How Elite Businesses Allow You to Contribute Less and Make MORE

It's all about taking a superior performer - and applying the magic of compounding

Getting paid a reliable and growing dividend is a great thing. Over time, it can produce 13%+ yields on an initial investment that started out at a 5% yield.

But there’s a way to make this great idea even better…

Elite, dividend-paying companies like McDonald’s (NYSE:MCD) and Coca-Cola (NYSE:KO) allow you to harness the most powerful investment force on the planet.

This force is called “compounding.”

Compounding occurs when you place a chunk of money into an investment that pays you a return on your money. But instead of taking the returns and spending them, you “reinvest” them… and buy more of the investment.

By doing this, your dividends earn more dividends and your interest earns more interest.

You can think of compounding returns through dividend reinvestment like rolling a snowball down a hill. As the snowball gets larger, it’s able to gather more snow… which enables it to get larger… which enables it to gather more snow… which enables it to get larger… and so on.

Eventually, you build a snowball the size of a house.

Compounding is the ultimate way for the “little guy” to safely build wealth in the stock market.

Given enough time, a good compounding vehicle (like a Dividend Aristocrat) will turn tens of thousands of dollars into millions of dollars.

For example, let’s say you invest $10,000 in an investment that pays a 5% dividend. You intention is to compound over the long term.

In Year 1, a $10,000 investment paying 5% in dividends will pay you $500. You take this money and buy $500 more of the investment.

In Year 2, your investment has grown to $10,500, but still earns 5%. That year, you’ll earn $525 in dividends… which you can use to buy more of the investment.

In Year 3, your investment has grown to $11,025, but still earn 5%. At the end of that year, you’ll earn $551.25 in dividends… which you can use to buy more of the investment.

You can see how it works.

After 20 years of compounding, a stake of $10,000 throwing off 5% in dividends will grow to $26,533.

After 30 years, it will grow to $43,219.

After 40 years, it will grow to $70,400.

And remember, this number assumes no further money is added to the program as the years go by… or that the investment produces any capital gains.

As you can see, long-term compounding produces extraordinary effects.

It’s a very important concept for young people to learn… because they have the power of TIME on their side.

The longer you can compound, the more extraordinary the results.

The following example shows just how extraordinary the results can be…

Consider two investors, Robert and Sally.

Robert opens a tax-deferred retirement account at age 26. He invests $3,000 per year in this account for 40 consecutive years. Robert stops contributing at age 65. His account grows at 9% per year.

Sally opens a tax-deferred retirement account at age 18.  She invests $3,000 per year in this account for eight consecutive years. After those eight years, she makes no more contributions to her retirement account. Her account grows at 9% per year.

The results of these two approaches are below… and they are extraordinary:

Robert Sally
Age Contribution Year-End Value Contribution Year-End Value
16 $0 $0 $0 $0
17 $0 $0 $0 $0
18 $0 $0 $3,000 $3,270
19 $0 $0 $3,000 $6,834
20 $0 $0 $3,000 $10,719
21 $0 $0 $3,000 $14,954
22 $0 $0 $3,000 $19,570
23 $0 $0 $3,000 $24,601
24 $0 $0 $3,000 $30,085
25 $0 $0 $3,000 $36,063
26 $3,000 $3,270 $0 $39,309
27 $3,000 $6,834 $0 $42,847
28 $3,000 $10,719 $0 $46,703
29 $3,000 $14,954 $0 $50,906
30 $3,000 $19,570 $0 $55,488
31 $3,000 $24,601 $0 $60,481
32 $3,000 $30,085 $0 $65,925
33 $3,000 $36,063 $0 $71,858
34 $3,000 $42,579 $0 $78,325
35 $3,000 $49,681 $0 $85,374
36 $3,000 $57,422 $0 $93,058
37 $3,000 $65,860 $0 $101,433
38 $3,000 $75,058 $0 $110,562
39 $3,000 $85,083 $0 $120,513
40 $3,000 $96,010 $0 $131,359
41 $3,000 $107,921 $0 $143,182
42 $3,000 $120,904 $0 $156,068
43 $3,000 $135,055 $0 $170,114
44 $3,000 $150,480 $0 $185,424
45 $3,000 $167,294 $0 $202,112
46 $3,000 $185,620 $0 $220,303
47 $3,000 $205,596 $0 $240,130
48 $3,000 $227,369 $0 $261,742
49 $3,000 $251,103 $0 $285,298
50 $3,000 $276,972 $0 $310,975
51 $3,000 $305,169 $0 $338,963
52 $3,000 $335,905 $0 $369,470
53 $3,000 $369,406 $0 $402,722
54 $3,000 $405,923 $0 $438,967
55 $3,000 $445,726 $0 $478,474
56 $3,000 $489,111 $0 $521,536
57 $3,000 $536,401 $0 $568,475
58 $3,000 $587,947 $0 $619,637
59 $3,000 $644,132 $0 $675,405
60 $3,000 $705,374 $0 $736,191
61 $3,000 $772,128 $0 $802,448
62 $3,000 $844,889 $0 $874,669
63 $3,000 $924,199 $0 $953,389
64 $3,000 $1,010,647 $0 $1,039,194
65 $3,000 $1,104,876 $0 $1,132,721
Less Total Invested -$120,000 -$24,000
Net Earnings: $984,876 $1,108,721
Return on Money: 8-fold 46-fold

Sally made just eight contributions of $3,000, for a total of $24,000 invested. Robert made 40 contributions of $3,000, for a total of $120,000 invested.

However, Sally started at 18 years of age and Robert started at 26 years of age. Sally started eight years earlier. And those eight extra years of compounding are worth more than all of Robert’s 32 years of extra contributions.

Despite a much smaller total contribution, Sally ended up with more money… and a much, much bigger return on her investment.

This example shows why compounding is such a powerful idea to teach children. They have the ultimate advantage of TIME.

This piece of knowledge is one of the greatest financial gifts you could ever give your children.

In order to put your compounding plans on autopilot, consider using something called a “dividend reinvestment plan,” also called a DRIP.

A dividend reinvestment plan is just what it sounds like. It’s a plan that takes the dividends you earn and reinvests them into buying more stock.

Once you set up a DRIP, you don’t have to do a thing. Again, think of a DRIP as a way to put your compounding plan on autopilot.

You can ask any stock broker to institute a DRIP for you. Any reputable online broker will do it for you. It’s a simple process. You can find directions on your broker’s website or call the customer service department.

Regards,

Brian

P.S. I hope you see how making 13% or more on your money is an incredibly reasonable goal.

But I see too many people try to take shortcuts.

That’s the biggest mistake you could make. Here’s why.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/how-elite-businesses-allow-you-to-contribute-less-and-make-more/.

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