Tight-Wad Tuesdays: We can all be Millionaires!
So you know, Mom loved the Sonic Blast, I do not bring home rich desserts that often for her, especially on a gym day (it was more of a reward) and Dylan and Skylar are ready to move on to Lesson II in ‘Baby Can Read’ already. So all the girls in my home are happy…today!
So I wanted to ask you, are you ready to learn how to become a millionaire for your retirement?
We all have been educated in different areas. While I love to learn more about some things I feel pretty secure on some areas of my education. One area is Personal Finance. I want to tell you of an easy, safe, and virtually painless method to accumulate wealth over time.
Wait! Don’t go! This is my soapbox moment; something I feel strongly about. I am not making any money off of this. You are! I just want to tell you how. It is so easy. You don’t need to be wealthy or have a six figure income. Ideally this type of investing is best for young adults; singles in their 20’s, young married couples with little debt, or 30ish professionals looking to map out their future and so on. We did not start until I was in my 40’s.
This type of building wealth, with little money to start, is called “Dividend Reinvestment Plans” or DRiPs for short. They are so simple. They should be taught in our schools, but they are not. You don’t hear about them because the big boys (banks and investment firms) don’t make any money from them.
WHAT: In a nutshell DRIP investing is owning a few shares of a great company that pays a regular quarterly dividend. Ideally the dividend is generous in relation to the stock price (dividend yield, I talk more about this later). You own the share of stock and make regular monthly purchases, like $50, every month to buy more shares of that stock. So you slowly accumulate more shares over time. The dividends, paid quarterly, are not taken as cash but instead are reinvested as more shares of stock.
Now you know, the more shares of stock you own, the higher your quarterly dividend payout ($ dividend amount x # shares of stock owned = dividend payout). So the paid dividend is reinvested and grows larger each time, building more and more shares. Simple, right? Kind of a snowball effect!
The stock shares do accumulate slowly over time (drips) with small regular monthly purchases. You might only receive $10 or $15 in dividend in new shares at first (still beats what interest you would get in a bank’s savings account). In a few years you have accumulated more shares and now that dividend looks more like $40 or $50.
You keep making regular monthly purchases and reinvesting your dividends over time and you can grow to hundreds and then thousands of shares (if you start early enough). Now how much would 1000 shares of Coke be worth at retirement? If Coke paid $1.00 per share dividend and you owned 1000 shares, how much would that dividend pay out be? How many more shares of stock would that buy? Plus you get a progressively larger pay out every 3 months! And its even better than that!
HOW: The slow and steady accumulation of shares and wealth is only one aspect of this. The ‘wealth’ is the CHEESE. The plans method is its simplicity. Can you spare $50 a month? Pack your lunch twice a week? Once you build this into your family budget it is painless. If you, or your spouse, gets a new job or a raise consider picking up a second DRIP.
We did this. We started off with two DRIPS and since have picked up a few more for a broader exposure. Can you imagine slowly building 1000+ shares in 5 or more great companies? That is our goal. You don’t need a large sum of money to start, just a little bit of room in your budget. It is investing on a shoestring and retiring with the whole shoe store! And as simple as a monthly transfer to your savings.
I will give some specifics next week on the way to start DRIP accounts and help you pick some great Dividend paying companies the following week in Tight Wad Tuesdays. I just want you to understand what DRIPS are and how they work. Simply, you buy a few shares of stock, put them in your name, and have a Transfer Agent, like Computershare, take care of the regular monthly purchases for you, usually automatic bank drafts. You get a statement at the end of the month saying the amount of the purchase and your accumulated shares.
Now if you are not a little bit excited about this either I am not doing my job right or you are not concerned about a comfy retirement. So I want to offer some ideas from the Fools,
…Drip plans constitute the closest thing to getting your shares “straight from the tap.”
“… plans are designed to allow investors to begin investing relatively small initial sums. You then have the option to amass a more significant position over time via low- or no-cost optional cash payments, which can typically be made monthly or as often as you can afford.”
So you buy shares, regularly over time, paying little to no commissions on each monthly purchase. Again, the CHEESE, is building wealth over the reinvestment of dividends…. in addition to the ‘Dollar-Cost Averaging’ idea and ‘Compounded Annual Growth’. Consider why reinvesting dividends rocks…
“One of the best things about Drips is that they allow you to have all dividends reinvested back into company stock, even if the dividends just buy fractions of shares.
Consider Ford Motor Co. (NYSE: F ) . If you bought some shares of it at the end of 1980 and hung on for 18 years to the end of 1998, they would have appreciated nearly 3,900% (22.7% annually). That’s amazing enough. But get this — if you’d been reinvesting dividends to purchase more shares, your total return would skyrocket to 12,300%, or 30.7% per year! An initial $1,000 investment would have grown to $39,000 without reinvesting dividends and $124,000 with reinvested dividends.
- Over the same 18-year period, Pfizer advanced 22.3% annually without reinvestment and 25.3% with it.
- J.P. Morgan shares grew 12.3% without reinvestment and 17% with.
- Coca-Cola (NYSE: KO ) appreciated 24% without reinvestment and 27% with it.
Over a decade or two, these differences can amount to doubling your money.”
Those returns were after 18 years of investing and reinvesting. If you start when you are 30 the timeline expands to more than 30 years, and can practically double the returns listed above. Coke has actually returned over 55% for me since 2004. That is 8 years of reinvestment growth over some very turbulent times in the markets. And now those reinvested dividends are actually larger than my monthly contributions. And growing!
So get started early, be patient, watch the account grow!
I think I have taken up enough of your time for now. If you have any questions at all please contact me via the email on my gravatar. We do own a small handful of DRIPS, so I know the process. I want to end with a summary of the DRIP advantages: Thanks for stopping by! Your future is worth your investment…..
1) You don’t need to be rich!:You don’t need a large amount of money to start. Usually owning one share is all that is required to enroll in a DRP.
2) Significant accumulation over time: DRPs are a cost-effective way to put stock dividends to better use — purchasing more shares of the company — than simply spending the money or having it sit in a money market account. Over a long-term horizon the paid dividends can grow exponentially!
3) Investing on a budget: Most companies allow investors to purchase additional shares through a Dividend Reinvestment Plan for nominal fees — or often no fee at all. These stock purchase provisions, allow an investor to send in as little as $10 to $50 at a time to purchase additional stock.
4) NO Commission investing!: About 100 companies have DRPs that allow investors to purchase stock at a discount to the current market price. These discounts can range anywhere from one to ten percent…with little to NO commissions!
5) Virtually ‘Painless’ building of wealth: DRPs “force” investors to buy stock on a regular basis and hold on to that stock (dollar-cost averaging). As a result, investors adopt a long-term horizon and often invest small amounts of money on a regular basis — money that they usually don’t even miss.
6) Comfortable Cash-Flow in retirement: When you reach your retirement age the accumulated piles of stock could amount to a significant cash flow if you decide to stop reinvesting the dividends and take the quarterly payout instead. ~ but please don’t do this before retirement!
7) Stock Slumps are OK: When the price of your stock goes down it is actually OK..you are buying MORE shares then. More shares = more accumulated shares for reinvested dividend shares!
Like all important financial decisions you should do a fair amount of research first. I will leave a few links to further define and illustrate the Dividend Reinvestment Plan; in addition to the links in my post. See you next week!
What are Dividend Reinvestment Plans (DRPs)?
This is a great idea! I’ll definitely look into it when I have a bit of income. Thank you so much for sharing the link with me. 🙂
That’s a great question. The main risks for DRPs are the same with any other type of investments in stock, mainly chance of depreciation in value. However the dividend pay out helps to minimize this. For instance, say the share price drops 6% in one year, but you are getting a dividend paid to you equal to 2.5% of the share price (dividend yield). Your loss is only 3.5%. But you are able to buy more shares at the discounted price now (dollar-cost averaging). So this risk is mitigated to some extent. ~over the long term a drop in price can actually be good as long as it is not within the last 5 years or so before you intend to sell the stock.(use the funds)
Investing risk # 2 is that your company may go out of business if the price sinks too low. A goal with owning DRPs is care-free, painless investing put on auto-pilot. So you want to pick a well established company, that you are familiar with, so you can count on that company being around for a long time. For instance, my wife lives on Coke. If anything went bad with that company WE would know. Wal-mart may be another good example . Next week I will give you a list of great companies and the dividends they pay out.
In answering this question I was thinking “disadvantages” versus “risks”. A main disadvantage is that DRPs are not tax favored. This means you have to pay taxes on any growth in value over time, as with any other stock gain. This is the same with most types of investments unless the stocks are in a retirement account like a Roth IRA. ~ a discussion for another time.
I have never sold any stocks in our DRPs and don’t plan to for another 15 years so the tax implications are in uncharted water for me. The way I understand it you will be taxed on each individual purchase’s growth. So over the long term that could be many, many purchases (1 per month over x amount of years) with varying amounts of growth. I trust the Transfer Agent, in the business in handling DRPs for thousands of people, will assist in the proper handling of the sales of stock here.
For a list of some other disadvantages you can click on:
at DRP Central.com. If you are interested in learning more I highly recommend checking out the Motley Fool web site. They do a great job of explaining terms in Fun, easy to understand writings. Or drop me a line @email@example.com. I am always happy to help.
What are the risks of a DRP?
You never hear about DRPs since the banks do not offer them. You direct DRPs not the banks.
Also, it is not glamorous investing in the early years, unlike all that tech stock stuff). It is more like a savings account as you slowly accumulate shares. Slowly you do accumulate shares and that is when it gets good, when the dividend, PAID TO YOU every 3 months (in the form of reinvested shares), surpasses the amount of money you give to the company. Shares build up quicker at this point. If you have any questions please ask Derek. If you are working with young adults at your church it would be a good, constructive use of money to pass on to them too.
I have never heard of that before. Sounds painless enough. I will look at the links some.