Updated On January 31st, 2024
Originally by Ben Reynolds
In the old ‘wild’ west days, people would store their valuables in a coffee can.
The coffee can was placed under a mattress for safe keeping. It would then stay under that mattress for years or even decades.
Note: Click here to download the original Coffee Can Portfolio article by Robert G. Kirby.
There – hopefully – aren’t gun slinging bandits out to steal your investments, but the ideas behind ‘Coffee Can Investing’ are still surprisingly relevant today.
The central concept behind Coffee Can Investing is true buy and hold investing. When you are careful with what you put in to your coffee can, you don’t need to sell.
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
– Warren Buffett
Higher Returns Through Lower Investing Expenses
One of the big – but not necessarily exciting – benefits of long-term investing is minimizing frictional costs.
Reducing investing expenses is one of the surest ways to increase returns over time.
The three primary frictional cost categories are below:
- Capital gains taxes
- Transaction costs
- Active management expenses
Long-term investing helps to reduce all three of these frictional cost categories.
Capital gains taxes are triggered upon selling. Not selling means you get to keep what you would pay in capital gains compounding in your investment account.
Brokerage fees, slippage, and bid ask spreads occur during buying and selling. By minimizing selling, you significantly reduce these expenses.
Finally, active management fees from advisors and/or funds can be eliminated when investors selectively fill their coffee can portfolios with individual stocks rather than funds. It doesn’t make sense to pay an advisor, ETF, or mutual fund an asset under management fee when your plan is simply to hold for the long run.
A few percentage points may not seem like much, but it can really add up over time. Here’s an illuminating quote from the original Coffee Can Portfolio article, written by a professional money manager:
“The plain fact is that the professional money management fraternity of more than 2,000 firms has produced a ho-hum aggregate result over the years. That is hardly surprising. We usually produce high turnover. Many money managers generate commissions each year that substantially exceed 1% of their assets under management. Thus, for example, firms that manage $1 billion produce $15-$20 million in commissions – a result that is totally incompatible with the word ‘investment.’”
Those frustrated by the seemingly never-ending barrage of fees can take solace in the fact that there could be a better way.
Enter the Coffee Can portfolio…
At the heart of the idea is that investors are collectively paying professional money managers a fortune for performance that in many cases is subpar.
The original Coffee Can article concludes with a powerful statement, regarding the exorbitant fees charged by fund managers:
“I am ending it complaining that professional money management today is really sophisticated trading, rather than investment. We leave a major piece of total investment return on the table in the form of transaction costs.”
Instead, investors can craft a portfolio of large, blue chip stocks, and simply hold them forever. The idea is to never sell these investments, which serves several purposes.
First, investors will minimize fees and costs that eat away at total returns.
Second, investors will let compounding interest work its magic.
The Coffee Can Portfolio: Needed Now More Than Ever
Investors are notoriously bad at leaving their portfolios alone. Much of this is not entirely our fault; the financial media shares the blame.
With the onset of the 24-hour news cycle, investors are inundated with analyst upgrades and downgrades, stock rumors, and an obsession with short-term performance.
This is all dangerous to your portfolio’s health.
The financial industry feeds off of our inner desire to ‘keep up with the Joneses’. Investors have a tendency to set unrealistic goals for their investment portfolios. At this point, professional money managers convince us that only they are equipped to get us where we want to go.
Add to this, an illogical focus on short-term results, rather than on investing over the long haul.
The Coffee Can portfolio theory advocates for buying stocks with the intention of holding them for years, not days. See the following excerpt from the original article:
“We can make sound investment decisions on a five-year time horizon with greater certainty than on a six-month time horizon – and also save the investor substantial transaction costs.”
Essentially, the Coffee Can portfolio rescues us from our own bad habit — the instinct to trade stocks, rather than invest in them.
However, in order for the Coffee Can idea to succeed, investors will need to adopt a long-term focus. A focus on the long-run can give individual investors an edge over shorter-term focused investors.
“The single greatest edge an investor can have is a long-term orientation.”
– Seth Klarman
In the short run the market is chaotic; nearly anything can happen.
A company can have a great quarter and the stock price can plummet because performance was slightly below what the analysts expected.
But In the long run, a company’s share price will follow the value of the business.
A company that grows its earnings-per-share year after year and decade after decade will invariably see its share price march along with per share business growth.
Potential Drawbacks Of The Coffee Can Portfolio
With all of the above said, the Coffee Can portfolio is not without its limitations.
Investors should not confuse this for willingly abdicating control of their portfolios to someone else — we all need to take an active role in our own financial lives.
The Coffee Can portfolio will only add to the need to take control, because investors will have a very hard time finding an outside adviser to help them construct and manage the Coffee Can portfolio.
After all, the money management industry seems to care more about assets under management — which generates higher fees and commissions — than about performance itself.
The original Coffee Can article acknowledges that investors will be hard-pressed finding a Coffee Can portfolio from a professional money manager:
“The Coffee Can portfolio concept has two problems. First, who is going to buy a product, the value of which will take 10 years to evaluate? A decade is likely to exceed the career horizons of most corporate executives and pension fund administrators, to say nothing of most money managers. Second, who will pay the large fee, up front, that is necessary to support a mature, first-class investment research organization needed to select a superior 10-year portfolio?”
What this means is that investors assuming their financial advisor will help them craft a Coffee Can portfolio are likely to be disappointed.
But the higher level of responsibility involved can also be liberating — it saves investors from the outrageous fees charged by professional money managers.
Filling Your Coffee Can With Dividend Kings
The coffee can approach gets even more interesting when combined with the idea of rising passive income.
Truly passive income is ‘set and forget’. You set it up, and the income rolls in thereafter without you lifting a finger.
Investing in high quality dividend growth stocks with a coffee can approach can create rising passive income over time.
Deciding which dividend growth stocks to buy and hold for the long-run is of critical importance when building your rising passive income portfolio.
For investors looking to start a Coffee Can portfolio that can generate excellent returns over time, without the fees of a professional money manager, the Dividend Kings are a great place to start.
The Dividend Kings are a select group of stocks that have raised their dividends for the past 50 consecutive years.
You can download a free spreadsheet of all of The Dividend Kings below:
The beauty of owning individual stocks is that there are no fees or commissions to eat into your returns. And, The Coffee Can approach is an attainable idea for nearly all investors.
The Coffee Can approach is a perfect match for long-term dividend growth stocks. The Dividend Kings are the ‘gold standard’ of dividend growth stocks as they have the longest streak of consecutive dividend increases.
However, the Dividend Kings aren’t the only place to look for high quality dividend growth stocks. The following lists contain other potentially high quality dividend growth stocks to consider:
- The Dividend Aristocrats List: S&P 500 stocks with 25+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The 20 Highest Yielding Monthly Dividend Stocks: Monthly dividend stocks with the highest current yields.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.