you’ll be able to get yields of 11% and average returns of 12% in 10 years. This is also known as his 10-11-12 method. Here are some of the points to the book:
1. As an investor, your time horizon should be for the long term (10+ years). Rather than focusing on actively trading to beat the market, just buy and hold. Statistically, 96% of people fail to beat the market. If you believe that you’re better than the 96% of people, by all means actively trade your shares. Investing guru Warren Buffett himself has said that Wall Street makes their money on activity but you make your money on inactivity. Look for companies that have a reliable and proven business model that has demonstrated that they’ve been able to make money. “My grandfather, a certified public accountant who owned a seat on the New York Stock Exchange, didn’t invest in the market looking to make a quick buck. He put money away for the long term, expecting the investment to generate a greater return than he would have been able to achieve elsewhere (and possibly some income). He was willing to take risk, but not to the point where he was speculating on companies with such ludicrous business ideas that the only way to make money would be to find someone more foolish than he is to buy his shares. This is an actual – and badly flawed theory used by some. Not surprisingly it is called the Greater Fool Theory. There are all kinds of companies, TheGlobe.com, Netcentives, Quokka, to name just a few, whose CEOs declared we were in a new era: This time was different. When I asked them about revenue, they told me it was all about ‘eyeballs.’ When I pressed them about profits, they told me I ‘didn’t understand the new paradigm.’ Maybe I didn’t (and still don’t). But I know that a business has to eventually have revenue and profits. At least a successful one does. I’m 100% certain that if Grandpa had been an active investor in those days, he wouldn’t have gone anywhere near TheGlobe.com . One principle that I believe many investors have forgotten is that they are investing in a business. Whether that business is a retail store, a steel company, or a semiconductor equipment manufacturer, these are businesses run by managers, with employees, customers and equipment and, one hopes, profits. They’re not just three- or four-letter ticker symbols that you enter into Yahoo! Finance once in a while to check on the stock price. And these real businesses can create a significant amount of wealth for shareholders, particularly if the dividend is reinvested.“
2. Statistically speaking, you have a 91% win rate in the stock market. Basically this means that 91% of of the time you have your money in the market, you’ll come out with more money than you had invested. If you reinvest your dividends, you’ll create even greater wealth. Find and invest in companies that pay dividends. “First of all, investing in the stock market works. Since 1937, if you invested in the broad market index, you made money in 67 out of 74 rolling ten-year periods, for a 91% win rate. That includes reinvesting dividends. The seven ten-year periods that were losers ended in 1937, 1938, 1939, 1940, 1946, 2008, and 2009. The periods 1937 to 1940 and 1946 were tied to the Great Depression. The ten-year periods ending 1936 to 1940 were brutal with an average decline of 40%. The decade ending in 1946 was much tamer with a loss of 11%. The 2008 and 2009 ten-year periods each lost 9%. So the only ten-year periods that didn’t make money were associated with near financial Armageddon. And even in some decades tied to those financial collapses, such as 2000–2010, investors still came out ahead. Paul Asquith and David W. Mullins Jr. of Harvard University concluded that stocks that initiated a dividend and increased their dividends produced excess returns for shareholders. Additionally, the larger the first dividend payment and subsequent dividend raises, the larger the outperformance. And research shows that dividend stocks significantly outperform during market downturns. Michael Goldstein and Kathleen P. Fuller of Babson College concluded, ‘Dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2% more per month in declining markets than in advancing markets.'” He later states, “As I’ve shown you, historically, there’s a 91% chance of the market giving you a positive return over ten years. Additionally, where are the baby boomers going to put their money? Bonds are paying ridiculously low interest rates right now. Is it worth it to won’t even keep up with inflation. For that little, I’d rather invest in a stock with a 4% or 5% yield and take the risk that in ten years, the stock will at least be where I bought it today. But you know what? Even if the stock falls, you can still make money. Let’s assume you buy 500 shares of stock at $20 for a total of $10,000. It pays a dividend of $1 per year or a yield of 5%. Now, this company has a long history of raising its dividend every year. Over the next ten years, it raises the dividend by an average of 5% per year. Let’s also assume that the government official was right and the stock tracks the market and falls 13%. If you reinvest your dividends for the next ten years, while the dividend is increasing and the stock price is falling, you’ll wind up with about $17,000. That’s a 70% increase, or a compounded annual growth rate of 5.45%—despite a decline in stock price of 13%! But what if you invested in a ten-year treasury, paying 2% per year? After ten years, you get your $10,000 back, plus you’ve collected $2,000 in interest for a total of $12,000, or a compound annual growth rate of 1.84%. So in this example, your stock investment lost 13% in price yet still nearly tripled the performance of a ten-year bond where your principal is guaranteed. Think about that for a moment. Your stock lost value, but because you reinvested your dividends, you nearly tripled your return on the guaranteed principal of the ten-year bond. And that takes into account a drop in the market over a ten-year period that would be equal to the fifth largest in the last 74 years.
3. Whenever you have an excessive amount of something, you tend to squander it. However, whenever you’re strapped or have very limited amount of something, you use it more wisely. Having said that, it’s much better for management of companies to distribute the cash back to shareholders as opposed to hoarding it and work more effectively with what they have. Warren Buffett has once said, “I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches—representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about. So you’d do so much better.” “I posed this question to several executives: Why does a company adopt a policy that commits it to an ever-increasing outlay of cash in the form of dividends? I received some interesting replies. Scott Kingsley, the CFO of Community Bank System, Inc. (NYSE: CBU), an upstate New York bank that as of January 1, 2012, paid a dividend yield of 3.8% and had raised its dividend every year since 1992, said he believes the dividend keeps existing shareholders happy but also attracts new shareholders. Regarding the idea that a company can retain capital for other uses rather than paying a dividend, he stated: We are very “capital efficiency” conscious. We believe “hoarding” capital to potentially reinvest via an acquisition or some other use can lead to less than desirable habits. We prefer to raise incremental capital in the market when needed—and we have a track record of doing that. Having excess capital on the balance sheet when assessing a potential use can lead to bad decisions—because at that point almost everything results in improvement to ROE [return on equity]. The case in point in our industry are the overcapitalized, converted thrifts. Their ROEs are usually so low, any transaction looks like it improves that metric, but it may not add franchise value longer term. So, according to Kingsley, not having a stash of cash forces management to be more responsible stewards of the company’s assets. When a company has lots of cash on hand and makes an acquisition, it usually increases ROE since cash, particularly these days with such low interest rates, returns practically nothing.“
4. Whenever you hear someone say that “you’ll always make money in real estate” or that “gold is the way to go”, be cautious of what that person is saying. Never in the history has an industry consistently made you money. I’m sure that real estate prices go up, but so do other things as well. Don’t believe the hype as you need to understand value rather than what everyone else is saying. Never put your money in just one thing; diversify. “Typically, you want to own a variety of stocks, bonds, real estate, precious metals, maybe some commodities or other investments. The recent financial crisis is a good example of how this type of portfolio can balance things out. While stocks and housing were crashing in 2008 and early 2009, bonds, gold and commodities performed well. An investor who was well diversified lost less than one who was primarily in stocks and real estate. I knew plenty of people who lost everything because all of their money was tied up in real estate—the very same people who told me just two years earlier that ‘real estate is the only way to make money.’ Next time someone tells you that one specific way is the ‘only way to make money,’ figure out a way to short that person’s net worth, because it’s heading south within a few years. I guarantee it. Within any asset class, it makes sense to diversify as well. If you own a portfolio of rental properties, you wouldn’t want to own houses that were all on the same block. If that block suddenly becomes all over the country. If your house in Florida takes a big hit in price, perhaps the apartment in California will hold its value. If rental prices slide in New Jersey, maybe they’re going up in Colorado. Same with stocks and mutual funds. In fact, the Oxford Club, where I am the Associate Investment Director, has an asset allocation model consisting of stocks, bonds, precious metals, and real estate.“
By Ryan Timothy Lee
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