Practicing the Art of Patience 149can do one of two things with its cash fl ow: either reinvest the cash
back into the business or pay it out in the form of dividends. Unlike
bonds, equities don’t expire. In fi nancial terms, this longevity implies
that stocks have a very long duration. As a result, the vast majority of
cash fl ows that will accrue to a holder of common stock will occur far
out into the future. And if a business is growing those earnings over
time, then the substantial gains that are to be had from holding equi-
ties will also occur further out in the future.
The greatest advantage, of course, comes to the patient investor
who can purchase common stocks of quality businesses at a substan-
tial discount of the present value of those future cash fl ows, often
referred to as intrinsic value. This fundamental aspect of stock valu-
ation is why true value investors are comfortable investing in under-
valued stocks, regardless of whether or not the purchases are made
at the absolute bottom. Even more so, value investors are comfort-
able holding bargain securities during temporary periods of distress.
Additionally, it’s this above premise that renders dividends so
extremely important in certain investment considerations. Over time,
dividends can begin to account for more and more of the value derived
from holding equities. Naturally, investors should always emphasize the
security of the dividend over the rate of the dividend.
To really appreciate the value of knowing when to sit still, look
no further than the Johnson & Johnson Company (J&J), arguably
one of the fi nest companies ever. Sales at Johnson & Johnson have
grown at over 10 percent a year for over 100 years, and that was after
the company had been established for 23 years. For decades J&J has
paid and increased dividends annually almost without interruption.
Back in 1944 when the company went public, one share of J&J cost
$37.50. That one single share today, with dividends reinvested, would
be worth $900,000—a stunning annualized return of 17.1 percent.
Without those dividends, that one share would be equal to 2,500
shares today or about $142,000 as a result of stock splits. And that
one share would be producing $4,500 in annual dividends today.^1CH008.indd 149CH008.indd 149 9/2/09 11:48:53 AM9/2/09 11:48:53 AM