John C. Bogle, father of the index fund, passed away at the age of 89 on Jan 16. He was known for his low-cost, buy-and-hold investing strategy and founded the Vanguard Group, the mutual fund house mostly known for their low-cost funds that track a market index rather than trying to outdo it. He said that the main appeal of these funds is that these capture nearly all of a bourses’ return ably and inexpensively.
Bogle always said “Why can’t managers beat the market? Where’s the value added? In terms of industrywide statistics, it’s just not there. One reason is because of cost. The cost is a handicap on the horse. If the jockey carries a lot of extra pounds, it’s very tough for the horse to win the race.”
Vanguard was formed in 1974 and began functioning the next year. Investors have put in nearly $5.3 trillion into Vanguard funds, according to the company. Most of the Vanguard funds are managed outside. Unlike other fund families, Vanguard doesn’t hire employees to manage funds. Instead, the world’s biggest fund family hires managers from outside. This makes it easier to replace the funds in case the manager fails to deliver. This in turn helps to control overall cost of actively-managed Vanguard funds.
When Bogle launched his first fund that tracked the S&P 500 index in 1976, it was called “the Vanguard experiment,” which initially accumulated $11 million. It is now famously known as the Vanguard 500 Index Investor (VFINX - Free Report) fund and has almost $441 billion in assets, noted Vanguard.
Bogle had very modestly said “I don’t think I’m anything like a folk hero, but there aren’t a lot of people like me in this business. Most keep a lower profile, are much more guarded in the way they speak, and much less strident in their advocacy of shareholders’ values and rights. If this industry had one fox and 1,000 hedgehogs, maybe I wouldn’t stand out. But if it has 1,000 foxes and one hedgehog, you’re going to be more distinctive. You carry a different set of values and investment ideas. If it’s unusual — even unique — you will stand out.”
So, what was his simple approach toward investing? No doubt, he asked everyone to consider index funds. Having a diversified portfolio comprising stocks as well as mutual funds was also recommended. Last but not the least he said that don’t be bothered about the broader market. Think long term, stay invested and ignore the noise. But, most importantly he had confirmed that growth comes from dividends.
Dividends Are a Stock Investor's Best Friend
According to Bogle, dividend yield along with earnings growth primarily drives stock prices. In the 20th century, out of the stock market’s 9.6% return, 4.5% came from dividend growth and 5% came from earnings growth. Meanwhile, a meager 0.1% came from adjustments in market price-to-earnings ratio, noted Bogle.
Bogle added that the compounding power of dividends is amazing and is key to huge wealth creation by index funds. Dividend payers, thus, make for wonderful investments. The best dividend stocks, undoubtedly, yield healthy returns, have strong prospects and are less susceptible to market gyrations. Their large customer base, sustainable business model, long track of profitability and strong liquidity allow them to offer sizable yields on a regular basis, regardless of market conditions.
4 Stocks to Go Over Bogle’s Timeless Investing Lesson
While finding solid dividend paying companies isn’t easy, they certainly do exist. To help you find these businesses, we have selected four dividend payers who have a Zacks Rank #1 (Strong Buy) or 2 (Buy).
McCormick & Company, Incorporated (MKC - Free Report) manufactures, markets, and distributes spices, seasoning mixes, condiments, and other flavorful products. The stock currently has a Zacks Rank #1. The company has raised its dividend payments for 31 consecutive years. It has a dividend yield of 1.6%, while its five-year average dividend yield is 1.9%. The Zacks Consensus Estimate for current-year earnings has increased 0.2% in the past 90 days.
Cintas Corporation (CTAS - Free Report) provides corporate identity uniforms and related business services. The stock currently has a Zacks Rank #2. It has raised its dividend for 34 years in a row. It has a dividend yield of 1.2%, while its five-year average dividend yield is 1.1%. The Zacks Consensus Estimate for current-year earnings has increased 1.5% in the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.
Archer-Daniels-Midland Company (ADM - Free Report) procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients. The stock currently has a Zacks Rank #1. The company has raised its dividend payments for more than 25 successive years. It has a dividend yield of 3.1%, while its five-year average dividend yield is 2.7%. The Zacks Consensus Estimate for current-year earnings has moved up 0.8% in the past 60 days.
Ameren Corporation (AEE - Free Report) operates as a public utility holding company in the United States. The stock currently has a Zacks Rank 1. The company has consistently paid dividends for a considerable period of time. It has a dividend yield of 2.9%, while its five-year average dividend yield is 3.5%. The Zacks Consensus Estimate for current-year earnings has moved 0.9% north in the past 60 days.
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