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For most investors, if their portfolio went up by X amount in Y years, they'd be satisfied. Yet simultaneously, those same investors secretly hope they bought the next big thing, waiting for the stock's price to grow 10x.
In truth, 10x-ing a stock price is challenging. It requires resources, unique ideas, and a willingness to go above and beyond fellow market participants. To the average investor, expecting every investment to go up tenfold might be wishful thinking. But what about growing your portfolio income 10x? Now that is much more attainable...
In this month's episode, Greg examines 3M, a company that has been in our portfolio for over a decade. Although the company's stock has recently seen a decline, he makes the case that it is much easier to 10x a stock's income than it is to 10x a stock's price — all it takes is a mindset. Later, he explores if there is any value in market predictions and forecasts.
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Ethan Anderson 0:00
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This is Greg Denewiler, and you're listening to another episode of The Dividend Mailbox, a podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks and make each year's check larger than the last one.
Welcome to another edition of The Dividend Mailbox, episode. 15. Today we're going to talk about 3M. It's been in our portfolio for a long time, and we've continued to buy it over the last decade. More recently, the stock hasn't been performing too well, but it's going to be a great illustration of dividend growth, which will lead us into 10xing your income and the concept of what I'm going to call the future dividend self. Finally, we'll look at predictions and forecasts. Are they really that important? I'm not even gonna tell you right now, I'll just let you listen to see what our opinion is.
So let's begin with 3M, another great dividend growth story, and originally, we bought the stock back in 2005- in October of 2005. I paid $76 for it, and we have accumulated over time, added more to our portfolios here in the last year or so. So one question you might ask is okay, why why 3M? When I originally looked at it the stock was the dividend growth stock. It's what they call a dividend aristocrat. They've grown the dividend for more than 25 years, and it's a company that's been around forever. They have a wide range of products from adhesives to advanced materials, compounds, films, coatings, office supplies, over 60,000 products, and they have over 100,000 patents. The materials that they manufacture or products that they manufacture, they really touch virtually everything. They've been a leading innovator. They usually come in in a top 10 list as far as companies from an innovation standpoint, and they've been there for decades. So you know, it's just a great R&D company. Their brands, they're high quality, they're perceived as high quality. They typically charge a 20 to 30% premium above their competitors, but people are more than willing to pay it because it's known as a very high quality company.
Well, right now the stock is $125 a share, and that is up from where we bought it originally, but the stock has actually had a peak in 2018 of $260. So it has come down quite a bit from that level, and even just recently, the stock was at $200 last year. The reason is pretty simple. The company right now is facing some real uncertainty with some litigation that's outstanding, which we'll touch on in a minute. So let's look at the company's dividend. 3M has grown their dividend in the last 20 years from $1.20 to almost $6, which is a little over 8% a year. In the last 10 years the dividend has grown by a little over 10% a year, and the last five years, it's grown by 6% a year. Just a great dividend growth story, which is what we want to see. If you look at the payout ratio, the stock roughly pays about 50% of its profits out over time- a little above a little blelow the trendline. Based on the current earnings estimates of $10, right now, the dividend payout is a little bit above 50%. So it's still an attractive company that can grow its dividend over time, which is one of the reasons why we still hold it. If you look at R&D expenses, this is one place where the company really shines. They usually spend about 5 to 6% consistently of their revenue towards R&D. Because of that they earn about 20% on their invested capital, which is higher than virtually all their competitors, and that has held steady for the last few decades. The one point where there's a little bit of a yellow flag, the debt to equity ratio was about 50% 20 years ago, got as low as a little over 30%. Right now is slightly over one-times, meaning for every dollar of equity they basically have slightly more than $1 of debt, but still not something that I think is is prohibitive. Over the last 20 years they have been buying stock back. They bought 37% of it back last 10 years they bought 18% of it back. So there you're increasing shareholder value just because there's fewer shares out there to divide the profits.
So what you have is a disciplined company. The company is is extremely profitable. It is a leader in its space for innovation. They've really grown shareholder value, built shareholder wealth over time, and I would call it a GDP plus company. If the economy grows, 3M is going to grow and it should grow a little bit more. So that's a summary of why we like 3M and why we've been investing in it over the years. More recently, in the last year we purchased more of the stock around the $160 range. But now we've got stock down to $125. What's going on with 3M? Yeah, it's been a great company. It's well managed, disciplined, but why has the stock come down? Well, there's a big unknown out there. A few decades ago they bought a company called Aero technologies, and one of the things that Aero technologies did was produced earplugs for the military. During the Iraq and Afghanistan wars Aero supplied US military with earplugs that actually functioned in two different ways depending on which way you put them in your ear, which was unique from that standpoint. On one side, if you put the earplugs in, it would drown out the heavy sounds but you could carry on a conversation. If you flip the earplug around, it was designed to muffle all sounds. So if you look at what's happening today, there's roughly 230,000 ex military plaintiffs that are alleging that the earplugs were faulty. So there's a huge unknown as to what exactly the liability the company is gonna end up being. So the stock has come down. And part of it is just due to the fact that the market has had a rough year, but 3M has come down more than just what the overall market has experienced. This is obviously due to liability or the potential liability of these lawsuits that are hanging out there. There's been 16 that have that have gone through trial. 3M, has won about 40% of plaintiffs have won the rest. But what we don't know is just what that number is going to end up being. There's estimates from as low as a billion all the way up to as high as 100 billion.
So you're faced with a dilemma here. If 3M ends up with a liability that's $100 billion or close to that it's most likely not going to be a dividend grower going forward, then you get into the situation that they could quite possibly cut the dividend. Or if it was a quick settlement, which really never happens in these kinds of situations, it can even bankrupt the company. But the reality is these things don't get ssettled quickly, they're usually over multiple decades. You have to step back. Do you really want to sell the company because you have this unknown out there? You know, if you're going to look at things that only have blue sky in front of them then you won't own hardly anything. The bigger problem is, if it looks like the company's just has a great future, you're really not going to be in a value space, you're going to be paying a huge premium. If you look at price versus value, and you go back to the October 2005 price of $76. They had earnings of $3.98. So I actually paid $19 for each dollar of earnings. We're currently at $125. Their estimates are that they're going to earn $10 a share. Well now, the stock only trades 12 and a half times its current earnings or $12 for each dollar earnings. So the stock actually has better value in it today than it did when I first bought it and the starting dividend is much higher. So right now we just don't know. But the stock is very reasonably priced. You've got a high quality company. The dividends almost 5%, so at this point they don't even have to grow it that much and I think we at least want to hold it.
Here's another thing to keep in mind too. When a stock is cheap representing the uncertainty, that potentially creates opportunities in and of itself. If you go back and look at Philip Morris, you have a company that was sued by all 50 states. There were a few tobacco companies that were involved in this but Philip Morris was the big player. The suit was over 250 billion in total because of all the issues out there was smoking. We don't need to get into that. But because the cashflow is so strong at Philip Morris, they continued to pay their dividend. And because the stock has always been relatively inexpensive, it comes back to the power of compounding. You still have Philip Morris, that was one of the best performing stocks going back 50 years going through 2021. So you can still have a big cloud of uncertainty and it can still be a great investment if you hold it just from the compounding of dividends. Now I will say we don't own it. We've never owned it, but it's just a great example of how uncertainty is not the end of the world. The great thing about dividends is they can cover a multitude of sins.
One way I want to also illustrate this 3M's case, we first bought it and we paid $76 a share. You fast forward to today and we've received a total of 64 a little over $64 of dividends. So that leaves us with cost basis per share of a little over $11. That's if I subtract all the dividend income that I've earned from it. The difference between 11 and 125- there I have 10 times my money and the stock is only up not quite two times what I paid for it. Dividends have a huge impact on your total return. And in this case, if I was just investing for price, I would be up less than two times on my money over the last 15 plus years. But because of the dividend income I'm up over 10 times. So let's even look at this at a little different angle. $5.96 for a dividend, the yield on the original investment is 7.8% on based on what I originally paid for it. But then if you change the perspective to we only have $11 invested in it now based on all the cash flow that we received, from that angle, we're now earning over a 50% dividend yield on an annualized basis.
One of the big takeaways of this, you're always going to get surprises virtually every company is going to do it on some level or another. You know, again, if you've held the stock for a while and it's been a good dividend payer that's really going to help out the volatility of the stock. They can still become great performers. But if you just purchased something you just haven't had enough dividends to really offset anything. That's why you want to own a portfolio these things. They don't all work and the timing on all these things is going to be different.
So I think this is a good transition over to the next thing that I'm going to call your future dividend investing self. What do you want your future investing self to have? A 10x income or a higher stock price? The answer to that question should drive everything you do now. I think it's a whole lot easier to 10x your income as opposed to 10xing the stock price, and the mindset of a dividend investor is going to allow you to do that. When you're looking at dividend growth, you're really focusing on as sustainable dividend and as I've used in the example of 3M, just looking at consistency, and you're letting compounding do all the hard work. If you're looking at trying to 10x a price, you're really doing all the work because you have to find something that's got a huge catalyst behind it and you have to be right. It has to be a somewhat unique idea or it just doesn't have that kind of capability of price movement. And part of that's the whole concept of the efficient market. The risk you take to try to 10x the price of a stock is a lot higher.
Let's just look at what it actually takes the 10x your income. If we look at the just the S&P 500, as I've stated in past podcasts, the dividend growth has been 6% over the last century. Well if you grow your dividends by 6% a year in 40 years, you'll 10x your income. Well, I can only imagine you're probably thinking there's no way I want to wait around 40 years. Well, the story gets a little better. There's a couple of index funds out there that just invest in dividend growth. One of them we've mentioned before is NOBL or proshares dividend aristocrat fund, and then you also have DGRW, which is the WisdomTree dividend growth index fund. Well, NOBL has grown its dividend in the last eight years by 11% a year and DGRW has grown its dividend by 10%. The reason why we're using eight years is because the funds go back to 2014 when they started, so that's all the farther back we can go with those. If you grow your dividend by 9% a year, 27 years you will have 10x your dividend income. If you grow it by 11% it actually cuts it down to 23 years. Even if you're a 50 year old investor, you can potentially 10x your income in your expected lifespan of roughly 85 years. So it starts to get more feasible. You got to think well that's still a long time. Just think about this. If you have a $10,000 income right now. 27 years, 23 years, you're talking about 10xing, at that point, you have a $100,000 income, which is going to most likely beat inflation. It's going to be most everything out there you can do whether it's investing in commodities, real estate. You may be thinking you know, thats still a long time. Well, let's make a little more reasonable expectation and just use 5x. Let's go back to the to the 6% growth of the S&P 500 dividend. We've gone up by five times in 28 years. If we get to 9%. We've grown it in 19 years. And if we grow it at 11%, now we're down to 16 years. You can do it with the S&P 500, it's just not going to be quite as fast as if you focus more on dividend growth. So if you have a $20,000 income, in 16 years, it could potentially be at 100,000. I think the point here is that it's a whole lot easier to grow your income by 10x than it is to try to grow your portfolio, the price appreciation, by 10x.
So to kind of move on, let's touch on market predictions and forecasting, because as I'm sure you're all aware with interest rates with inflation, are we going to go into recession? Are we already in a recession? How's that going to impact the market? Predictions and forecasts are just coming fast and furious. If anything, maybe they've gotten a little wider than in general. No matter what environment you're in, you're always going to have outlier predictions and forecasts. The problem is, people are not really accountable, and if they hit one of these things, they get their quick moment of fame. So this poses a question. Is there any real value in these predictions or forecasts? I personally think it's perfectly normal to look at them and say, well have I missed something here? And this is the part where most people can't get past this: the risk is they tend to influence you and potentially take you to a place where it's just contrary to your long term investment goals because in the end, you just don't know.
Howard Marks put a memo out last week. He's a partner in the firm Oaktree Capital Management. They're $100 billion plus investment firm that mainly looks at distressed debt, but he does a great memo. I don't subscribe to everything he says but this latest one was entitled, The Illusion of knowledge. And I think he does a really good job of just going through and looking at how these predictions and forecasts are really not useful. And he quotes several prominent economist investors, people in business. He gives their perspective.
The first one was by John Kenneth Galbraith. He was a famous economist back in the mid 1900s. He said: "There are two kinds of forecasters, those who don't know, and those who don't know they don't know." Then there's Daniel Borstein: "The greatest enemy of knowledge is not ignorance, It is the illusion of knowledge." Ian Wilson, he's a former GE executive: "No amount of sophistication is going to allay the fact that all of your knowledge is about the past, and all your decisions are about the future." Then there's Peter Bernstein, one of the core people that helped form the efficient market theory. He says: "Forecasts create the mirage that the future is knowable." Here's one you've probably heard before: "It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." And that was by Mark Twain. Warren Buffett is known for saying: "forecasts usually tell us more of a forecaster than of the future." Albert Einstein said: "I never think about the future it comes soon enough."
Now great quote by Morgan Housel. He's a partner in a venture capital fund. He has a book out, The Psychology of Money, which is a great book, just looking at the mindset that you really need to accumulate wealth. And he states: "The inability to forecast the past has no impact on our desire to forecast the future. Certainty is so valuable that we never give up the quest for it. And most people couldn't get out of bed in the morning, if they were honest about how uncertain the future is."
So the problem with forecasting is is that most people just draw linear conclusions from the past in the future. But one of the things that Howard Marks mentions in his memo, you just don't realize the number of assumptions and inputs that are required. From an economic standpoint, there are hundreds of 1000s, probably even millions of variables to consider. You don't look at the number of processes, relationships that have to be incorporated, how they interact with each other and the role of randomness and the likelihood of surprises. How many people predicted that the economy was going to be shut down in 2020? Before it happened, basically, nobody. Russia invading Ukraine? There's always surprises and there's no way to predict them.
So here's another side just how predictions and forecasts can change. So Annie Oakley, you know, I'm sure you are aware of that name. She was she was a well known sharpshooter back in the late 1800s, early 1900s. She is reported to have shot a cigarette out of Kaiser Wilhelm's mouth. If she would have just missed by a few inches, we quite likely wouldn't have had World War One. There wouldn't have been a depression for Germany over the 1930s which probably would have kept us out or World War Two. That alone could have just changed history. History still would have unfolded, we would have had other wars because that's what happens. But who in the world could have predicted all of those outcomes? And it's the smallest little action that could change everything.
So when you hear somebody predicting a recession a year from now, or that the markets got another 20% to fall, or inflation is going to be this or employment is going to be that the problem you have is none of these people are looking at all the variables. There's just so many more that people aren't even aware about and how they're interconnected. How one may affect another today could literally change in 24 hours, and we sort of see that in the marketplace from day to day. These people that are trying to make exact predictions, it's really almost totally ridiculous.
You do have to make some general predictions. We make a prediction when we wake up in the morning that we're probably going to make it through the day or otherwise you can't function. But again, you don't know. People in general, they want to go to work, they want to take a trip, they want to have decent quality of lifestyle, and consequently over time the economy just grows. That is a prediction, but it's basically just, in my opinion, it's really just predicting that there's somewhat of a normal lifestyle, and then over time, it just continues on. So to wrap up, I think all these topics really are tied together. And I hope you realize that you really don't need to predict anything on a day to day, month to month or even year to year level. It's just a matter of looking at the Broad prediction of the economy over time is going to grow. And if you have good dividend growth stories, it's just a matter of being patient and you can 10x your portfolio income.
If you enjoyed today's podcast, please leave us a review and follow us on LinkedIn, Instagram and Facebook. If you would like more information regarding dividend growth or just our style of investing, go to growmydollar.com. There you will find some of our previous podcasts and also our monthly newsletters. If you have any questions or anything to add regarding today's podcast, email Ethan@growmydollar.com. Past performance does not guarantee future results. Each investor should consider whether a strategy is right for them and all the risks involved. Dividend Stocks are volatile and can lose money.
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