How a Bad Investment in the Cabbage Patch Led to a Passion for Dividend Growth

Before delving too much into the specifics of dividend growth, I thought I would start by providing some background on where my personal passion for this area came from.

My interest in dividend growth investing started at an early age, as a high school student in the 1980s.  I became interested in the stock market and would use my earnings from various odd jobs to scrape up enough to make a few small initial investments.  As I started to dabble in stocks, buying just a few shares at a time, I noticed something interesting in the bond section of the financial pages.  Coleco, a gaming and toy company, had a bond selling at a large discount with a very high yield (as I recall, the yield was something close to 20%).  This seemed almost too good to be true.  If I understood this opportunity correctly, I could get close to 20% a year in interest by simply waiting for the bond to get paid off, at which point the company would give me back more than I invested in the first place.  In addition, this wasn’t just any company.  I thought I knew Coleco’s products fairly well from its former popularity in electronic games and game consoles as well as the widely popular Cabbage Patch dolls.  So, I pulled together some funds and made my first bond investment.

Sure enough, it was not too long after my investment that I received my first interest check, which was then followed by another three months later.  My investment seemed to be working out as planned…until the checks stopped.  The bond, of course, was selling at a big discount for a reason.  Coleco was on the verge of bankruptcy and I ended up losing most of my investment.  The irony is that I would have been better off using my money to buy the Cabbage Patch dolls instead of the bonds – at least those held their value over time (and some even became collector’s items).  At the time, though, I viewed my failed investment as just a painful financial loss.  What I didn’t realize then was that this single bad investment would be the seed for the search that eventually led me to dividend growth investing.

I’m a naturally curious person and the Coleco bond debacle led me to question my basic assumptions about investing.  Why did the market seem to know that the company was in such trouble when I didn’t?  How could a company with a prior history of successful products fall so hard and so fast?  These and other questions led me to become a student of the market at a fairly young age.  I began to study and learn about different investment strategies, and I started to include investment research into my academic work as a student whenever I could.  I also began to test my theories out in both model and real world investments.

Among these investments were a few early holdings in dividend reinvestment plans (programs where you can enroll your shares in a program that uses dividends to buy more shares).  It didn’t take long to notice the powerful impact of reinvesting these dividends.   Every quarter I could see my share holdings in each company build just a little bit.  While it was nice to see holdings grow on a small but consistent basis, the event I realized was most profitable was an announced dividend increase.  Whenever a company would increase its dividend, this resulted in having even more buying power with which to purchase additional shares.  In addition, this increase wasn’t just one time in nature, but also meant an increased dividend stream for years to come.  As I realized just how powerful the combined effect of the continued reinvestment and increases could be, I began to focus on determining when, and by how much, companies I followed would likely raise their dividends in coming years.  Soon, the prospect of dividend growth became a central and profitable foundation for my own investment approach.

So, out of one very bad investment in a soon to be bankrupt company, I started down an investment path that soon led to a profound appreciation for the power of dividend compounding.  At the time, the Coleco bond investment seemed like a costly mistake, but like many things in investing, the lessons learned over years of investing can lead to more profitable investing in the future.  Most importantly, this all led me to an ongoing personal and professional search for the stocks of companies that grow their dividends over time.  It is this journey that I look forward to sharing with the readers of this blog.