The Massive Benefit to Limiting Your Investing Universe

Keep it simple... silly

I often get flack for telling people that I exclusively invest in dividend-paying securities.

“But what happens if it’s the greatest stock in the world and it doesn’t pay a dividend?”

Don’t care. And, shockingly, the next. big. thing. often turns into the next big turd. The actual result rarely lives up to the hype. So I’m pretty okay with skipping those kinds of stocks.

I do come across a few non-dividend payers each year that are interesting investments. Mainstreet Equity (TSX:MEQ) was one here in Canada, but it gave into pressure and issued a dividend at the end of 2023.

Welcome to the dark side, sucka.

Monster Beverage (NASDAQ:MNST) is another excellent company that doesn’t pay a dividend, choosing instead to consistently repurchase its shares.

Expedia Group (NADSAQ:EXPE) is another stock I’d look at a lot more closely if it paid a dividend. It even paid a dividend up until COVID rocked the travel market. It chooses instead to repurchase stock, a move that has delivered middling results so far.

Besides, there are enough dividend payers out there I’m not exactly handicapped by my self-imposed obstacle. I can easily find a wide assortment of stocks that meet my investing criteria that also happen to pay dividends.

What I realized a few years ago is non-dividend stocks don’t get me any closer to achieving my goals.

Some people have only one retirement goal — to end up with the biggest pile of money. My goal was always a little different. I wanted to end up with a portfolio of dividend stocks that churned out enough cash flow to cover my expenses, great companies with a history of increasing dividends faster than inflation.

Such a portfolio would continue to grow in the background as I got my dividends, giving me a steady income stream today with growth for tomorrow. Talk about the best of both worlds.

There are millions of other investors with similar goals to mine. Some might choose to leave an inheritance for their kids and grandkids. Some might want to achieve generational wealth and put their money in a trust fund. Or some, like me, want to give it all away at the end.

Whatever the details look like, the goal is the same. We don’t want to deplete our capital in retirement. We’re just not wired to sell shares to pay for our later years. That’s akin to shooting the golden goose, something to be avoided at all costs.

It turns out there’s another advantage to limiting my investing universe to dividend-paying stocks. It makes investing a lot simpler.

The paradox of choice

One of the greatest strengths of capitalism in the 21st century is we have often have a huge amount of choice.

I used to be in the grocery business, so I know this first hand.

Want some jam? No problem. We have Smuckers (14 varieties), E.D. Smith (13 varieties), Bonne Maman (9 varieties), Last Mountain (7 varieties) and anywhere from 1-4 local suppliers. Oh, and private label if you’d like to save some money.

Salad dressing? Sure. We have Kraft (about 25 different varieties), Hellmann’s (6 varieties), Hidden Valley (4 varieties), The Keg (4 varieties), Olive Garden (3 varieties), Renee’s (that’s over in the fridge in produce), and both a cheap private label (8 varieties) and an upscale private label (4-6 varieties).

And that’s just two categories of a store with dozens of different grocery sections.

We’ve quickly gotten to the point where too much choice has become exhausting. So, generally, shoppers will default to one of three options:

  1. The cheapest one

  2. The best-known one

  3. The one the store is pushing

The store often works with the supplier so 2 and 3 are the same thing, which is just one reason why dominating a grocery category is such a good business.

The same thing is happening in stocks. There’s too much choice. There are approximately 14,000 publicly-traded stocks in North America, including things like preferred shares and ETFs. And that number balloons to some 55,000 if you include stocks listed around the world.

It used to be difficult to gain access to worldwide stocks. Investors like Peter Cundill or Jim Rogers used to have to physically travel to some obscure country for the opportunity to buy their telecom provider or largest bank for 5x earnings. Now investors with an Interactive Brokers account can quickly access about 50,000 of those 55,000 listed stocks.

But is this such a good thing? I’d argue no — and for one simple reason. Just like with jam and salad dressing, people have too much choice. Trying to weigh the pros and cons of an industrial company in Canada versus one in the United States is hard enough. It’s almost impossible when you throw in ones from Germany, India, and Japan into the mix.

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How I limit investing choice

The easiest way to limit investing choice is to simply buy a broad market ETF. That gets an investor exposure to thousands of different stocks.

I prefer a different strategy. I have a series of simple rules in place that ensures I don’t even look at what I view as the bottom 80% of the market.

To create these rules, I first looked at how I want to invest. So I created some ground rules:

  • I want to buy companies that generate consistent, growing cash flows

  • I prefer companies with a long history of success

  • I insist on getting paid at least a steady dividend, with a strong emphasis on dividend growth

  • And I want to pay a reasonable price for any investment

I repeat these ground rules a lot, so apologies if it seems like I repeat myself every other week. But the rules really do drive most of my investment decisions.

Basically, I’m looking for companies with a demonstrated moat that has held up over time, that pay dividends, and that trade at a reasonable price. And, because selling is so hard, I want to ideally hold these stocks forever.

If a company doesn’t check off the boxes, I’ll eliminate it until it does. Many stocks have no chance to join the club, so they get eliminated. Forever.

For instance, I’m not convinced (most) oil companies have a moat. It’s a commodity business with prices that are at the whim of the market. There’s exploration risk, execution risk, and management risk. It’s a tough business and most execs have a “drill baby, drill” philosophy, no matter what the underlying commodity is doing.

That makes 99% of oil stocks uninvestable. An exception to the rule is Canada’s oil sands stocks, which have a pretty clear moat. That oil is going to be sitting there for a long time. So I get my oil exposure there.

Virtually every other commodity has the same issues, so I avoid those names all together. I only make two exceptions:

  • Royalty companies

  • Commodity companies that also control their own distribution

By making those two decisions, I’ve eliminated 99% of the TSX’s commodity stocks.

I further limit my investing universe by only buying stocks with a U.S. or Canadian listing, by insisting on dividends, and by avoiding the hot new it thing. I know what I’m looking for, so I eliminate large swathes of what I don’t want.

These moves take a huge investing universe and turn it into something way smaller, something much more easily handled. A complex universe filled with thousands of stocks becomes list of just a few hundred. I can then keep a close eye on some and ignore the others until they become interesting from a price perspective.

The important part isn’t following my rules. You’ve got to make your own rules. You might insist on boring, dividend-paying blue chips, like I do. Or you might go for hyper-growth software names. The details aren’t important. The key part is limiting a complex universe down to something infinitely more manageable.

The bottom line

Investing is hard, and active investing is even harder.

It’s why I’m such an advocate of keeping things simple.

The first step is figuring out why you’re investing. What are your goals? What do you hope to accomplish?

From there, create a series of rules that’ll help you accomplish those goals. Insist on dividends. Or don’t. Look for solid balance sheets and consistent success over multiple business cycles. Or don’t.

The important part is narrowing down a big, scary investing universe into something more manageable. From there you’ll be in much better shape to choose investments that resonate with you.

Investing is deeply personal. Make sure you’re making the choices that are right for you… not someone else.

One more thing

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