Be Wrong, Get Rich

Peter Lynch, former superstar manager of the Fidelity Magellan (FUND: FMAGX  ) fund, has famously said that he'd be happy to be right 60% of the time when picking stocks. I would be, too. Heck, any of us would. But here's the thing: How many of us have the smarts and discipline of Mr. Lynch? Not many.

Thank goodness, then, for dividends. Getting a portion of every year's return guaranteed by cold, hard moola can make the poor investor look competent and the average investor look brilliant. Allow me to explain.

Don't strike out
Those who have seen my portfolio holdings know that I'm a bit of a Rule Breaker. I relish the hunt for the multibagger. Interestingly, though, I don't follow every precept in Rule Breaker investing. For example, I believe the best growth opportunities are actually value buys in disguise, often characterized by huge levels of short interest.

I also find it uncomfortable to swing for the fences with every stock pick in the hope of putting one or more out of the yard. To put it in baseball terms, I'd rather be Don Mattingly than Rob Deer. Mattingly, a former New York Yankees first baseman, was a student of hitting. As such, he crushed the ball frequently, usually to the gaps in the outfield at Yankee Stadium. Those balls that didn't go over the fence often went for doubles or the occasional triple. Deer, on the other hand, hit .179 for the Detroit Tigers in 1991 with 25 home runs and a breathtaking 175 strikeouts.

It's the either/or prospect -- either you win big or you lose big -- that sometimes scares me in high-growth investing. Which is also what makes dividend growth investing so appealing. You could be wrong -- and I mean really wrong -- and still do well.

One base at a time
Consider my old stomping grounds: Silicon Valley. The home of long-term winners such as Apple (Nasdaq: AAPL  ) and Cisco (Nasdaq: CSCO  ) has also seen extraordinary amounts of shareholder value destroyed. Such losers as former network operating systems king Novell (Nasdaq: NOVL  ) , application software provider Borland (Nasdaq: BORL  ) , and database contender Sybase (NYSE: SY  ) come to mind.

You see, all of them, at some point, enjoyed big advantages in their respective markets. No longer. And the 10-year performances of their stocks prove it. Have a look:

Company

Oct. 7, 2005 Closing Value

Oct. 6, 1995 Closing Value

% Loss

Investment Value*

Borland

$5.74

$14.87

61%

$3,860.12

Novell

$7.38

$17.38

58%

$4,246.26

Sybase

$23.00

$33.88

32%

$6,788.67

* Data provided by Yahoo! Finance; assumes $10,000 original investment

Yuck. Investing in these dogs in 1995 would have cut a $30,000 portfolio in half if held through last Friday.

200 base hits or 50 home runs?
Of course, this could have been avoided by mixing in just one proven company with a healthy dividend. Take consumer staples king Procter & Gamble (NYSE: PG  ) , for example. Over the past 10 years that stock has delivered better than a three-bagger with dividends reinvested. Look what happens when we add it to our mix of losers:

Company

Oct. 7, 2005 Closing Value

Oct. 6, 1995 Closing Value

% Gain/Loss

Investment Value*

Borland

$5.74

$14.87

- 61%

$3,860.12

Novell

$7.38

$17.38

- 58%

$4,246.26

Sybase

$23.00

$33.88

- 32%

$6,788.67

P&G

$56.04

$16.67

+ 236%

$33,617.28

Total value

$48,512.33

* Data provided by Yahoo! Finance; assumes $10,000 original investment

Got that? Instead of a more than 50% loss, you'd be sitting on a 21% gain.

Sliding in safely
The lesson here ought to be clear, but I'll say it anyway: 200 base hits and 50 home runs both equal 200 total bases. And there's no guarantee you'd score more runs with the longball than with the smallball. Indeed, a continual stream of hits will score runners over and over and over again. Reinvested dividends act the same way, moving a portfolio closer and closer to its target. Your home plate, if you will.

If that approach sounds appealing to you, then allow me to introduce you to Mathew Emmert, chief advisor for Motley Fool Income Investor. His strategy of investing in companies with ample cash flow, proven growth, and a commitment to raising their dividends over time has delivered market-beating returns for subscribers. Indeed, as of this writing, the Income Investor portfolio is beating the S&P 500 by more than five percentage points. (You can get in on the action by taking a risk-free trial.)

The Foolish bottom line
No one ever expects to be wrong when making stock picks. But we're all going to be wrong at some point. The best strategy involves admitting that right up front, and then building in a cushion to soften the inevitable blow. For that, nothing has ever beaten the cold, hard comfort of cash delivered by solid dividend-paying stocks. And it's unlikely anything ever will.

Go on, take the money and run. Take a 30-day risk-free trial to Motley Fool Income Investor today and you'll get access to all of the picks and research that have helped chief analyst Mathew Emmert beat the market by more than 5% as of this writing. And there's never, ever an obligation to buy. (Though if you do, the service is backed by our money-back guarantee, no questions asked.)

Fool contributorTim Beyersis still trying to find a way to get paid to drink beer. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking his Foolprofile. The Motley Fool has an ironcladdisclosure policy.


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 497581, ~/Articles/ArticleHandler.aspx, 12/22/2014 2:57:35 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement