As a dividend growth investor, I’m usually interested in buying stocks of companies paying growing dividends. Google doesn’t pay a dividend and its P/E is a lot over 20. But, I recently bought 2 shares of Google class A stock (GOOGL).
Some people ask me why I did that. Here’s my explanation.
I should have bought Microsoft shares in 1990!!!
I was having a beer at a family party recently and one of my uncle was having a chat with my father about their past investment decisions. My uncle said to my father :
“You remember in 1990 when I told you we should buy shares of Microsoft? I told you back in the days that it would become one of the greatest company in the world…”
But, even thought they were prescient, none of them bothered to buy even a share… They then spent the next 5 minutes complaining about the fact that they were not as rich as they could have been if they would have taken the time to invest 10,000$ in Microsoft in 1990.
Then, the conversation eventually felt on time machines and how rich they could become if they would have one.
We all know someone who knows someone who could have bought a rental apartment on Broadway for 50$ back in the days and that this building would now be worth millions today.
This simple conversation made me realize two things. First, no one can accurately predict the future so even though we could have the feeling that an investment will turn out to be a great one, if we don’t act, it will only bring us remorse. Second, I don’t want to end up like my father and my uncle and cry that I should have done something I didn’t do. I just couldn’t picture myself in 30 years from now, talking to my grandson about Google and telling him “sorry buddy, Gran’pa didn’t buy Google shares. He knew it would have been a good investment, but hey… He didn’t even buy 1 share…”
This was my first justification! An emotional one indeed!
In fact, since my brokerage account has been opened, I’ve been wanting to buy Google shares, but it always seemed to me that they were too expensive. The problem with Google is that everybody think that its shares will follow the same path then those of Microsoft. So, finding an entry point at a reasonable price is kinda hard.
I decided to dig a little since the market had a small correction recently to see if there was an opportunity to buy at a “reasonable” price.
GOOGL (data from Morningstar.com)
|GOOGL||Industry Avg||S&P 500||GOOGL 5Y Avg*|
|Data as of 08/20/2014, *Price/Cash Flow uses 3-year average.|
|Dividend Yield %||—||0.1||2.3||—|
When I looked at Google’s averages, I found that its P/E ratio was far under its 5 years average, its P/B ratio, P/S ratio and Price/Cash flow ratio were also far under its 5 years averages.
Google is a great brand and it has a wide moat. But, one of the problems with Google is that it’s really hard to predict its future growth. I performed a couple of tests with a DCF calculator from Moneychimp.com, but, predicting Google’s future price is not like trying to predict Coke or McDonald’s future price. Anyway, even though its ratios are far under its averages, I still think that Google is currently sold at a premium. But, I also know that timing the market is difficult.
In the end, Google is a great company with still a lot of potential and I could easily picture Google becoming a lot bigger than it is right now. Since the price seemed expensive, I only bought 2 shares. I plan to buy more Google shares over the years to come and to cost-average my purchases. I truly believe Google is here to stay and that it still has a lot of space to grow! But, as you can see, my rational is thin. I’d say that Google is an emotional buy. It is usually not a good idea to rely on emotions when we are investing, but sometimes, you just need to do something and go with your feelings. I decided here to trust my feelings and think very long-term.
While most of the stocks I will buy will be dividend growth stocks, I still want to own shares of other great companies. Berkshire Hathaway will certainly be part of my portfolio eventually. I will also probably follow Warren Buffett’s advice and buy a Vanguard index fund.
What about you? Do you only buy dividend growth stocks or are you an open-minded investor?[author] [author_image timthumb=’on’]http://quityourdayjob101.com/wp-content/uploads/2014/03/ID-10050051.jpg[/author_image] [author_info]Hi, my name is Allan. I’m the masked blogger. Like you I’m a modern slave, prisoner of a 9@5 job in Corporate America. They told us when we were young that we would live in a society of leisure and that technology would permit us to work only a couple of hours per day. But we live in a society of stress and uncertainty. My situation could be a lot worse and I know it. So many humans are suffering on this planet. But a golden cage remains a cage anyway. At least, I have an escape plan. I will retire before 45 years old over my passive income. This is a dream that is so powerful that I will make sure it happens. To build my wealth, I mainly invest in undervalued dividend growth stocks. [/author_info] [/author]
Image courtesy of ionosphere / FreeDigitalPhotos.net