Due to their boredom, long-term, low-cost, and passive investing strategies have lost ground to more speculative asset classes. This article aims to make a case for boring investments.
A Case for Boring Investments: Blue Chip Stocks
During its most recent earnings calls, Costco Wholesale announced that it would pay a special dividend of $15 per share on January 12, 2024, to shareholders of record as of the close of business on December 28.
The special dividend is in addition to the quarterly dividend the giant retailer has already committed to paying. The company’s last quarter dividend payout was $1.02. Shareholders who have owned the stock since January 2023 would receive nearly $19 in dividend payout for each share they own.
On top of the healthy dividend payout, the stock has soared nearly 40% year-to-date. Moreover, equity holders continue to provide healthy retained earnings, meaning net profit returned to the company’s balance sheet to be reinvested.
The company balance sheet is strong. During its operating results for the 17-week fourth quarter and the 53-week fiscal year ending September 3, 2023, it had about $7 billion of debt, nearly $18 billion of cash, cash equivalents, and short-term investments.
In this new age of perpetual noise from financial news, bloggers, and social media influencers, everyday investors dont appreciate Costco Wholesale because it’s not loud enough. They want noise and social media hashtags with their returns. Social media hashtags and noise bring charlatans and unnecessary complexities to investing.
For people who say that, who cares about the anemic $19 dividend payout per share? If you own 1,000 shares, you would earn $19,000 in dividend payments this year, with unrealized capital gains and retained earnings to spare.
I know that we all heard the news that former Microsoft CEO Steve Ballmer will earn $1 billion in dividends annually from his stake in the company. Microsoft is another boring company paying about $3 per share a year.
Yes, there are complicated investment strategies that investors can use to generate alpha, which is the excess return of an investment relative to the return of a benchmark index. However, everyday investors need more money for those strategies to yield alpha. Regular investors will benefit more by learning about inflation, compounding interest, and diversification.
Long are those days when people used to say, “Yes” blue chip stocks pay dividends, but the growth is not there. Only six companies have a trillion-dollar market capitalization, which is the market’s valuation of a company at a given time. Microsoft is one of them. The company stocks have risen by over 55% so far this year.
Multinational corporations have embraced new emerging technologies, allowing them to continue growing, scaling, and entering new segments and markets. Microsoft invested $13 billion in ChatGPT Maker Open AI. That investment put a blue chip stock front and center of a new industry that is changing nearly every industry.
Blue chip companies pay out steady dividends every period, regardless of the market’s volatility, and their stocks are increasing at the same rate as highly risky and speculative assets.
Blue chip companies such as Costco, Microsoft, and Cisco Systems don’t come with the same excitement as the Bored APE Yacht Club or other non-fungible tokens (NFTs). Still, they provide investors with healthy returns without extreme volatility.
A Case for Boring Investments: Index Funds
Building a well-diversified portfolio with individual stocks requires hard work, including reading and deciphering financial statements to conduct a thorough fundamental analysis, including analyzing the macroeconomy, the company’s industry, and the company itself.
Investors who don’t have time to study financial statements and pick up blue-chip stocks can achieve diversification via index funds such as mutual funds and exchange-traded funds (ETFs),
Mutual funds and ETFs are exciting indexed management but differ in key aspects. Mutual Funds are traded once a day at a set price based on the fund’s net asset value (NAV), often require a minimum investment, and may have higher expense ratios due to active management. They can also be less tax-efficient due to higher turnover.
In contrast, ETFs trade like stocks throughout the day at fluctuating market prices, typically have no minimum investment beyond the cost of one share and usually offer lower expense ratios and greater tax efficiency.
ETFs also provide more transparency with daily disclosure of holdings, compared to the less frequent disclosures of Mutual Funds. While Mutual Funds can be actively or passively managed, ETFs are predominantly passively managed.
The Vanguard Dividend Appreciation ETF, iShare Core High Dividend ETF, Invesco QQQ Trust, and SPDR S&P 500 ETP are great blue-chip ETFs.
Index funds offer many benefits, including diversification, simplicity, and tax efficiency.
Fidelity Blue Chip Growth Fund (FBGRX), T. Rowe Price Blue Chip Fund (TRBCX), and Vanguard Growth Index Fund Admiral Shares (VIGAX) are examples of mutual funds that invest in blue chip stocks and that you can add to your portfolio.
Historically, index funds have often outperformed actively managed funds over the long term. This is partly because high fees can eat into the returns of actively managed funds.
Index funds’ low costs and auto-automatic rebalancing allow amateur and experienced investors to start investing easily and yield significant returns.
All investing is subject to risk, including the possible loss of money. However, investing in passively managed index funds and blue chip stocks drastically reduces this risk.
Loud financial pundits, bloggers, and social media influencers make people believe that they need to invest in NTFs, cryptocurrencies, or other highly speculative assets to make money and that investing is complicated.
They often coerce people into buying courses and books which promise to reveal the secret of investing. Investing is relatively straightforward: open a brokerage account at a reputable firm and start putting blue chip stocks, ETFs, and quality mutual funds in the account and regularly invest a fixed amount of money over a specified time, regardless of the market conditions otherwise known as dollar-cost averaging (DCA).
Morningstar, Weiss Ratings, and Value Line are great places investors can review mutual fund ratings. Many local libraries give their residents free access to one or all three.
Launching a successful business, investing smartly in the real estate market, and participating smartly in the financial markets are the three sure ways to build wealth. Investing in the financial market is the easiest way to build wealth if investors can cancel the noise.
