I recently read a report that the young generation of today are the most adverse to the stock market in recent history. I think a big part of the reason people are scared away from investing is they don’t understand that a share of stock is a piece of ownership. Let’s look at Unilever as an example. When you look at the company, you see a business that sells great products ranging from Lynxs deodorant to Magnum ice cream to Toni & Guy haircare. Last year, it brought in £43,171,950,000 in sales. After paying all of the expenses, salaries, and taxes, the owners were left with £4,245,700,000 in profit. Since the company that is Unilver is divided into roughly 2,839,700,000 “pieces”, or shares, each piece of the business was entitled to £1.49 of the profits. The Board of Directors decided that, of that, they were going to mail £1.04 per share out to the owner, and retain £0.45 to upgrade equipment, research new products, expand factories, acquire new companies or whatever else they think will help the business in the long-run.
It’s a really simple thing. If you owned 1,000 shares, it means your cut of the sales came to £15,200. It means your cut of the profits were £1,490. It means that you collected £1,040 of this in cash and the business kept £450 to reinvest in future growth.
Likewise, if you owned 10,000 shares, it means your cut of the sales came to £152,000. It means your cut of the profits were £14,900. It means you collected £10,400 of this in cash and the business kept £4,500 to reinvest in future growth.
What’s marvellous about it is this is a totally democratic process. Your share of Unilever doesn’t care if you are male or female, old or young, black or white, Christian or atheist, gay or straight, conservative or liberal … it is still entitled to 1/2,2839,700,000ths of Unilever results for the year. If deodorant profits are up, you make more money. If ice cream profits are up, you make money. If hair care profits are up, you make money.
Instead of focusing on those numbers – how much stuff is sold and how big the profits are – investors get caught up in “the stock market”, which is nothing more than a giant auction where people who want to buy or sell ownership pieces get together and try to work out a deal. In other words, they focus not on the economic engine of Unilever – selling fast moving consumer products- but on what other people are paying for an ownership stake at the time.
It’s such a foolish way to live. Take a look back over the past 20+ years. There have been periods when Unilever shares would skyrocket or crash. There have been wars, recessions, crises, multiple government administrations, inflation, deflation, the rise of the Internet … yet, if you owned a stake in Unilever, you collected a heck of a lot of cash. A period like 2008-2009 is a wonderful example. The stock fell by almost 35% as people tried to liquidate whatever they could during the recession, yet the profits and dividends at Unilever were increasing! Far from being upset, even if your account statement had fallen by half, this is a cause for celebration. It means you could buy even more ownership for a cheaper price if you wanted to increase your stake in the firm so you got to keep more of the money brought in from Domestos, Dove, Persil and Surf
I think the world would be a much better place if people focused on buying ownership in companies they understand, that produce real profits, and then sitting back and collecting their dividends. I’m looking at a table of the Unilever dividend payments dating back to 1999 as I type this and it’s just a beautiful thing. No matter what happened in the stock market, that list shows you that Unilever kept sending you more and more money. You take the number of shares you owned multiplied by the pounds and pence amount and that’s how much cash appeared in your account. And because the products are so steady, this is a business that has a reputation for delivering uninterrupted year on year dividend growth.
That’s money you can use to buy more shares of Unilever, if you want, or go out to dinner, buy theatre tickets, get a new car, help pay for a university education, get a new pair of trainers, or whatever else you desire. That money showed up during stock market crashes and booms.
If you want to understand Unilever, start by reading the most recent annual report to owners . It may seem confusing at first, but highlight the parts you understand. No one is born with the ability to know what all of that means. It’s a learned skill, just like riding a bicycle or learning how to talk. That’s how I started – I picked up annual reports a long time ago and began to notate them as I tried to figure out what all the charts and numbers meant. It exists to tell you how the business is doing; where the money is coming from, where it is going, and how much is left for you, the owner.
I have said it before that owning shares in great businesses is a wonderful thing (LINK). All you need to do is save up some money – it doesn’t even have to be that much – to make that initial investment. From then on, you simply kick back and let the management team at the company do the hard work for you. They will put in the 100 hour a week shifts and take all the stresses of the job whilst you get a share in the success in proportion to your holdings. You get mailed dividends every year. And slowly by slowly you can start of by building that divined machine.
I started off by having £0 in dividend income just over 24 months ago. But I made my first investment in BP and didn’t look back from there. By diligently saving money and re-investing any dividend income I have earned, I have been able to increase my dividend income over time. I first hit the £1000 dividend income millstone and followed this up by reaching £1500 in annual dividend income a year. £2000 seems right around the corner. All this is due to me taking that first step. I realised the stock market is the biggest wealth creating mechanism in human history. And I want to be a part of that.