In this episode, I'll share with you the two most important words in investing.
I also cover the following topics in this episode:
- The inspiration for this episode
- Who is Arnold Bernhard?
- Successful investing in two words
- What is Dividend Yield
- JNJ returns over 318%
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode, I'll share with you the two most important words in investing.
I also cover the following topics in this episode:
- The inspiration for this episode
- Who is Arnold Bernhard?
- Successful investing in two words
- What is Dividend Yield
- JNJ returns over 318%
Disclaimer: The views and opinions shared on this channel are for informational and educational purposes only. Simply Investing Incorporated nor the author and guests shall be liable for any loss of profit or any commercial damages, including but not limited to incidental, special, consequential, or other damages. Investors should confirm any data before making stock buy/sell decisions. Our staff and editor may hold at any given time securities mentioned in this video/course/report/presentation/platform. The final decision to buy or sell any stock is yours; please do your own due diligence. Stock buy or sell decisions are based on many factors including your own risk tolerance. When in doubt please consult a professional advisor. No advice on the buying and selling of specific securities is provided. All trademarks, trade names, or logos mentioned or used are the property of their respective owners. For our full legal disclaimer, please visit our website.
In this episode, I'll give you the secret to successful investing in just two words. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we're going to cover the following four topics First, the inspiration for this episode, next, we'll talk about who is Arnold Bernhardt, and then next, I will give you the two words for successful investing. And then the last topic is we will cover dividend yield with a real life example. Let's get started with our first topic. So I want to give a shout out to our friends at Investment Quality Trends, specifically the 2011 December 1st edition on page 10, for inspiration for this episode. Also, a shout out to the Maxims of Wall Street. This is a book written by Mark Skosin, so thank you to both Mark Skosin and Investment Quality Trends for inspiration for today's episode.
Speaker 1:Let's move on to our next topic who is Arnold Bernhardt? So Arnold Bernhardt was born in New York City on December 2nd in 1901. He spent his entire career working in Wall Street and in 1931 he founded Value Line, which was best known for publishing the Value Line Investment Survey. And in 1958 he also published a book called the Evaluation of Common Stocks. Now let's move on to our third topic in today's episode. In two words, what is the key to successful investing? So in his late 80s, mr Bernhardt was asked Mr Bernhardt, you have lived a long, successful career on Wall Street. If you could reduce your approach to investing to one sentence, what would it be? And Mr Bernhardt responded he said the secret to successful investing can be reduced to two simple words no value. He said that everyone on Wall Street knew the prices of stocks and other assets, but few understood what its assets were really worth or what they would be worth in the future. Paraphrasing Oscar Wilde, bernhardt declared brokers, security analysts and investors the whole lot know the price of everything and the value of nothing.
Speaker 1:Now our friends at Investment Quality Trends also write if the sole purpose of investing is to realize a return on investment, there is nothing more immediate and fundamentally representative of value and a return on investment than the receipt of dividends. Of the three fundamental measures of value Priced earnings, priced a book and dividend yield the dividend yield, which exists only if there is a receipt of dividends, is the only measure of fundamental value that is tangible. This is to say that you can't spend or reinvest a PE ratio or a PB ratio. You can only spend or reinvest cash essentially, which is the dividend. Now, investment quality trends continues to write. They say fundamentally, then, the underlying value of a stock lies within its dividend, which determines yield.
Speaker 1:In a world of unanswered questions, what I do know is this Great, high-quality companies with long track records of performance over time increase their dividends and reward shareholders with higher stock prices End quote. So this is really important. This is coming from Kelly Wright, who is the editor of Investment Quality Trends, and what he's talking about here is the importance of dividend yield. So that is our next and final topic in today's episode. So let's talk about dividend yield. I'm going to show you a real-life example as well, and we're going to see why it is so important and how it helps you to understand the value of a stock.
Speaker 1:Now, as you all know, dividends are basically profits that a company shares with you, the shareholder. So if a company is paying a dividend of $1 per share and this is an annual dividend and you own a thousand shares, you will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend. Now you can spend the dividend if you wish or reinvest it. The dividend is deposited directly into your trading account as cash and we're going to see in a couple of minutes that, even if stock prices go up and down, the dividend remains consistent. So what is dividend yield Because that's what Arnold Bernhardt was referring to and that is what Investment Quality Trends was referring to is the dividend yield?
Speaker 1:So it's quite simple. It is the annual dividend divided by the share price. So if you look at the current share price, you are going to be then calculating the current dividend yield. So let's say the dividend is $1. This is an annual dividend per share and the share price today happens to be $20. So 1 over 20, we want to express that as a percentage is 5%. So what does the 5% really tell you? Well, it's a quick way to figure out how much dividends you'll receive.
Speaker 1:So in this example, let's say you have $20,000 to invest in this company. Well, a 5% yield 5% of $20,000 is $1,000. So you will receive $1,000 every year for as long as you own the shares in this company and as long as the company continues to pay you a dividend of $1 per share. Now another way to look at it is, again, we're going to assume in this example You've got twenty thousand dollars to invest in this company. The share price happens to be twenty dollars a share. That means you're going to be able to buy a thousand shares. So if we take a thousand shares, multiply that by the one dollar dividend, we end up with a thousand dollars again. So we end up with the same result at the end of the day. So basically, the dividend yield is the return on your investment While you hold on to your shares, again regardless of the share price. The share price could drop to five dollars a share or three dollars a share, or it could go up to eighty or ninety dollars a share. But if your purchase price was twenty dollars and the company is paying a dividend of one dollar, your dividend yield will remain at five percent.
Speaker 1:Now the dividend yield can also help you determine Value, and that's what we're talking about in today's episode is how do you calculate or figure out value? So this is interesting. Looking at the dividend yield, we can figure out when a stock is priced low, when it's undervalued, and when a stock is priced high, when it's overvalued. So if you're looking at a stock and it's overvalued and it's priced high, well, you want to skip it for now. If the stock is undervalued and it's priced low, then you may want to consider it for purchase. So if you take the current dividend yield and you look at that and you compare to the average Dividend yield and we like to use the 20 year average dividend yield so if the current yield is higher than the stock's 20 year average dividend yield, then the stock is considered to be priced low, which means it's undervalued. Now the reverse is true if the current dividend yield is less than the 20 year average dividend yield, then the stock is considered to be priced high or overvalued. Right, it means historically, the stock is now priced high, it's overvalued, and we don't want to be investing in companies when they're priced high.
Speaker 1:Now for those of you that are interested in more details on how we came up with both of these formulas up on the screen how do we determine when a stock is priced low? How do we know when it's overvalued? I cover all of this in detail. You got to go back and watch episode number one and we cover all that in there. I'm gonna leave you with one last quote and then we're gonna jump into our real-life example. So this quote comes to us from Geraldine Wase, who is the founder of investment quality trends, and she says, I quote a clever accountant Can make earnings appear good or not so good, depending on the season or the objective. There can be no substitute about a cash dividend. It is either paid or it is not. End quote. So this is super important, right, you can use clever accounting to manipulate the earnings, but you cannot do that with the dividend, because it is paid to the shareholders as cash and the cash has to come from somewhere, right? So this is so important. You can't lie about the dividend or the dividend yield.
Speaker 1:Now let's take a look at a real-life example with Johnson and Johnson. As of this recording, the current dividend yield is 2.96%. Now we're interested in let's take a look at the past. We want to go back and look at the last 22 years. So we're gonna go all the way back to 2002. You can see the blue line, or the purple line, is the stock price and, like I said before, stock prices go up and down all the time. The orange line represents the dividend and you can see the dividend has gone up every single year. Now, if you take a look at the stock price, you'll notice, there are dips. There are times when the stock price drops by five dollars a share, ten dollars a share, even more than twenty dollars a share.
Speaker 1:So how can a company like Johnson and Johnson Continue to pay the dividend? How can they continue to increase the dividend when its stock price tanks, in some cases by more than twenty dollars? And the answer is the dividend is not paid from the share price. The dividend is paid from the earnings. So as long as the company is profitable and has a long-term track record of profitability and they continue to earn money, then they can afford to pay the dividend and they can afford to grow the dividend every year. So this chart up on the screen is remarkable. This is the last 22 years and has the dividend ever gone down? No, that's the orange line and it keeps going up.
Speaker 1:As dividend investors, this is important for us because this is part of it makes up our dividend income. We want our dividend income to come in every single year as consistently, every single year consistently, but also to grow every single year. That's what's going to help us to stay ahead of inflation as well. In fact, johnson Johnson has been paying a dividend since 1944 and they have had over 61 years of consecutive dividend increases. This is important, so I'm going to say it again Johnson Johnson has had 61 years of consecutive dividend increases. Think about how many market crashes we've had in the last 61 years, how many market downturns we've had in the last 61 years. But companies like this, and especially in this case, johnson Johnson, has continued to not only pay the dividend but to grow the dividend over time.
Speaker 1:Let's take a look at a real-life example here to see how dividends in the beginning will feel like they're very small and insignificant, but over time they grow quite a bit. If we go back to 2002, at the time the stock price was $52.26, the dividend back then was $0.79 per share, and now it's an annual dividend. So you would have to hold even one share for the whole year to get your $0.79.5. So that doesn't seem like a lot. However, fast forward to today, as of this recording, the share price is at over $161 a share and the annual dividend is at $4.70 a share. Now we're talking about dividend yield, so let's take a look at dividend yield on cost, which is basically the dividend yield based on your purchase price. So had you bought shares in Johnson Johnson back in 2002, your dividend yield back then would have been 1.5%. So again, that doesn't seem like a lot and the dividend doesn't seem like a lot. However, the dividend yield on cost today is 9%. Why? Because the company has increased its dividend every single year. They've done it for over 61 years, but in this example we're just going back to 2002. So since 2002, the dividend has gone up every single year. And remember our formula for dividend yield, which is the dividend divided by the purchase price. So the dividend now is $4.70. We divide it by the purchase price of $52.26. You can see the dividend yield is now 9%. So this investment today is earning 9% annually, regardless of what happens to the stock price.
Speaker 1:So let's take a look $20,000 invested in Johnson Johnson back in 2002. Today would be worth over $83,600. Now that includes all of the dividends you would have received since 2002. So take a look at this Again. Your initial investment was $20,000 back in 2002. Since then, you would have received over $21,800 in dividends. So that covers your initial capital investment. So your risk has now gone down to zero because your initial money has been paid back to you in the form of dividends. Now, if we add that to the share price. That's how we get the total amount, which is over $83,600, which represents a return of over 318%, which is a great return.
Speaker 1:So dividends are key. It takes time. It takes years and years and years to grow the dividend and reinvest the dividend over time and to collect the growing dividend. But the dividend yield also helps us to determine value when is the stock priced low and when is the stock priced high? So that's the key here. So the question on most people's mind as well should I just go out and buy any dividend stock today? And the answer is no. There's a couple of other things that we need to check and I'm going to go through those with you right now.
Speaker 1:So our approach to investing is to invest in high quality, dividend paying stocks when they're priced low. So the key here is quality dividend stocks when they're priced low. So not just any dividend stock. It has to be a quality stock and it can't be just any quality dividend stock. It has to be priced low. So how do you know when you're looking at a stock anywhere in the world? When you're looking at a stock, how do you know that it's a quality stock? How do you know that it's priced low.
Speaker 1:So for that I've created what I call the 12 rules of simply investing. You can see them up on the screen right now. This is basically your checklist. If a company fails even one rule, skip it, move on to something else. A company has to pass all of these 12 rules before you invest in it. So rule number one do you understand how the company is making money? If not, skip it, move on to something else.
Speaker 1:Rule number two 20 years from now, will people still need its products? Rule number three does the company have a low cost competitive advantage? Rule number four is it recession proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine we want to avoid any companies with recent dividend cuts. Rule number 10, does it buy back its own shares? And rule number 11, is the stock priced low? So we covered a few things in rule number 11 in today's episode. So we compare the current yield to the 20-year average yield. We also do look at the PbRatio and the PbRatio. If a company meets all of those three conditions, then it passes. Rule number 11 and we know that the stock is priced low. And rule number 12, keep your emotions out of investing.
Speaker 1:So, for those of you that are interested, I have an online self-paced simply investing course. We cover all of these rules in detail. The course itself is made up of videos, so there's 10 modules. Module 1, we cover the investing basics. Module 2, we cover the 12 rules in detail. Module 3, we apply the 12 rules to real-life examples. Module 4, we show you how to use the simply investing platform.
Speaker 1:Module 5, placing your first stock order. Module 6, building and tracking your portfolio. Module 7, knowing when to sell, which is just as important as to knowing when to buy. Module 8, how to reduce your fees and risk, especially if you have mutual funds, index funds, etfs. Module 9, your action plan to get started right away.
Speaker 1:And module 10, I answer your most frequently asked questions, and we also have a simply investing platform, which is an online application. It applies these rules to over 6,000 companies in the US and in Canada every single day, so you can immediately see which companies pass which of the rules and which companies fail which of the rules. So it really allows to filter out just the high quality, dividend paying stocks that are undervalued today. So if you're interested in either the course or the platform, you may want to write down the coupon code SAVE10SAVE10. It's going to save you 10% off the course or the platform itself. If you enjoyed today's episode, be sure to hit the subscribe button. We have a new episode out every week. Hit the like button as well, and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.