It is not surprising that most investors, even casual ones, pay much too much attention to day-to-day movements in stock prices. Entire TV channels are designed to make us do so. We can (and do) check our portfolios in real time on the internet. But what if all of this attention is not only wasted effort, but worse, distracts investors from what they should really be watching?
We are in a period of low growth in the world’s developed economies. No one knows how long this will last, but it could be a while. Stock prices mostly depend on rising profits, and rising profits mostly depend on economic growth. If stock prices are not going to rise very rapidly, counting on capital gains alone to drive investment returns will not be a winning strategy. Yet almost everything we see, hear and read is focused on just that: price movements, and short-term price movements at that.
Here is a different approach. Find very high quality stocks that have a history of raising dividends. Buy a diversified group of them, monitor them religiously, and wait. It is not very exciting. It is hard to make good TV out of this strategy. The only thing in its favour is that it works. Take for example the Royal Bank of Canada. Imagine that you bought the stock on Dec. 31, 2000 for $25.40, and held it for the next fifteen years, through two major stock market crashes. In the first year you would have received a dividend of $.57, a not very impressive yield of 2.2% on your investment. But by 2015, that dividend grew to $3.08 per share, and the stock now yields over 12% per year on your initial investment.
Even if Royal Bank stock had not increased a penny in price (in fact, it tripled over this period) by 2015 you would have received back more in dividends than you paid for the initial purchase. Today you would be getting a tax advantaged yield few investments can touch. The lesson is simple: focus on the long term; buy quality dividend-growing stocks; watch them very carefully. Repeat.