Growing up in Southern California, fruit trees were everywhere. It seemed like orange, lemon, and avocado trees were on every corner. My backyard had two huge trees – one orange and one lemon that repeatedly produced fruit. My grandfather owned a citrus ranch with thousands of trees.
Fruit trees can live for 30 years or more. Apple and apricot trees can live for 40 years; persimmons can thrive for more than 50 years. A fruit tree takes about four to six years to grow before it starts to bear fruit. Once trees begin bearing fruit, they can deliver bushels for decades. An Apple tree can produce about six to ten bushels with each harvest, approximately 750 to 1,250 apples. How about them apples?
To diversify your orchard, plant several types of trees like apple, avocado, pear, cherry, pomegranate, orange, or grapefruit, to name a few. Your farm will produce fruit at various times and in contrasting quantities, giving you an abundance of choices at harvest time.
Moving from a small seed to a thriving orchard requires time, patience, and effort. Planting an apple tree today will not produce results tomorrow. It will need several years before the roots take hold and grow. If you continually rip the tree out of the ground to see how the roots are growing, it will never grow. Once your trees start producing fruit, you must tend to their upkeep by watering and pruning them regularly. If a tree dies, remove it and plant a new one, and manage your healthy trees so that they can grow and flourish.
Your trees will grow at different intervals, some fast, others slow. At times it will appear as if your trees aren’t growing, but they are.
Dividend-paying stocks are like fruit trees; they can produce results for years in the form of dividends. Standard & Poor’s has a list of dividend aristocrats – companies that have paid dividends for more than twenty-five years. Currently, there are 64 companies on the list. Here are a few names from this outstanding list: Coca-Cola, Pepsi, Procter & Gamble, Walmart, Walgreens, 3M, Abbot Laboratories, Medtronic, McDonald's, Chevron, and At&T.
The yield on the S&P 500 Index is 1.8%, and more than 1,000 companies yield 2% or higher. Beware of companies with extremely high dividend yields. If a company has a dividend yield of 10%, 15%, or more, it can be a trap, and they probably have a weak balance sheet. More important than a high yield, is a company that regularly raises its dividend. Intel’s dividend in 2000 was .003 cents per share (per quarter). It is now .33 cents per share, an increase of 10,900%.
At times, a stock experiences stunted growth. Microsoft traded flat from January 2000 to July 2016, the price of Microsoft did not budge for sixteen years. It dropped to a low of $16.25 in March 2009 after peaking at $55.75 nine years prior. In 2003 they initiated a dividend of 8 cents per share, and today it is 51 cents, an increase of 537%. In addition to their regular payout, Microsoft paid a special dividend of $3.00 per share in 2004. A patient shareholder enjoyed a steady stream of rising income while waiting for Microsoft to recover. Microsoft is trading for $195 per share today.
In a low-interest-rate world, a portfolio of dividend-paying companies is attractive. The yield on the U.S. Thirty-Year Treasury has been falling for decades. In 1980 the bond paid more than 15%. Today it’s yielding 1.5%, a drop of 90%. If you are relying on government bonds for retirement income, you’re in trouble. McDonald’s dividend in 1980, as a comparison, was .004 cents per share (per quarter) or .4%. It’s now $1.25 per share, and it’s yielding 2.51%. McDonald’s dividend increased by 31,150% since 1980!
Get started today by investing in several dividend-paying companies that will bear fruit for generations. If you’re not sure which dividend stock to buy, you can purchase an exchange-traded fund like ProShares S&P 500 Dividend Aristocrats (NOBL) or Vanguard’s Dividend Appreciation ETF (VIG). These two ETFs will own high-quality, dividend-paying companies.
He replied, "Because you have so little faith. Truly I tell you, if you have faith as small as a mustard seed, you can say to this mountain, 'Move from here to there,' and it will move. Nothing will be impossible for you." ~ Matthew 17:20
June 10, 2020
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and are not suitable for every investor.
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