Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here weekly.
The late Steve Jobs built what is arguably one of the most influential businesses in history. In the 20-plus years Jobs ruled supreme at Apple, the company changed how we interact with technology and, as a result, how we live our lives.
Apple was also the quintessential “growth” company for investors. The stock’s value rose thousands and thousands of percentage points under Jobs. In fact, the company recently had the largest market value of any firm on Earth, outstripping even ExxonMobil.
But Apple pays no dividends and thus provides no “income” to investors. One criticism of the company is its preference for stockpiling cash instead of using profits to buy other companies, pay dividends or even buy back its own stock. Apple has had as much as $70 billion just sitting in the bank.
All of this is just fine with growth investors, who look to ride a stock’s escalating value to a hefty payday when they sell some or all their shares. These folks don’t care if Apple doesn’t pay a dividend — the stock’s price chart has been nearly vertical for 15 years. Cha-ching!
So what’s an income-oriented investor like me to do? As income investors we typically don’t own something that doesn’t pay a dividend. Are we missing out on some juicy returns?
Probably. But the truth is that for every Apple-like growth-stock home run, there’s also an income home run. Income stars just aren’t very sexy or buzz-worthy. The BP Prudhoe Bay Royalty Trust (BPT) is a perfect example. This is a relentlessly boring equity that is directly related to the sale of specific oil coming out of the ground in Alaska.
Comparing Apple and BPT
From June 1998 through September 2011, Apple had a total return on share value of 5,628 percent. If you count the impact of dividends, the return was still 5,628 percent because Apple pays no dividend. Still, that’s a very impressive average annual return of 35.4 percent.
BPT’s share price during the same period grew just 891 percent. But when you add in the impact of its dividends, your return rate soars to more than 5,100 percent — or about 34.5 percent per year, nearly equal to Apple’s.
Keep in mind that 83 percent of BPT’s total return came from “income,” not from the stock price going up. What do you do with all of that income? Re-invest it.
There are many successful strategies for investing, none perfect or immune from market realities. Chose the path that best suits your circumstances and stick with it. Don’t get distracted by trendy shiny, sexy things – even those with an “i” in front of them.
Do you lean more toward growth or income investing? What factors — about a company and about your own circumstances — do you weigh the most?
– Wes Moss, for the Atlanta Bargain Hunter blog