Chris’ note: If you’re like most folks, you spend a lot of time checking the prices of the shares you own. Sometimes it can even seem like these are the only numbers that matter.
But friend of Legacy Research Brad Thomas says that couldn’t be more wrong.
Brad is one of America’s most widely read income investing experts. After he lost it all in 2008 as a real estate developer, he built back his millions by setting up multiple streams of stock market income.
Ever since, he’s been sharing how he did it with a growing group of subscribers. And he’s made it his mission to help you and your fellow Legacy readers build your wealth the same tried-and-tested way.
As you’ll hear from Brad today, if you’re focused on day-to-day swings in your portfolio, your chances of growing your wealth as a stock market investor are slim to nonexistent.
Instead, you should look for a “step pattern” in another far more important number.
Every day, investors all over the world log into their brokerage accounts to check the prices of the shares they own.
I get it…
Green numbers make you feel good. When the market is rallying, like it has been most of this year, you’re on top of the world.
But as soon as a bear market arrives… and your portfolio bleeds red… it can drive you crazy.
But what if I told you those red and green numbers matter a lot less than you think?
And what if I told you there’s a number that matters a lot more than what price your shares are trading at on any given day?
As long as this number is going up, you can buy stocks, hold them for the long term, and sleep well at night no matter what the economy is doing.
One Bad Year Doesn’t Matter
Take one of my favorite stocks, Lowe’s (LOW).
It’s a chain of home improvement stores. There’s nothing flashy about its lumber, plumbing, or garden offerings…
But the company operates more than 1,700 stores. It’s one of the 10 largest box-retail stores in the country, along with Walmart, Costco, and Target.
And its size and scale, combined with a strong market share, has produced outstanding results over the decades.
Over the last 20 years, it’s grown its bottom line – measured by earnings per share or EPS – 17-fold.
Even more impressive, Lowe’s has produced double-digit EPS growth during each of the last 10 years.
And over the last decade, Lowe’s shares are up by 367%. That compares with a gain of 163% for the blue-chip S&P 500 index.
But investors are growing jittery over the company’s prospect this year.
Lowe’s is expecting to see sales fall by roughly 9% in 2023 due to higher interest rates hurting the housing/construction markets.
That sounds bad. But folks who get hung up on one bad year will miss the bigger picture.
Instead, what you should be looking at is the company’s impressive streak of dividend growth.
Magic of Dividends
The best way we know to reliably make money from the stock market is not to try to time the highs and lows of its stock price.
Instead, what you want to focus on owning companies with a long track record of raising their dividend payments.
A dividend is a cash payment a company pays to shareholders. It’s a way for it to distribute a portion of their earnings back to investors.
Every quarter, Lowe’s pays you $1.10 for every share you own. That’s $4.40 a share every year.
That’s works out to a 2% dividend yield. This shows how much a company pays out in dividends each year relative to its current share price.
A 2% yield may seem low now. But given Lowe’s track record of raising its dividend, it won’t stay that way for long.
The company has raised its annual dividend now for 61 years in a row.
And over the past 20 years, it’s grown its annual dividend, on average, by 25%.
Lowe’s stock price goes up and down daily. But as you can see below, its dividend trends in only one direction – up.
And looking ahead, Lowe’s should continue to provide investors with double-digit annual dividend growth.
That’s why I don’t worry about Lowe’s relatively low 2% yield today… or its volatile share price.
Based on its trajectory, our “yield on cost” will head higher.
It’s the yield you earn on your shares relative to your original purchase price.
If Lowe’s grows its dividend at a 10% annual clip, in 15 years someone buying shares today will have a yield on cost of about 8%.
And if it can maintain a 20% annual growth, that would mean a 32% yield on cost in 15 years.
At that point, Lowe’s pays you back almost one-third of your original investment, every year, in the form of dividend payments.
That’s what makes this such a great investment.
Lowe’s is a proven company that’s been around for decades. And although I don’t expect its share price to go down 32% in the next few years, its growing dividend gives you a cushion to weather even a drawdown that steep.
Sleep Well at Night With These Stocks
As my regular readers will know, I like to buy what I call sleep-well-at-night – or SWAN – stocks.
These are stocks in companies with proven track records of growing earnings and paying out rising income streams to shareholders… no matter what the economy is doing.
And it’s why I’d rather pay attention to the perfect stair-step pattern on Lowe’s dividend growth chart than its volatile share price movement any day.
Lowe’s is one of many companies I hold in the model portfolio in my Intelligent Income Investor advisory that offers a 10-year-plus dividend growth streak.
Since I launched this advisory, our dividend income has grown every year. And due to our focus on dividend safety and growth, I expect that to continue for years to come.
To get the names and ticker symbols of our favorite dividend growth stocks to own today and stop worrying about seeing green one day and red the next… go ahead on over here.
Happy SWAN investing,
Brad Thomas
Editor, Intelligent Income Daily