The more often you make choices as an investor, the more opportunities you have to lose money. Your research and analysis may be wrong. Your valuation may be wrong. The market's random fluctuations may move against you, through no fault of your own. On top of that, each time you trade a stock, you pay commissions, and you might face taxes if you're closing a profitable position.
For these reasons and more, it makes sense to minimize the number of times you make buy or sell decisions. Take that line of thinking to its logical conclusion, and an ideal holding period would be forever.
It's a great concept, but in reality, very few stocks are truly worth holding for the rest of your life.
Still, what would it take?
First and foremost, a "forever" company would have to pay a dividend.
As successful as Warren Buffett has been at creating wealth for Berkshire Hathaway
Of course, paying a dividend isn't enough. A truly solid business will be able to sustain -- and grow -- those payments over time. A one-time dividend is nice, but a sustainable, growing payment reflects the strength of the operations that enabled the payments in the first place.
General Electric, for instance, has been paying dividends for more than a century. Even better, it has raised those payments every year for more than 30 years. Like General Electric, the companies listed below pay decent dividends, have increased those payments for at least a decade, and aim to keep doing more of the same:
|
Company |
Current |
Payout |
Year-Over-Year |
|---|---|---|---|
|
McGraw-Hill |
2.1% |
28% |
7.3% |
|
Cato |
3.9% |
44% |
10.0% |
|
Eli Lilly |
3.7% |
63% |
10.6% |
|
Wrigley |
2.2% |
50% |
13.3% |
|
Emerson Electric |
2.3% |
38% |
14.1% |
|
Linear Technology |
2.9% |
48% |
16.7% |
Why it matters
Dividends give you tremendous financial flexibility throughout your investing life. As long as you have an income from working, you can reinvest those payments to speed the process of compounding your wealth. Once you've left the workforce, the cash thrown off by dividends spends just as well as any money you earned from your salary. Even better, a rising dividend payment can help you fight inflation by providing you more cash every single year.
Additionally, dividends have the distinct benefit of being exceptionally difficult for companies to fake. After all, it's difficult to persuade lenders to loan money to a company if it's only going to turn around and hand that cash over to its shareholders. As a result, to sustainably make and increase those payments, a business needs to generate serious cash -- on a regular and repeatable basis.
Perhaps most importantly, a company's dividend payment comes from its operational success -- not from the manic gyrations in its stock price. In volatile market periods, those payments give you a way to make money even when your stocks move down.
What's not to love?
Faster compounding. Better financial flexibility. Cash in hand without selling. A buffer against inflation. An honesty check on a company's accounting. Money in a down market. With all they give to you, it's obvious why dividend payments are such a key part of anyone's search for a company to hold forever.
If you're ready to find your forever stocks, I encourage you to join us today at Motley Fool Income Investor. Our picks sport an average dividend yield well above the S&P 500's, and they're beating the market since we began. You can see all our picks and research for the next 30 days, free of charge. Once you've discovered the true power behind those payments, you'll be thrilled you did.
This article was originally published Aug. 15, 2007. It has been updated.
At the time of this publication, Fool contributor Chuck Saletta did not own shares of any company mentioned. The Motley Fool holds stock in Berkshire Hathaway. Berkshire Hathaway and McGraw-Hill are Motley Fool Inside Value picks. Berkshire Hathaway is also a Motley Fool Stock Advisor recommendation. Wrigley and Eli Lilly have been chosen by Income Investor. The Fool has a disclosure policy.
