by Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
Wednesday, March 14, 2012: Issue #1729
I couldn’t believe the returns I was seeing. Could investors really generate this much money by using this strategy?
I emailed Wall Street Daily’s Matt Weinschenk, my go-to guy when I have questions about quantitative or mathematical issues. “Can you check these numbers? They seem a bit high to me,” I wrote.
I was using a financial model on an Excel spreadsheet to figure out a way that investors could generate double-digit yields and returns over the long term. The theoretical returns that the model said were possible were enough to satisfy nearly any investor.
A short time later, Matt emailed me back. “Yes, these numbers are accurate. And they’re not just theoretical. Check out the attached.” Matt was referring to a screen shot he attached to the email that showed some startling figures.
Using this strategy, an investment in Southern Company (NYSE: SO) 10 years ago had an average annual return of 11.4%. That compares to the S&P 500, which only rose 9.5% over the entire decade.
If you go back 20 years, the returns were even more impressive. A $10,000 purchase of Colgate-Palmolive (NYSE: CL) grew to $102,190 – a return of over 900%.
It’s why I call this investment methodology “The Only Investing Strategy You’ll Ever Need to Become a Millionaire (or Stay One).” It’s the topic of my presentation next week at the Investment U 14th Annual Conference in San Diego.
One thing you’ll notice about the two stocks mentioned so far, they’re not exactly exciting names. You won’t find them on anyone’s hot lists or must-buys for 2012. Yet these companies and others like them outperform the market year after year, decade after decade, because they have one thing in common: They pay dividends and raise them every year.
I looked at hundreds of stocks. Most of them are what you’d consider boring companies. Companies such as Coca-Cola (NYSE: KO) and McDonald’s (NYSE: MCD) – they all produced stunning results when you invest over many years. And if you reinvest the dividend over those years, look out, your returns really get amplified.
That’s because of the power of compounding. When you reinvest your dividends, you buy more shares, which spin off more income, enabling you to buy more shares, which spin off more income…
“The Most Powerful Force in the Universe”
Albert Einstein said that compound interest is “the most powerful force in the universe.” Whether we’re talking about interest or dividends, it’s obvious that compounding really picks up momentum after several years.
For example, let’s look at Kimberly-Clark (NYSE: KMB) – another stock that isn’t going to get anyone’s adrenalin pumping. I mean, you can only get so excited about Huggies, Kleenex and Scott paper towels.
But Kimberly-Clark pays a healthy 4.1% dividend yield, or $2.96 per share. If you bought $10,000 worth of stock, reinvested the dividends, and the dividend grew 9% per year like it has for the past 10 years, in 2022 your stock would yield nearly 14% on your original investment. Instead of $416 in income that you receive the first year, you’d get paid $1,388.
And if you could keep on reinvesting the dividends, the compounding machine kicks into overdrive the longer it goes. In 15 years, you’d receive $2,900 per year in dividends, or a 29% yield on your original cost. And in 20 years, $6,482 for a ridiculous 65% yield. So you’d make your original investment back every 18 months at that point.
These numbers assume the stock price rises 5% per year.
I call these kinds of stocks Perpetual Dividend Raisers – and will be talking about my specific strategy for how to invest in Perpetual Dividend Raisers at the conference in two weeks… It will be the first time I’m revealing this strategy to the general public.
But even if you need income today and won’t be reinvesting dividends, Perpetual Dividend Raisers can ensure that you stay ahead of inflation by receiving more income every year from the same stocks.
The best part is that these stocks tend to have lower volatility, and can even be safer than the broad market. And certainly more so than any hot stocks you may have been chasing to try to boost up your portfolio.
Don’t Trust Wall Street
I believe so strongly in this method of investing that I’m setting up my kids in Perpetual Dividend Raisers.
I’m no longer trusting their college educations to Wall Street professionals like mutual fund managers. Last year 84% of stock mutual funds underperformed the market, according to Standard & Poor’s. Over the past 10 years, more than half of all stock funds didn’t perform as well as the overall market.
So why would I trust my kids’ money to people with an established track record of underperformance, when I can instead invest in stocks and a strategy with a long history of producing strong returns?
For decades, dividend paying stocks have outperformed the general market. Perpetual Dividend Raisers even more so. And when you reinvest the dividends, the total returns compete with and in most cases far outpace nearly all Wall Street pros.
Marc LichtenfeldDividend Aristocrats: The Most Profitable Force in the Universe,