A “Boring” Investment Strategy That Always Pays

What Makes a Stock an Attractive PackageAmong blue chips, 3M Company (MMM) is getting a lot of increased earnings estimates from analysts. For such a mature company, 3M’s been doing very well on the stock market, and it looks to be well-positioned for more capital gains.

At the end of 2013, 3M had approximately 89,000 employees (full-time equivalent), of which 60% were based abroad. The company spends a lot on new research and development, and while many blue chips have been doing everything they can to squeeze costs, 3M keeps spending on new scientific and technology development ($1.57 billion in 2011, $1.63 billion in 2012, and $1.72 billion in 2013).

The largest component of the company’s sales is its industrial business, which makes a lot of product for automotive original equipment manufacturers (OEMs) and the automotive aftermarket. Products like tapes, sealants, ceramics, vinyl, polyester, and adhesives are sold to this market, but they’re also sold to electronics, appliance, food and beverage, construction, and paper and printing customers.

Thanks to the acquisition of Ceradyne Inc. in the fourth quarter of 2012, 3M is now one of the top manufacturers of advanced ceramics used for solar, electronics, and defense applications.

The company’s industrial business was 34% of last year’s total sales, growing the most over other operating divisions at 6.5% in U.S. dollars comparatively.

3M has paid a dividend to stockholders since 1914 and just recently increased its first-quarter dividend 34.6% to $0.855 per share, representing the 56th consecutive year of dividend increases. (See “The Six Things I Look for in a Company Before Buying Its Stock.”)

No wonder this stock is doing well. Its five-year chart is featured below:

MMM 3M Company Chart

Chart courtesy of www.StockCharts.com

What I like about dividend-paying blue chips and the important role that they can play in an equity portfolio is that dividends paid can be automatically reinvested in new shares of the company. Even brokerage firms can reinvest cash dividends in new shares without commission. And those additional shares add up. With more shares, you get more dividends, and your investment compounds in a way that can really make a difference.

According to Morningstar.com, if you bought Archer-Daniels-Midland Company (ADM), for example, in November of 2008, your simple return to date would be around 55%. But add in dividends that were reinvested in new company shares and the total investment return jumps to approximately 74%.

More recently, if you purchased stock in Duke Energy Corporation (DUK) in June of 2011, your simple rate of return to date would be approximately 28%. But with dividend reinvestment, the total return to date rises to 46%, which is a very material difference.

3M Company is a good candidate for an investor interested in dividend reinvestment. The company’s long track record of increasing dividends and solid share price performance makes for an attractive package.

Rising dividends are the key, and they become even more attractive when the broader stock market goes flat or retrenches.

Even aggressive investors shouldn’t ignore the potential that dividend reinvestment has as part of an overall portfolio of stocks. There’s a lot of peace of mind that comes with owning a good business that pays you quarterly.