The day my daughter was born changed my approach to investing forever.
Watching her sleep in the crib that first night, I realized investing was no longer just about my retirement...my vacation home...my dreams. It was now about creating security for the loved ones around me. It was about building a dynasty of wealth for the next generation.
Of course, building a fortune that can last a century takes a different type of thinking. Multi-generational investing requires identifying companies with a sustainable competitive advantage that will outlast most of us alive today. Unfortunately, few businesses are built to withstand the test of time.
But this company is. In fact, the firm has dominated its industry for over a century and has paid out a dividend to shareholders every year since 1882. I'm talking, of course, about ExxonMobil (XOM 2.22%).
Build a family dynasty you can be proud of
ExxonMobil is one of those eternity stocks: a giant, cash-rich company with a wide competitive moat.
Every year the company generates billions of dollars in cash flow, allowing it to reward shareholders with big share buybacks and rich dividends. And because Exxon has a proven ability to hold up in good times and bad, it means we can count on this stock to generate wealth for generations.
With a $400 billion market capitalization, the company is far and away the most dominant player the industry. That gives the firm more financial resources than any other organization in the space.
Given this advantage, is there any question as to how Exxon has been able to pay an uninterpreted dividend for 131 years? Think of everything that has happened since that time: two world wars...the Great Depression...asset bubbles...financial crises.
Yet for this company it hardly mattered. Exxon has continued to send out dividend checks to shareholders without skipping a beat.
Nothing is guaranteed. But history shows that the types of firms needed for building multi-generational wealth are companies that power over their respective industries and deliver a product that will always be needed.
Earn an 18% yield from this energy giant
Multi-generational investing requires seeing the opportunity in small things. It's about building wealth over decades. But most investors want the fast return -- today.
Take Eagle Rock Energy (NASDAQ: EROC) for example. This summer, the master limited partnership boasted a yield north of 8% luring in many income hungry investors. But the partnership could only fund this oversized distribution through debt, an unsustainable formula that required the firm to cut its payout 31% in October. This is hardly a formula for long-term wealth building.
What's small about Exxon? Its dividend yield for one. At a measly 2.6%, many investors skip over it entirely.
But this would be a mistake. Exxon is a great example of what decades of compound growth can do for a stock's yield. Over the past decade, the company has increased its dividend at almost a 10% annual rate. If you had bought and held the stock over that time, the yield on your original investment would be 7% today.
Take a look at the chart below to see what I'm talking about. This example assumes you purchased 100 Exxon shares around $35 near the beginning for 2003.
| Year | Dividend per Share | Total Dividends | Yield on Cost |
|---|---|---|---|
| 2013 | $2.46 | $246 | 7.03% |
| 2012 | $2.18 | $218 | 6.23% |
| 2011 | $1.85 | $185 | 5.29% |
| 2010 | $1.74 | $174 | 4.97% |
| 2009 | $1.66 | $166 | 4.74% |
| 2008 | $1.55 | $155 | 4.43% |
| 2007 | $1.37 | $137 | 3.91% |
| 2006 | $1.28 | $128 | 3.66% |
| 2005 | $1.14 | $114 | 3.26% |
| 2004 | $1.06 | $106 | 3.03% |
| 2003 | $0.98 | $98 | 2.80% |
Source: Yahoo! Finance
Let's continue this thought experiment for another decade. Assuming Exxon can continue to grow its dividend at a 10% clip, by 2023 our yield on cost would be over 18%. Good things take time.
Foolish bottom line
Building a family dynasty that you can be proud of requires a different type of thinking. Only companies that can withstand the test of time will do. And Exxon may just have the size and scale to pull it off.
