I Only Invest in One Type of Stock
Because, like most people, I have no idea what I’m doing
I can be an incredibly undisciplined person.
Give me an inch. I will take a mile.
This is why I stopped drinking, smoking weed, and eating edibles.
It’s also why I stopped working in bars. If I can stay after work, drinking until six in the morning, I will stay after work, drinking until six in the morning. I’ll leave a mess for the morning bartender and not think twice about it.
If you discover you can’t do certain things in moderation, stop doing certain things.
This is why I no longer trade stocks. In fact, I concluded the only way I can successfully invest in stocks is if I buy one very specific type of stock.
Being undisciplined carries consequences.
When I trade or chase hot stocks, I stress myself out, lose money, or end up making less than I should have.
Something always goes wrong.
If I pick a winner, the gains I see do not compensate for the emotional state I put myself in by trading and following the crowd into the market’s high flyers.
Worse yet, I have been known to take gains and put them into another stock — like a penny stock (!) — and lose money. Sometimes all of it.
I’m not the only one who feels this way or does these types of things. Most people just don’t write about the experience on the internet.
I have no system to determine which stocks to buy and, more importantly, when to buy, when to hold, and when to sell.
I fly blind.
You can’t fly blind and expect to see consistent success in the stock market.
As I recently wrote on Seeking Alpha:
For me, putting together a portfolio of stocks I simply think will go up doesn’t work. There are no parameters. Of course, I could create parameters… But I’m not good at that either. There are way too many moving parts.
Many investors are great at some form of this. Some pick stocks without a system and do well. Others do so within a system — based on one or more sets of metrics — and do well. Millions of others probably fall somewhere in between.
However, for every person who can successfully manage a portfolio of stocks on the primary basis of them going up — as in, they have to go up, a lot, for the portfolio to be a success — I unscientifically bet I can find one or more people who cannot do this successfully.
This Is What I Do
- I don’t buy a stock unless it pays a dividend. No exceptions.
- I only buy two types of stocks that pay dividends: Dividend aristocrats or companies with a history of raising their dividend and reasonable prospects of one day becoming a dividend aristocrat.
What is a dividend?
A dividend is cash a company returns to shareholders instead of sitting on or reinvesting back in to the business.
Let’s example Starbucks.
It pays an annual dividend of $1.64, distributed to shareholders quarterly. If you own 100 shares of Starbucks’ stock, you’ll receive $164 in dividends throughout the course of a year.
I reinvest every dividend Starbucks pays me back into Starbucks stock. I do it with every single one of my stocks because — they all pay dividends.
But here’s the beauty of it.
Starbucks has increased its dividend ten years in a row.
Last year, Starbucks increased its dividend by nearly 14%. For the last five years, Starbucks has increased its dividend at a 22% clip.
As Starbucks increases its dividend you buy more Starbucks shares by reinvesting the income it pays you each quarter. As you do this, your position grows (as in the number of shares you own), which means your dividend income also increases.
If the $1.64 annual dividend increases by 20%, it becomes $1.97. You can do the math, but $197 buys more shares of a stock than $164. Let those numbers build on themselves for 10 or 20 years and you’re in business.
It’s the most positively vicious cycle in the world of investing.
Starbucks has an excellent business. Even amid a global pandemic, I bet we’ll continue to see dividend increases.
I reckon Starbucks will be a dividend aristocrat in roughly 15 years. A stock becomes a dividend aristocrat once it has raised its dividend for 25 years in a row.
Apple falls in the same category as Starbucks. Not a dividend aristocrat yet, however, based on what we know today, it’s headed in that direction.
The name of the company doesn’t matter.
Here’s all that matters — strong company, even stronger dividend.
What You Can Do
It’s so simple and straightforward.
When a company comes to mind, pull up its stock quote.
Go to the dividend information.
Look at its dividend history.
Research the company. If it’s as strong, stronger, or you believe it could be as strong as Apple or Starbucks (or a current dividend aristocrat) someday, buy a few shares.
Make regular buys of the stock with new money.
Reinvest all dividends.
Be patient. Use time to your advantage. It’s the most powerful factor in investing.
The only thing that might be more powerful is realizing your limitations.
If you know have a discipline problem. If you don’t have a system for picking stocks (and, face it, most investors absolutely do not), strictly adhering to the best dividend payers takes much of the guesswork out of investing.