Drip investing is Foolish in that it can be begun with very little money, and wealth can be built through steady investments of menial sums, but it's also Foolish because it makes it difficult to sell a stock once you've begun to invest in it. It isn't physically difficult, mind you, but you do pay some fees and there is extra paper-work involved.
Either way, the Fool's "Dripfolio" calls for buying companies that it hopes to hold over the next few decades -- and buy more of -- NOT sell. We're buying stocks that we're not expecting to sell. We don't want to sell, we want to buy, keep buying, and build.
Now, you don't find companies that can be bought and held for decades on every limb of the tree. You have to do some foraging to find the really strong branches. We'll explain our process for finding and deciding upon companies in-depth in the portfolio recaps, but let's summarize what we're looking for here.
As said, we don't want to have to sell what we buy. Not ever, if that's possible. So we're looking to buy companies that we're realistically hoping to hold for the next decades to come. Within that rock-solid stability that we're looking for, we also want to find growh -- of course!
We're looking at companies that have shown and will likely continue to show consistent sales and earnings growth. But importantly, we're also looking at companies with strong managements that are improving the business model with each passing year. A company like Coca-Cola has been steadily improving its margins and return on equity, for example, for the past decade. Even during the quarters that sales don't grow, earnings do, because management is running a leaner, meaner ship.
We'll be looking for companies that are improving returns on equity (ROE), returns on invested capital (ROIC), returns on assets (ROA), margins, cash flow, inventory turns, days sales outstanding -- you name it! Everything that we talk about in the Fool's School on Valuing Stocks. All the while, we're searcing for stocks that the market will grant not only share price appreciation, but share multipleappreciation as well.
If a company is consistently improving all the numbers representing its operations, investors are often willing to grant it an expanding price-to-earnings multiple, for one. Or a multiple above its growth rate -- like COCA-COLA (NYSE: KO). People pay a premium for a well-run world leader -- and the better that a company performs, the more possibility for expanding multiples.
Our strategy is to buy world-leading companies that we don't plan to sell, and to invest in companies that are so well run or improving steadily enough that the stock market grants them expanding multiples, or values them more highly than other stocks, but reasonably so. The businesses that we buy will be mature but still steadily growing -- both through sales volume and through better management.
Dividend yield is also a consideration, surely -- as any dividends paid are put directly back into the stock. But we're more concerned with the business that we're buying and the long-term share appreciation possibilities than, say, the 2% to 4% dividend.
