September 25, 2013
Professors Elroy Diomson, Paul Marsh, and Mike Staunton of London Business School provided some excellent research for us all to reflect on. If you had invested $1 in U.S. stocks in 1900 and spent all your dividends, your stock portfolio would have grown to $198 by the year 2000. But if you had reinvested all of your dividends, your stock portfolio would have been worth $16,797!
Clearly, dividends are the most powerful force in stock investing.
When buying any cash flowing asset, don’t let the market fluctuations scare you out of wealth building. It’s hard for most to comprehend this, but buying into a great business has very little risk. I bring this up because these are the type of dividend paying companies you should be buying.
f you look at risk as meaning the loss of your investment, buying a company like Exxon Mobil (XOM) carries almost no risk. Can the market price go down, yes, but this only effects you if you are forced to sell. The fact is Exxon is the 2nd largest publicly traded company that has roots going back all the way to 1870. The odds of anyone losing their investment in Exxon is slim to none in my opinion.
You should view your safe stocks the same as a landlord views his rental properties. If it cash flows, then the market conditions are irrelevant. Most when buying a rental property see risk as having a bad tenant, not selling the property for less than they paid. However, when it comes to stocks, people ignore the cash flow and focus only on the capital gain or potential for loss.
The math is powerful if you give your companies time to grow…
A company paying a 3% dividend purchased today, could be paying 6% on your investment today if it doubles over 10 years. That means for those who bought a $10 stock today paying a 3% dividend, would one day see a real yield of 6% on their original investment if the stock is $20 in 10 years still paying a dividend of around 3%. In 20 years, your original investment could be seeing a 12% return. This is why it is important to buy companies with a solid dividend history.
Purchase the right companies and ignore the market fluctuations, focus on your cash flow.
Super Charge Your Investments
Setting up a dividend reinvestment plan (DRIP) is easy to do with most brokerages, what this will do is automatically reinvest your dividends without paying a new commission for purchasing more shares.
For those looking to make smaller purchases, you can avoid almost all brokerage commissions by buying the stocks direct through their transfer agents, one of the common ones is ComputerShare.com. If your stocks aren’t listed on there, just Google or call the company you own and ask them if they have a direct stock purchase program. It’s a good way to purchase large cap stocks you plan to hold for life, especially if you plan to only invest a small amount at a time. Most companies allow you to purchase as little as $50 in one transaction. Many of the companies pick up all the fees, which are extremely minimal anyway.
Look for our new speculative stock suggestion this Sunday September 29th. They are a low cost producer, their in ground resources have more than doubled over the past 18 months, and they just completed a financing where the Warren Buffet of China, Mr. Li-ka Shing (richest person in Asia) made a significant investment.
Have a prosperous week!