Editor's note: Greg Thomas (pictured) is the president of ThomasPartners Inc., a Wellesley, Massachusetts asset management firm.
Greg Thomas was 44 when he retired for the first time, in 1992. He resigned from William Blair & Company, a Chicago-based management banking institution, and moved to Aspen, Colo., where he owned a vacation home. There he raised his daughter and spent his days in a variety of activities: teaching finance at the College of Charleston and serving on the county financial board as well as several corporate boards. He invested his own money, in equities and especially in real estate, where he was very successful.
Concerns of the individual investor
When a friend asked for his help in starting a registered investment advisory firm, Thomas saw an opportunity to learn about the "unique problems" of the individual investor, a shift from his career focus on the institutional investors but more aligned with his experiences as a retiree investing his own money.
It was during that time that he began to develop the investment philosophy that is now at the heart of ThomasPartnersInc., a financial advisory firm in Wellesley, Mass.
"When I retired I was looking for a fool-proof strategy. I wasn't interested in anything that might go wrong," says Thomas, a 59-year-old whose shaved head and wire-rimmed glasses give the appearance of a man at the helm of a venerable banking institution.
The philosophy: Buy stock only in companies that have increased their dividends each year for at least the past 10 years, and research them very carefully to ensure they will continue that dividend growth into the future.
This philosophy narrows the field of U.S. equities - the 5,000 to 6,000 that have a reasonable market cap - to a little more than 300 domestic companies. Of that 300, ThomasPartners will own or be actively looking at just 80 to 100 companies at a time.
Investment strategy put to the test
Thomas remarried about six years ago and moved with his new family to eastern Massachusetts, near his wife's home. With time on his hands, he began to manage money for friends and family members as well as others who learned about his investment style. He bought an established company in Concord that his younger partner, Bill McMahon, was looking to buy at the same time. The two joined efforts to grow the firm, now called ThomasPartners, to $650 million in assets from $50 million in five years. The company employs seven people in all, including five professionals.
"We spent that first year back-testing the investment philosophy that I had intuitively developed to meet my own needs and found that it seemed to have some historical merit," Thomas said.
Thomas said he wasn't willing to put his money in investments that might go wrong. Buying aggressive stocks carried more risk than he was willing to take, and owning bonds could lose purchasing power over long periods of time.
But if dividend growth investing was a good philosophy it would have to pass a test, and the question was: "Had investors employed this strategy at any point -- not just at key points, at bottoms or tops of the market -- over extended historical periods, would it have worked? Would it have provided a growing purchasing power?
The answer was yes, it delivered against the objective, but the findings surprised Thomas and his associates.
"It actually delivered superior performances historically," he said.
Why so few practitioners?
Thomas has thought hard about why the strategy is not more widely known and practiced.
"One is that income is very difficult to get excited about in any sort of a short-term measurement period," Thomas says. A dividend is too small to have much impact on total returns.
"Even if you have stock that is yielding 4 percent, the dividend in one quarter is only returning 1 percent," he notes. In the same time period, the price of a stock can change 5, 10 or 15 percent in any direction - far more noticeable.
A second reason why the dividend growth strategy is not widely practiced is the nature of the stocks themselves.
"The kinds of stocks that pay dividends, and particularly those that pay increasing dividends, rarely capture the excitement of the short-term marketplace," says Thomas.
The dividend growth companies are the "steady eddies" of Wall Street - GE, MDU Resources, Procter & Gamble, McGraw Hill, to name a few.
"The market is a popularity contest in the short term," Thomas says. "And the last thing we want to be doing is always be buying the most popular kid on the block, because those things have a way of changing."
Portfolios from $200,000 to $20 million
Clients of ThomasPartners cover a wide spectrum, from 25 to 75 years old and with assets of $200,000 to almost $20 million. From 25 to 30 percent are receiving distributions from their investments in retirement, a point Thomas uses to emphasize that his philosophy is an "effective wealth building strategy" and not merely one for the distribution phase.
Thomas says his firm resists the industry's tendency to increase the minimum investment required as a firm grows.
"It doesn't sit well with us. We're very egalitarian," he says.
But the firm's strategy is not practical for an investor with less than $150,000 because commissions for transactions cut too deep into profits.
If there is one type of investor who has a difficult time with the ThomasPartners philosophy it is the person who thrives on excitement. That's not what ThomasPartners is about.
"We don't assume we are going to catch winners on way up and be clever enough to get out of them before they go down," Thomas says. "We pay attention to industry sectors and are influenced by their relative prospects, but we do not try to 'play' the sectors and their shifting market fortunes. Our turnover is very low."
"In other words, we're not trying to tame the short-term volatility of the markets," he says. "We're trying to capture the long-term value in a way that delivers a reasonably predictable investment performance."
