When you compare the state of the United Kingdom today to where it was fifty years ago, one aspect that stands out is economic security is more difficult to attain due to structural changes in the global economy.
Firstly, zero hour contract employment and the gig economy have largely replaced the prevalence of union jobs that could readily be attained. In the long run, this makes corporations more profitable because it grants companies the autonomy to only hire workers that are the most economically productive to the company. This is a good trend for business owners. However, it is a much less friendlier trend for workers because these employment practices have brought with them less security.
That lack of job security can be scary—although you can control the extent to which you are productive, your employer ultimately has the final say whether you get to stick around. For people that value financial security, that arrangement can be a strong cause of discomfort.
In addition to the shift from union jobs to ‘new-ear- employment practices, there has also been a shift away from defined benefit pensions and in to defined contribution pension schemes.
Instead of getting a guaranteed £2,000 per month when you retire as a condition of your work at a company for 40 years, it’s up to you to spend those forty years intelligently investing in a way that more or less generates that £2,000 in monthly income. Nothing is guaranteed anymore.
I mention these background facts for one thing—what happens if you want to simulate the guaranteed financial security of the “good old days” while living in a world in which it is entirely up to you to create that guaranteed income?
My answer would be this: Make it your first priority in your financial life to own big slugs of the most dominant businesses you can find, and let them grow for 20+ years and reinvest the dividends.
I would make a list that would something like this:
- Own 250 shares of Unilever by the end of 2020.
- Own 400 shares of Royal Dutch Shell by the end of 2021.
- Own 200 shares of Pepsi by the end of 2022.
- Own 100 shares of MasterCard by the end of 2023.
- Own 200 shares of Nike by the end of 2024.
- Own 150 shares of Microsoft by the end of 2025.
- Own 200 shares of Johnson & Johnson by the end of 2026.
- Own 100 shares of Procter & Gamble by the end of 2027
You might use Pound Sterling amounts instead of share counts. You might adjust the companies and the year as necessary for valuation—if Microsoft is much more attractively valued than Unilever in 2020, there’s no reason not to use common sense and switch up the order of your list. And heck, you might have different companies. You might include Coke instead of Pepsi. You might include Coke in addition to Pepsi. You might choose BP or Exxon instead of Royal Dutch Shell. You might choose Visa instead of Mastercard. The example above is just a template to be adjusted to your personal circumstances and style, not something to read literally. It is not a recommendation.
The point is: a good financial life needs a good foundation. For the most part, I like value investing. But when it comes to the most dominant profit-churning companies in the world, the world dominating dividend paying stocks, I think “growth at a reasonable price” investing can kick the ass of value investing because of the underlying strength of the business models we are discussing. Three or four times in your life, value investing will have a short-term fling with the most dominant companies in existence, and if you load up on the Coca-Colas and Johnson & Johnsons during the 1973s and 2009s of your life, the world will be yours.
Ideally, these investments would be done within an ISA or SIPP (Pension). The tax advantaged nature of these accounts can not be underestimated as it would allow your money to compound uninterrupted year after year, decade after decade.
If you want to get serious about your future, you need to dedicate a certain chunk of your savings to the most profitable enterprises in the world . The ones that make you think, “When I die, that company will still be paying out dividends to shareholders.” Procter & Gamble has increased its dividend for 64 years in a row. Johnson & Johnson has increased its dividends for each of the last 58 years. Pepsico has a dividend streak of 47 years straight. You cannot get better than this.
You also need to set a specific goal for each company, and create a target date for when you want to own it. If you have six to twelve names on your list, you have some flexibility to modify your list to adjust for valuation. And try to do this within a tax sheltered account, so none of your dividends get siphoned off, and you have some protection in the event that disaster strikes.
By the time you die, those 400 shares of Royal Dutch Shell could be pumping out more oil profits than is generated by the owner of the local petrol station in your community. Retirement accounts plus ownership stakes in the most powerful companies in the world, deliberately acquired over time, is the greatest way to guarantee you will end up rich if you allow those seeds the proper amount of time to grow.