What if I gave you $10,000 to invest for 30 years, with your only aim being to make me $1 million? What would you do?
Surely you'd buy stocks. But what if I said that you could buy just one stock? What would it be?
What?!?
Call it my variation on Warren Buffett's famous exercise in focus, in which he suggests that investors act as though they'll be given just 20 chances to buy during their lifetimes.
There's power in investing this way. First, it forces you to weigh risk carefully. Who wants to bet his portfolio on a fly-by-nighter like Sigmatel
Second, it forces you to think about history. What are the characteristics of the best stocks of the past 50 years? Here are a few:
|
Company |
CAGR |
|---|---|
|
Tootsie Roll |
16.11% |
|
Fortune Brands |
14.55% |
|
Deere |
12.76% |
|
Textron |
12.59% |
|
Dominion Resources |
12.44% |
Examine these businesses and you'll find:
- They dominated necessary, if boring, markets.
- They produced plenty of free cash flow.
- They paid consistent, and growing, dividends.
History is anything but perfect when it comes to predicting stock market returns. But it's also all we have short of tarot cards, palm reading, and astrology. Doesn't it stand to reason that, if you really had to choose just one stock, you'd want a dividend payer?
Fine, here's the math
Consider the numbers. A stock would have to return almost 17% annually in order to transform $10,000 into $1 million within three decades. Or, in simpler terms: You'd have to buy and reinvest in the next Altria -- a stock that has combined heady capital appreciation with substantial dividend growth to produce 46 years of better than 19% annual returns.
Don't underestimate dividend growth. Buffett originally spent $11 million to acquire a stake in Washington Post, which, like Altria, has a history of hiking its dividend payments. Today, Berkshire Hathaway collects roughly $14.2 million annually in dividends from the newspaper.
Then there's this guy, who enjoys a 3,017% annual return thanks to dividends. Peter Lynch would be jealous. But what, really, did he do? Buy Pfizer at a low price and hold for 47 years.
That's the millionaire-making power of dividends at work -- with just one stock.
Intrigued? You should be. My Foolish colleagues James Early and Andy Cross are beating the market with a whole portfolio of high-yielding dividend payers. Accept a 30-day free pass to their Motley Fool Income Investor service and you'll see everything they're recommending right now. There's no obligation to subscribe.
Fool contributor Tim Beyers owned shares of Berkshire Hathaway at the time of publication. The Motley Fool also owns shares of Berkshire Hathaway. Find Tim's portfolio here and his latest blog commentary here. Berkshire Hathaway and Pfizer are Inside Value recommendations. Berkshire Hathaway is also a Stock Advisor selection. The Motley Fool has a high-yield disclosure policy.
