STEWARDSHIP 60 SEPTEMBER 2025 www.goodnewsfl.org Good News • South Florida Edition “What has been will be again, what has been done will be done again; there is nothing new under the sun,” so it says in the Book of Ecclesiastes. To us, a familiar and fond passage. It also reminds us of the four most expensive words in the English language, attributed to John Templeton, this time is different. We cannot count how many times we have heard those words uttered by those promoting a new investment or investment trend. When we hear it, we have good reason to believe that something bad is about to happen. Consider the dot.com bubble, when profits seemingly no longer mattered. Consider the Great Recession, triggered by a new definition of AAA credit. Examples abound throughout history. There’s the Mississippi Scheme and the South Sea Bubble. Tulip-mania caused Issac Newton to utter, “I can calculate the motion of heavenly bodies, but not the madness of people.” Dividends matter Truth is that the further we can look back and learn from the past, the better we will be able to prepare for and see the future. As we look back at financial history, we can see much that applies to an investor’s future. Another core investment principle, Dividends matter. Just as there are in other investing approaches, there are clear trade-offs when investing in dividend-paying stocks. They generally outperform in choppier, lower-return markets. And they are not as likely to participate fully in the upside in exceptionally strong markets. Dividend-paying stocks tend to be very large companies, typically offer higher and steadier payouts, and are often less volatile in price. For these reasons, our nervous system and the principle of compounding, we tend to favor dividend-paying stocks. We especially favor – at the right price - those deemed “Dividend Aristocrats.” These are companies that have increased their dividend payments for a minimum of 25 consecutive years. There are nearly 70 such companies. Moreover, given an extended timeframe, dividend-paying stocks provide an indirect way to focus on underpriced stocks. That’s because these stocks tend to pay out more of their earnings in the form of dividends. And dividend-paying stock investors often pick up what is often called the “quality effect,” an extra fillip of return provided by companies whose businesses become more profitable over time – because such firms can afford to sustain their dividends. Perhaps, most importantly, as a result of all these factors, in the long-run dividend-paying stocks have historically outperformed the rest of the U.S. market by up to one percentage point annually. If one does the math, it quickly becomes apparent that it’s a meaningful difference, especially when compounded. An example from Warren Buffet Let’s examine a dividend-growing stock investment made by Warren Buffett: In 1987-88, Mr. Buffett began accumulating shares of Coca-Cola. Coke was going through a difficult time as a result of a marketing miscue known as the “New Coke debacle.” The investment totaled approximately $1.3 billion. Mr. Buffett saw an unassailable brand, a far-reaching distribution network, an inexpensive share price, a good balance sheet, and exceptionally strong cash flows. The company is a Dividend Aristocrat and had a dividend yield of near 7% at the time. Remarkably, this Aristocrat has increased its annual dividend payout each year for more than 60 consecutive years. As of 2024, that initial $1.3 billion investment has yielded more than $11 billion in dividends and the stock’s value had risen to near $25 billion. In Mr. Buffett’s 2022 annual shareholder’s letter he wrote, “The cash dividend we received from Coke in 1994 was $75 million. By 2022, the annual dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays.” In 2025, the dividend is expected to top $800 million. (Carefully, reread this paragraph. While difficult to replicate, there is much that can be learned.) The rule of 72 This brings us to the mathematical “rule of 72,” which is a quick calculation of how long an investment will take to double based upon its rate of return when compounded. Take that Coke 7% yield and divide it into 72 and it gives us a rough estimate that it will take a little more than 10 years. Thus, in roughly 10 years, Mr. Buffett had recouped his entire investment in the form of dividends. In addition, there was the stock’s rise in price. Sometime in the future, if all stays on track, the annual dividend should reach the amount of the initial investment. Mr. Buffett once quipped, “Not bad for sugar water.” Great investors know their investments well, and do not undertake one unless they can calculate a high potential for reasonable profit. They also ignore those who know their investment’s less than they do. Importantly, they avoid any investment where there is little to gain and much to lose. Math matters. There is nothing new under the sun. Patrick J. Kelly has spent more than four decades at the most senior levels in the financial services industry. He has held executive leadership positions in banking and securities firms, served numerous profit and nonprofit boards, possesses advanced education in economics, accounting and finance, and has been a featured guest in numerous financial media forums. At present, he endeavors to impart his experience and knowledge to younger generations whenever possible while also offering consultation on securities and banking industry practices for litigation-related expert witness testimony. - Patrick J. Kelly - President, Kelly Advisory Group Nothing New Under the Sun
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