3 Short Lessons in Dividend Investing From the Greatest Investors of All Time
By: Jonathan Wolfgram,
These investors have been around for decades, weathering the storms of economic fallout and trying to take advantage of any opportunity that came their way. This article focuses on three short lessons in dividend investing from these great investors to let those who are interested study what they did right and learn from anything they initially did wrong.
Investor: Grace Groner
Grace Groner was a lesser-known investor who embodied the principle of buy, hold and reinvest. She was not a fund manager and had little financial training, but Groner worked as a secretary at Abbott Laboratories (NYSE:ABT) for 43 years. Early in her career in 1935, she invested $180 in three shares of Abbott. She never sold and instead opted to reinvest all of her dividends. After 75 years, she had $7 million.
Lesson 1: Reinvest your Dividend Income
While it may be tempting to cash in on dividend income and splurge once a quarter or so, investors who reinvest their dividend distributions can see exponentially higher payouts.
This means when investors receive a dividend payment, they should think before they spend it. Opting to invest this money back into buying shares of stock in the company can lead investors to collect even more future earnings from those stocks without having to pay any additional capital. If an investor holds onto his or her earned dividends long enough, eventually compound interest works its magic and makes for some sizable gains on investment returns over time.
Investor: Charlie Munger
Charlie Munger is most famous for his contribution to Berkshire Hathaway (NYSE:BRK_B). The investor is still the vice chairman of Berkshire Hathaway at 97 years old and was the source of many of the company’s most important investing decisions.
Munger and Warren Buffett made their fortune not off any bold or spectacularly well-timed investments, but by doing very few things explicitly wrong. Rather than gaining incredible returns, they instead focused on never losing money — the magic of compound interest did the rest.
Lesson 2: Make Reliable Investments
In other words, investors should strive to minimize their mistakes and losses in the stock market by making investments that have a good chance of being profitable over time — not taking big risks with money they can’t afford to lose!
By avoiding big losses in one’s portfolio, investors build up a long-term return on investment rate that beats out very intelligent investors who take too many unnecessary chances. Even if you’re still learning about investing (like most people are) be sure to make reliable moves once you get started — doing so will help you earn more cash than trying something new every time, wasting money instead of growing wealth.
Investor: Warren Buffett
Warren Buffett has time and again argued that buy-and-hold is still the best strategy. Where the vast majority of investors lose fortunes reactively buying and selling according to market fluctuations, simply purchasing good companies and allowing them to grow in the long term tends to yield much greater returns.
Buffett writes, “Don’t watch the market closely. If they’re trying to buy and sell stocks, and worry when they go down a little bit… and think they should maybe sell them when they go up, they’re not going to have very good results.”
Lesson 3: Ignore Short-term Fluctuations
This is to say that investors who focus on the short-term are more likely to make poor decisions. As Warren Buffett would say, Mr. Market is always emotional and jumpy — it’s important to tune him out and stay focused on your goals. Buffett has stuck with this philosophy for decades and it has served him well. In fact, he described price as the least important variable when deciding to purchase a stock, citing how minimal changes in price affect the long-term growth of a good company.
It can be tough not to get caught up in market noise, but if you want to be a successful dividend investor, you have to learn how to tune out the distractions. Remember: Ignore short-term fluctuations and focus on the long-term goal of building wealth.
Dividend investors can learn a lot from the greatest investors of all time. By studying Warren Buffett and other investors, you can develop habits that will help you achieve your financial goals. Reinvest your dividend income, make safe investments and tune out the noise of market fluctuations, and you’ll be well on your way to becoming a successful dividend investor.
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Jonathan Wolfgram is an investment analyst who writes website content at Eagle Financial Publications. He graduated from the University of Minnesota with Bachelor’s degrees in Finance and Philosophy. Jonathan writes for www.DividendInvestor.com and www.StockInvestor.com.