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Some of the best investing strategies are the simplest.
Lowell Miller’s The Single Best Investment boils investing down to three things that really matter: quality, cash flow, and time.
Here are 8 lessons from the book to help you build a compounding machine.
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1. The Single Best Formula
Compounding wealth over time boils down to a simple equation:
High Quality + High Current Yield + High Dividend Growth = High Total Returns.
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When you can find a company with all three, you have three engines working to build your wealth.
This kind of situation usually happens when Mr. Market gets very depressed about a temporary problem at a great company.
An Example:
In 2019 Mr. Market got very depressed about AbbVie’s top-selling drug, Humira, losing its patent protection.
The stock price went down and the yield went up to 6.5%.
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Management replaced the revenue with new drugs, and investors who bought then now have:
Total returns of around 375%
A yield on cost of nearly 11%
A Dividend CAGR of more than 7%
2. Dividends Don’t Lie
Earnings are always an estimate, but to pay dividends, a business needs cash in the bank.
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There are lots of ways for accountants to make a business look more (or in some cases, less) profitable on paper.
But Miller says that “Dividends are the only thing you can truly know about a stock.”