Dividend Stocks: The Ultimate Child Savings Account
by Marc Lichtenfeld, Investment U Senior Analyst
Friday, July 13, 2012: Issue #1814
People have always said that my son’s an “old soul.” Perhaps that’s because he’s never been as wild as most boys. He’s contemplative, serious and has a long attention span.
A few years ago, I showed him how to play poker. (I figured someone has to pay for his college education. So it might as well be his fellow students.)
He got into it. And as I was writing my book, Get Rich with Dividends, he was annoyed that I was so busy. My work was eating into his poker time. He finally asked me what the book was about. So I taught him a bit about the stock market.
Once he understood the basic concepts, I explained to him the power of dividends. More specifically, how compounding dividends can triple your money or produce extremely high yields in a matter of years.
Being the practical kid that he is, he asked me how much money he would have for college if he invested his money according to the strategy in my book.
When I calculated it for him, his jaw dropped. “Will I really have that much money in eight years?” he asked. I told him there were no guarantees. There’s always risk in the market. But I felt confident he’d have plenty of cash when he gets to college. That’s because we’d be investing in conservative stocks and using a strategy that makes money over the long term – regardless of whether the market goes up or down.
The key is to buy a stock with a decent dividend – and reinvest that dividend to buy more shares. This generates more dividend cash to buy even more shares, which racks up higher dividend payouts… and so on.
You eventually get to a point where it doesn’t really matter what the stock price is doing. You still make money no matter what. In fact, a dip in share price can work in your favor, since you can reinvest your dividends at a lower cost.
In the end, the results can be mind-boggling.
For example, shares of ConocoPhillips (NYSE: COP) are down 4.5% from 10 years ago. But if you’d purchased $10,000 in shares and reinvested the dividends, your holdings would now be worth $27,923.
Meaning you would have nearly tripled your money, regardless of the 4.5% loss.
Better yet, when you eventually need the income (instead of reinvesting it), the yields will be incredibly strong.
For example, say you invested $10,000 in BHP Billiton (NYSE: BHP) 10 years ago and reinvested the dividends. And today you decided to start taking the dividends in cash instead. Your annual income from the stock would be $2,400, or 24% on your original investment.
But what if you need the income today and can’t wait 10 years? No problem. Just invest in stocks that I call “Perpetual Dividend Raisers.” These are companies that consistently raise dividends each year.
Altria Group (NYSE: MO), for instance, has raised its dividend every year since 1968.
Over the last 10 years, the company increased its dividend an average of 11.6% per year.
Now it yields 4.75% – nearly triple that of 10-Year U.S. Treasuries. And as long as it maintains the same rate of increase, in a decade, shareholders will enjoy a yield of 12.8%.
Ultimately, this allows you to generate a decent amount of income today, while ensuring that you stay ahead of inflation at the same time.
I don’t know of a more potent moneymaking tool.
My 11 year old is already well on his way to financial independence. Not because he has that much money right now, but because he understands how to use basic strategies to make his money grow.
I go over all of these simple dividend strategies – and more – in my new book, Get Rich with Dividends. For more information, including a 35% discount, click here.
Good Investing,
Marc
Dividend Stocks: The Ultimate Child Savings Account,Any investment contains risk. Please see our disclaimer.
3 Responses to “Dividend Stocks: The Ultimate Child Savings Account”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
Kids can use all kinds of tricks to learn about, save and earn money. Sites such as Bankaroo.com (free!) are great starting points for pointing kids to financial literacy.
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That final figure of $27,923 for ConocoPhillips doesn’t look right. The share price ten years ago was $53, which would have bought 188 shares with $10,000. The dividend ten years ago was .55 a share and the dividend growth rate would have averaged 11.5% over the past decade. Putting those figures into a dividend reinvestment calculator (http://buyupside.com/calculators/dividendreinvestmentdec07.htm) gives a final figure of $12,123, not $27,923, with final shares of 228 and dividends paid of $2,158 for an annualized return of 1.98%.
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My previous comment has an error. I should have used the presplit dividend, rather than the post split dividend. Using the presplit share price ten years ago of $53.06, presplit dividend of $1.10 per share, and ten year average dividend growth rate of 11.5%, produces the following results from a dividend reinvestment calculator (http://buyupside.com/calculators/dividendreinvestmentdec07.htm): 277 shares and $4,723 in dividends for a total final value of $14,698, which is an annualized return of 3.95%.
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