The new year is the traditional time to make resolutions on things we'd like to do better. And unless you're one of Warren Buffett's superinvestors and have already mastered the stock market, you may find that you have room for a resolution or two for improving your investment strategy.
Unfortunately, resolutions are notoriously hard to keep. If they weren't, we'd all be rich, thin, non-smoking marathon racers.
But what if there were a way to get paid to keep your resolutions? Wouldn't that help motivate you, at least a little bit?
Fortunately, there often are ways to get paid from your investments, regardless of whether you're resolving to improve your ability to buy, sell, hold, or sock away more. This is the first article in a short series on how to do just that, and it focuses on how to get paid to hold on to good companies.
The power of time and compounding
Buffett has famously said that his favorite holding period is forever. In order to meet Buffett's criteria of a "forever" stock, though, the company needs to have both an outstanding business and outstanding management. That's a tough hurdle to clear, but the rewards of success can be tremendous. Just ask the folks at Lake Forest College, who inherited $7 million that grew from Grace Groner's initial $180 investment in Abbott Labs through the power of time and compounding.
Holding even a good company's stock forever is challenging, especially once you stop working and start trying to live off your investments. After all, if you need cash, there are really only two ways to get it from your portfolio: sell a stock or collect a dividend. That dividend can be mighty powerful, as it's not only how you can collect cash from your investment without selling, but it's also often a hallmark of an exceptionally strong company.
Indeed, if you take a look at the companies in the Berkshire Hathaway portfolio that Buffett manages, you'll see dividend titans galore. Berkshire owns significant stakes in companies that not only pay good dividends, but also consistently raise them, too.
Peeling back Berkshire's covers
For instance, Buffett's Berkshire owns 200 million shares of Coca-Cola (NYSE: KO ) , a company that has paid higher dividends in each of the past 49 consecutive years. That's a tremendous track record, and it's fueled in large part by Coca-Cola owning the world's best global brand. It takes a powerful business to consistently deliver profitable growth while turning over ever-increasing sums of money to shareholders. Yet Coca-Cola has managed to pull it off, which helps explain why Buffett continues to own it.
Berkshire is also a part owner of ExxonMobil (NYSE: XOM ) , a business with a 29-year streak of increasing dividends. While the past few years have seen strong oil prices, the past 29 years also included the late 1990s, a time when oil prices had fallen into the low teens. Keeping that streak alive during a time like that shows that ExxonMobil does more than just profitably ride the commodity's coattails. Indeed, it showcases the company's focus on operating effectiveness.
Also in Buffett's Berkshire portfolio is Wal-Mart (NYSE: WMT ) , a company that managed to grow to be the world's biggest retailer while still maintaining a 37-year tradition of paying higher dividends. How can a company with a slogan of "Save More. Live Better." simultaneously reward its customers with low prices and its shareholders with higher dividends? The answer is straightforward: It's a very well managed business that focuses on controlling its own costs to be able to pass savings on to consumers.
Strong-enough companies led by solid-enough leadership teams with good-enough dividend histories provide enough impetus to even pull the once-resistant Buffett into technology stocks. Recent purchases of IBM (NYSE: IBM ) and Intel (Nasdaq: INTC ) show what it takes to turn Buffett into a technology investor. IBM's 16-year and Intel's 8-year history of rising dividends likely played a part in those decisions, as that dividend track record would not be possible without solid, long-term execution.
Find your own forever stocks
If your investing resolutions include a desire to hold on to good companies, there's nothing like getting paid a good, solid, and increasing dividend to do that. Whether you choose to follow in Buffett's footsteps or to find other companies you'd like to own forever, a rising dividend is a great thing to see. The routinely increasing payments not only help you hold as the market moves, but the incredible strength it takes to keep those raises going helps you truly understand the company's staying power.
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