In the ever-evolving landscape of investing, a recurring theme has emerged: the allure of high-risk, high-reward opportunities often overshadows the quiet strength of long-term, stable investments. This shift in investor behavior has led to a surge in speculative activities, from the rise and fall of Special Purpose Acquisition Companies (SPACs) to the NFT craze. Yet, amidst this chaos, a more resilient strategy persists—dividend growth investing. This approach, rooted in patience and discipline, emphasizes the power of “boring” businesses that consistently deliver returns through dividends.
The Rise of Speculative Investing
The modern investment scene is marked by a fascination with excitement. High-flying assets, such as SPACs and meme stocks, have captured the imagination of both new and seasoned investors. This trend was notably fueled by figures like Chamath Palihapitiya, who popularized SPACs through his platform, leading to a surge in their creation. However, the 2020-21 period saw a dramatic increase in SPAC activity, peaking in 2021 before a sharp decline. Many of these companies, including Virgin Galactic and Opendoor, experienced significant losses, highlighting the risks associated with speculative investing.
The appeal of these high-risk ventures lies in their potential for quick gains, but history has shown that true wealth is built through consistent, reliable returns. As Warren Buffett once noted, markets today exhibit more casino-like behavior than in the past, where the thrill of speculation often leads to regret.
The Case for Dividend Growth Investing
In contrast to the volatility of speculative assets, dividend growth investing offers a more stable path to wealth creation. A company’s ability to pay and grow dividends is a strong indicator of its financial health. It reflects confidence in future earnings and cash flow, signaling a commitment to long-term shareholder value. This strategy is exemplified by Warren Buffett’s investments in well-established companies like Coca-Cola and railroads, which have provided steady returns over time.
Dividend growth investing is not limited to large-cap stocks; it can be equally effective when applied to small-cap companies. These firms often offer unique risk-reward profiles, with the potential for substantial returns due to their growth opportunities. However, they also come with higher volatility and risk, making it crucial to focus on profitable, growing small-cap stocks that are less likely to be affected by market fluctuations.
The Small-Cap Advantage
Small-cap stocks, typically defined as those with a market capitalization of $5 billion or less, present an opportunity for investors seeking growth and income. While they may not be as glamorous as tech startups or crypto projects, they often provide better value for money. This is because smaller companies can experience significant earnings growth, which can translate into higher returns for investors.
Moreover, small-cap stocks are often undervalued compared to their larger counterparts, offering a chance to invest in overlooked companies with strong fundamentals. By focusing on profitable, growing small-cap businesses, investors can benefit from both capital appreciation and a steady stream of dividends.
Real-World Examples of Boring, Beautiful Businesses
Several real-world examples illustrate the success of dividend growth investing in small-cap companies. Boyd Group Services (BYD), for instance, has grown from approximately 250 locations to over 1,000 across North America since 2008. Investors who purchased the stock at C$2.30 in 2008 have seen remarkable returns, with total dividends received reaching C$8.69 and a total return of 10,081.24%.
Another example is Hammond Power Solutions (HPS.A), which has demonstrated impressive growth in its dividend. Investors who followed KeyStone’s recommendation to buy the stock at C$0.60 have seen a total return exceeding 20,000%. Even more recently, those who invested at C$6.01 in 2020 have benefited from a 223.5% dividend growth and a total return of 1,930%.
Brookfield Infrastructure (BIP.UN) further highlights the effectiveness of dividend growth investing. With a portfolio of essential infrastructure assets, the company has delivered a total return of 594% for investors who purchased units at C$9.91 in 2011.
Conclusion: Boring is Beautiful
In a world driven by the pursuit of quick gains, the value of patience and discipline cannot be overstated. Dividend growth investing offers a proven strategy for building wealth over the long term, emphasizing the importance of investing in durable businesses that provide essential goods and services. While the allure of high-risk ventures may be tempting, the returns from “boring” businesses like Boyd Group, Hammond Power Solutions, and Brookfield Infrastructure demonstrate the power of consistency and resilience.
As economist Paul Samuelson noted, the price of excitement in investing is often a portion of one’s capital and peace of mind. In contrast, dividend growth stocks continue to pay out, even during market downturns. This reliability is a testament to the enduring value of “boring” investments, which, when chosen wisely, can lead to significant long-term gains.