A discussion on the importance of dividend-paying stocks and how a $10,000 investment can make you a millionaire by the time you retire.
This article is published with permission from InvestmentU.com.
By the time you read this I will have just finished one of the scariest speaking engagements of my career.
I’m used to speaking in public. I’ve spoken at investment conferences all over the world. I have been interviewed on dozens of radio programs including Bloomberg. And I regularly appear on the big TV networks including CNBC and Fox Business.
Additionally, I moonlight as a ring announcer for boxing and mixed martial arts events. Strange job, I know, but I love it. I can be found on HBO, Showtime or ESPN just about every month.
So getting up in front of a room (or arena) full of people doesn’t rattle me. However, on my drive to today’s engagement, my stomach was doing flips like it hasn’t in years.
I was asked to give a presentation to a class of high school seniors.
Typically, when I talk about stocks, I talk to experienced investors. They are excited to attend a conference, or they have made a conscious choice to tune in to financial programming.
That’s not the case with my latest “captive” audience. They don’t have a choice. It’s me… or detention.
How in the world am I going to connect with 17-year-olds who are counting down the minutes until lunch?
Money gets attention
Well, since many of them were probably already thinking about McDonald’s (NYSE: MCD), I could show them how they could have tripled their money if someone had the foresight to buy them some stock when they were 7 years old.
That should raise a few heads off of desks.
When I wrote my book Get Rich with Dividends I had two goals.
The first was to help people generate greater income and create wealth through dividend-paying stocks. But my second was the hope that younger readers, in their 30s, 20s or even teens, would learn the strategies in the book and begin to invest early.
After all, a 30-year-old who invests $10,000 in the right dividend growth stock could easily have over $1 million at age 65.
Even better, a 25-year-old who puts the same amount of money away until they’re officially a senior citizen can grow a nest egg worth $3.5 million at retirement.
It’s like free money
There are two important steps to take if an investor wants to grow their wealth so significantly.
1. Invest in Perpetual Dividend Raisers
These are stocks that raise their dividends every year. And, hopefully, they do it at a meaningful pace. A 1% raise is better than no raise at all, but 10% is a heck of a lot better than 1%.
2. Reinvest the dividends
That allows the dividends to compound. When an investor reinvests the dividends, they buy shares with their dividends (usually commission free), which generates more dividends, which buys more shares, which generates more dividends, etc. The power of compounding is incredible.
Here is an example:
An investor buys 400 shares of a $25 stock. His initial payout is $10,000. The stock has a 4% yield, which grows 10% per year. And over the decades, the stock goes up in line with the historical market average.
At the end of one year, the stock will generate $415 in income (not $400 because the dividend is reinvested quarterly). After that first year, the investor will own 415 shares.
After five years, the investment produces $711 in income and the shareholder owns 490 shares.
After a decade, the investor receives $1,440 in dividends annually and owns 617 shares.
At this point, the shareholder now owns over 50% more shares than he started with and those shares are all generating a higher dividend than the original position 10 years earlier.
After two decades, the holdings produce $6,440 in dividends on 1,053 shares, achieving a 64% annual yield on the original cost.
By the time we hit the 30-year mark things really start to heat up. The $10,000 investment now earns $32,508 in annual income on 2,127 shares — a yield of 325% on the original investment
And 40 years after the initial stake, the figures are incredible. The investment generates $203,600 in annual income on 5,062 shares. The yield is now 2,036%.
This works in real life… not just in theory.
A $10,000 investment in Colgate-Palmolive (NYSE: CL) 30 years ago would have you $9,732 short of being a millionaire today.
The same investment in McDonald’s would have turned into $944,806.
Better than a gift card
With the end of the school year approaching, you probably know someone who is graduating from high school or college.
If you need to give them a gift, consider shares of a quality Perpetual Dividend Raiser. Give the graduate the explicit instructions that the stock is not to be sold for at least 20 years.
When the kids use the money to buy a house, send their own kids to college or even help fund their retirement decades from now, they’ll look back fondly on the gift you gave them this year.
I hope at least one of those students that I spoke with will look back on my presentation and remember Mr. Singer’s guest speaker who made them forget about lunch for a half hour and instead opened their eyes to a rich financial future.
Marc Lichtenfeld is a senior analyst at Investment U. See more articles by Marc here.