Companies in any industry are constantly challenged by the risks of new technologies and changing customer behavior that could potentially threaten their bottom line through pressure on their revenues and/or on their cost structure.
Like societies and industries are always changing, so do businesses. There is a constant need to adapt and optimize.
And then there is a special “breed of businesses” – almost all of them from the tech sector – that are literal disruptive forces, leading to drastic changes in our society and economy. Enterprises eventually put weaker companies out of business.
Some of the world’s largest actively managed exchange-traded funds (ETFs) are led by Ark Invest which sets its focus exactly on that kind of super-growing companies. For instance, in Ark ETFs, you can find stakes in
- Square, the ultimate bank industry disruptor,
- Facebook with the world stronges social media platform ecosystem,
- Shopfiy, the innovative e-commerce platform provider (helping small businesses to compete with Amazon),
- Pinterest with its unique business model
- Alibaba, the Chinese e-commerce giant and major player in cloud business
- Alphabet, the parent company of Google which became synonymous with the internet
These are just a few examples of wonderful businesses that are shaping the secular digitalization trend.
Growth Investors and Dividend Investors alike want to own pieces of these companies which AS A GROUP will thrive for decades to come. And don’t be surprised to see several of these high-flying tech businesses paying out dividends in a few years.
So fair enough, long-term oriented buy-and-hold investors literally have to have some exposure to these disrupting companies, as most of them will be profitable growth stories.
But does that mean, that Dividend Stocks, for instance of businesses like PepsiCo, Unilever, Heineken, Coca Cola are risky investments as they are not innovative tech companies? Should investments in those companies be avoided?
The clear answer is: definitively NO! You even need such businesses in your investment portfolio too. For income (dividends) and growth.
Let’s get at the issue a bit closer.
During the 2020 COVID-19 pandemic and lockdowns all around the world, one could hear the “Standard Narrative” that “traditional business models” will all be disrupted, from the car industry to the oil sector to the “brick and mortar” retail business and so on.
Well, such a “Standard Narrative” falls short of the business reality: companies that have existed for some time are complex, adapting, and growing ecosystems. I mean we all see Apple’s “unique way” of combining great products and services, connecting them in its ecosystem, and provide customers with a great user experience.
But think about that for a second, is this really so unique? Can you just find ever-growing ecosystems and scalable capital-light business models in the tech sector?
Of course not.
Just look at The Coca-Cola Company. Each time I am in a restaurant, I see on almost every table at least one bottle of Coca-Cola. Now I guess that company has a sticky product, right?
When I am in a board room for ZOOM- or physical meetings, I see bottles of Minutes Maid fruit juices and Dasani mineral water on the tables. Both brands of The Coca Cola Company.
Yes, customer tastes are changing and people drink less sugary carbonated drinks. But the Coca-Cola Company does not just have Sprite, Fanta, and Schweppes in its brand portfolio. They have a vast array of offers beyond sparkling soft drinks ranging from waters & hydration to juices and dairy and plant-based drinks. Coca-Cola’s distribution channels are unique, wherever you are in the world, you can find beverages from The Coca-Cola Company.
Or let’s look at two other companies like PepsiCo and The Walt Disney Company. As The Coca-Cola Company, they are roughly 100 years old.
Or just have a look at the way The Walt Disney Company uses its unique brand portfolio and expertise in capture the attention of people of all ages around the globe in order to become a major streaming player through Disney+.
So, we can surely state that AS A GROUP, companies like Danone, Nestlé, L’Oreal, Unilever, Heineken, etc. will continue to prosper despite the fact that they are not innovative tech companies.
And here’s the key: such businesses don’t have to change all too much. Most of their products never get old. They already have their successful and tested platforms. These companies usually are as capital-light as a tech company and their business model is as scalable as theirs.
Just look at Hershey with its sweet chocolate growth or the Italian company Ferrero with its chocolate candies. I loved eating them as a child and still like eating their products today. Nothing has changed, but the business scaled its offering, has a global presence, and put tremendous varieties to its brand portfolio.
Even major dominant car makers and oil businesses won’t be put out of business in a matter of just a few years. Most of them will adapt, change and even continue to thrive.
So, as an investor, it’s key to have exposure to the disrupting tech winners, but also make sure to keep/have the high-quality “boring traditional businesses” in your portfolio.
You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.