This year, I’m choosing to give my children a “gift that keeps on giving.”
Unlike fleeting presents like toys or clothes, my wife and I decided to celebrate Christmas with a gift that could be savored for decades.
Remember, my kids are older now and they don’t hanker after toys or bicycles.
My eldest girls are married and they prefer gift cards at shops like The Home Depot (HD), Lululemon (LULU), or privately held Hobby Lobby.
My younger girls are employed and studying, so they prefer clothes and cash.
As a child, my Uncle Lee gifted me shares in Consolidated Edison (ED) that have multiplied in value since then.
I don’t own ED shares today…
However, if I did, I would be rich, as $1.80 (purchase price) has ballooned to over $90.00 today.
Uncle Lee understood the power of dividends. He likely foresaw that Consolidated Edison would manage its capital wisely to reinvest in its business and reward shareholders with steady dividends.
It wasn’t until college that I grasped the importance of dividends.
My professor, Dr. Arnold, imparted the concept of dividend policy, referencing a study by Harvard Professor, Michael Jensen, which delved into the free cash flow hypothesis.
Jensen’s theory highlights how payouts to shareholders reduce resources under managers’ control, thus curbing potential misuse of free cash flow.
In Graham’s words, paying dividends yanks at least some cash out of the manager’s hands before they squander it.
In essence, dividends are about ensuring discipline in capital markets.
A REIT For My 5 Children
I plan to buy each of my children (and grandson) shares in a real estate investment trust (“REIT”) as a Christmas gift.
Unlike ordinary C-Corporations, REITs are required to distribute at least 90% of their taxable income in dividends to shareholders, making them a prime avenue for generational wealth building.
Similar to my Uncle Lee’s gift, I aim to aid my kids in kick-starting generational wealth by investing in top-notch REITs poised for long-term growth.
#1: Realty Income Corporation (O)
Realty Income is backed by favorable quality scores due to its exceptional earnings and dividend history, robust balance sheet, conservative payout ratio, and diversified property portfolio spanning the U.S. and Europe.
- Exceptional earnings history – positive earnings growth in 26 of 27 years
- Exceptional dividend history – 29 consecutive years of rising dividends.
- Fortress balance sheet: A rated by S&P and Moody’s,
- Conservative payout ratio (of 76% based on adjusted funds from operations, or AFFO, and
- Highly diversified business model of over 13,000 properties (in the U.S. and Europe).
One of the great things about REITs is that there’s not much temptation for C-suite managers to “squander” away free cash flow because these companies MUST pay out at least 90% of taxable income in the form of dividends (most payout 100%).
My hope is that my children will regard this gift with the same reverence I have for Uncle Lee’s shares in ED.
Given the attractive quality scores for each of these REITs, there’s a very good chance that this gift will be one of the best gifts that keep on giving.
I’ll close out my holiday-inspired writeup with this famous quote from one of the wealthiest investors of all time, John D. Rockefeller:
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”