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Defining A Long-term Investment In The Stock Market
By: Charles O'Melia
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Defining a long-term investment in the stock market.
For some “long term” would mean holding a stock position over the weekend. For
others, it may mean holding a security for at least 1 year for the purpose of
declaring a long-term capital gain, thus saving on taxes.
The rigid definition of a long-term investment in the stock market would be
holding a security for a minimum of 5 years, to as long as 30 years.
I’m going to tell you my definition of a long-term investment in a security by
telling you a story. A true story!
My Mother worked as a teller in a small bank in Dover, New Jersey. The name of
the bank was called The Dover Community Bank. While working at the bank (she
eventually became a branch manager) she enrolled in the bank’s dividend
reinvestment plan, making purchases of the stock through pay-roll deductions
from her paycheck. She continued purchasing the stock through the years, having
the dividends from her shares in the bank reinvested into more shares every
quarter. By the time she left the bank (in the early seventies) she had
accumulated around 300 shares of The Dover Community Bank.
My Father, when he retired, had the dividends from those shares sent home – to
help ends-meet. When my Dad passed away at age 80, my brother and I inherited
over 7,600 shares of The Bank of New York, all originating from those 300 shares
of what was once called The Dover Community Bank.
So, through this individual experience I have adopted my own opinion of what is
called a long-term investment in a security. It is simply this – securities
should be purchased with the intent of providing dividend income to help
ends-meet during retirement, with the understanding that no one can successfully
retire without financial freedom. So every investment now in a security would be
purchased with the intent of holding that security (and adding to it during the
years) until the dividend income from that security is ample enough to ease the
loss of income from retiring from my job. Now, I not only provide for myself
during my retirement years, but will leave this earthly realm knowing that I
will also be able to relieve some financial burdens for those I’ve left behind.
With this definite, concrete purpose for investing in mind, a definite, concrete
plan would need to be created (and can be found in my book The Stockopoly Plan)
to achieve this long-term investment goal. My Mother invested in only one stock
and got lucky – a considered plan would diversify.
So if I am going to hold a security position forever, what criteria should I be
looking for in that security? Certainly dividend income – that’s a given! And
since I never intend to sell the security, capital gains may not even be an
issue (more on this later).
So then, what else? I would argue that a company that just pays a dividend isn’t
good enough. Instead, I will only purchase those companies that have a long
history of raising their dividend every year. This will eliminate a whole bunch
of risk. It would eliminate the possibility that the company is ‘cooking their
books;’ after all, the money has to be there to pay the shareholder. And because
this company has been raising their dividend every year for many years, it
eliminates the risk of investing in a start-up company that may not even be
around in a year or so.
Also, the rising dividend every year would help off-set the risk of inflation
and the risk of a lower stock price during the year would actually accelerate my
income from the security.
Since I would want my position in the stock to grow through the years, thus
increasing my dividend income, all dividends would be reinvested into the stock,
until retirement. A lower stock price, therefore, would purchase more shares, at
a higher dividend yield and would simply accelerate my dividend income.
Now the question may arise, when would I want to sell a stock? Certainly not
because a Merrill Lynch has downgraded the whole sector – that’s a blessing in
disguise – a temporary lower stock price just means a higher dividend yield,
allowing my dividend to purchasing more shares.
The question of when to sell a stock puts me in the mind of a quote I once read
by Jacobsen – “Judgment is the one thing you cannot learn at college. You either
have it or you don’t have it.” The time/reason to sell a stock varies. If there
comes a time when you have so much money tied up in just one stock position that
it’s making you feel uncomfortable, sell some of it. If the company you
purchased stopped raising its dividend you may want to lighten up and/or divert
the funds you were putting into that security into one that is continuing its
program of increasing their dividend every year.
A company may trim their dividend – when and if this happens (and it does) my
advice is not to be overly anxious to sell the stock. Find the reason why the
company is trimming their dividend. It may be to reduce debt or for the
possibility of acquisitions. The company’s dividend yield may have been around 6
percent, and all their peers’ dividend yields are around 4 percent. Certainly,
do not add to your holdings in this company, but give management a chance to see
how they handle the extra cash, since they appear to have better use for the
money, other than to pay their shareholders. The resulting growth in that
company may make up for the lower dividend yield and two or three years later
you’ll get a better perspective on whether to sell the company or not (or to
continue adding more shares through new monies, or simply to allow the dividends
to continue purchasing the stock).
To read the PREFACE from the book ‘The Stockopoly Plan- Investing for
Retirement’visit: http://www.thestockopolyplan.com
About the Author:
Charles M. O’Melia is an individual investor with almost 40 years of experience
and passion for the stock market. The author of the book ‘The Stockopoly Plan’;
published by American-Book Publishing. The book can be purchased at http://www.pdbookstore.com/comfiles/pages/CharlesMOMelia.shtml |
