An Easy Way To Understand Our Strategy

When you consider long-term returns of the stock market, it is easy to recognize that returns ultimately follow company earnings growth, and earnings growth is driven by increases in US GDP. The market can deviate temporarily but at some point, stock prices ultimately track underlying profit growth. Market history has shown that the US economy (or GDP) has averaged 6% (including inflation) annual growth for the last 100 years. Corporate earnings (which make up a significant part of GDP) have grown by about the same rate. Over that same 100-year period, adding in the S&P 500 dividend boosts the overall stock market return by roughly 4%.

The first chart shows 70 years of GDP, earnings, and dividend growth. As you can see, they have all grown by about the same 6%. Our strategy at Denewiler Capital Management is to focus primarily on the dividend line. It has the same 6% growth, yet it helps us focus our investments on companies that have sustainable dividend growth. Since an increasing dividend also implies growing earnings, you still end up with a version of a growth stock. When we target sustainable growing dividends, we are constructing an income-generating portfolio that can either be used to support a lifestyle or reinvested to accelerate the compound effect. If your dividend income grows by the market’s historical 6% per year, it will double in 12 years. Once you get past year 10, compounding begins to perform its magic in what we call; “the second-decade effect”. A lot of investors seem to forget this fact – compounding is incredibly powerful, but it takes time.

The second chart is the 70-year dividend growth line, which we call ‘The Line’. In January of 2000 the dividend for the S&P 500 was $16.70, by the end of 2020 it was $58 (increasing by 250% in 20 years). This strategy is simple enough, yet tremendously powerful, which is why we came up with the slogan: “Just get on The Line – and stay on The Line”.