Most of the stocks I own have long histories of annual dividend increases and were bought when their yields were near historical highs. This was the case with Nucor (NUE -0.26%) on Sept. 29, 2015, when I bought the stock. Here's a look at how I've done (very well), with a little drill-down into some tough years in between then and now.
A simple approach
I believe that a company that has increased its dividend annually for many years is likely to be well-run. After all, you can't keep hiking the dividend if the business isn't doing well. At this point, North American steel giant Nucor is a Dividend King, with 50 years of annual increases behind it. This is pretty much the pinnacle of success in the dividend world. When I bought it the streak wasn't that long, obviously, but it was still very impressive.
Image source: Getty Images.
On top of that, the yield was near a historical high point at roughly 4% or so. That hinted that the shares were cheap, triggering my deep dive into the company.
That examination, meanwhile, proved to me that Nucor was in fact a rare gem. It had industry-leading technology (electric arc mini-mills) backing its steel production. It had a diversified portfolio, with an increasing focus on higher-margin steel products. Management was focused on growth, investing in the business even during industry downturns. And it had excellent relations with its employees, thanks to a profit-sharing program. There was no question in my mind that Nucor was a great company.
The problem at the time was that the cyclical steel industry was out of favor. A big part of that was coming from the pressure of cheap steel imports. Given the long-term success of Nucor, I bought the stock anyway because I believed it would be able to muddle through the headwinds and keep paying me a generous dividend. If I had invested $10,000 (my investment was actually larger than that) on Sept. 29, 2015, it would be worth a very pleasing $46,500 or so today.
And, all along the way, I benefited from annual dividend increases. But I reinvest dividends, so that $10,000 chart above doesn't actually do full justice to the results. For that, you need to look at total return, which assumes dividend reinvestment. With dividends reinvested that $10,000 would have turned into around $56,700.
Giving myself a pat on the back
I would be lying if I said I wasn't happy with the outcome here. Not all of my investments work out so well. Nucor is by far one of my biggest winners. But the real story here isn't really the difference between the starting point and the ending point.
Take a look at the chart above, which ends on March 15, 2020, near the bottom of the coronavirus pandemic bear market. Between my initial investment and this date, I was sitting on a capital loss, even with dividends reinvested. But there's more to the story -- look at the roller-coaster ride!
At one point that $10,000 would have been worth $20,000. From the initial investment to that high-water mark, the return was 100%, with the drawdown a very painful 50%. Despite those massive swings I never flinched because I knew Nucor well and believed (and still believe) it is the best-run steel mill in North America, and, perhaps, the world. Moreover, the company kept increasing the dividend, albeit in very small increments most years. Essentially, the key reasons for buying the stock remained in place. There was no fundamental reason to sell, only emotional ones. I try not to trade emotionally.
If I weren't so busy buying other stocks that had gone on sale during the pandemic, I probably would have added to Nucor. In hindsight that was an opportunity I missed. In fact, it wasn't until after the pandemic bear market that Nucor's shares really started to take off. And now, looking to the future, there are massive opportunities presented by increased investment in infrastructure, from clean power to domestically located chip plants, to keep the good news flowing.
The emotional strength to stick it out
While I'm happy I bought Nucor because of the paper profits I have, what I'm actually proud of is that I stuck with my investment approach even during a period when it was difficult to do so. Focusing on a good investment process materially increases your chance of winning over the long term. The key is to find the process that works best for you. Buying great companies (noted by regular annual dividend increases) when they have historically high yields is the one I've found to suit my fancy. My success with Nucor proves it can be a winner.
