Dividend compounding: the royal road to riches

Just four dividend-paying stocks and time can help today's college graduate retire as a millionaire.

By TheStockAdvisors Dec 9, 2011 2:35PM
By Steve Christ, Wealth Advisory

(© Stephen Wisbauer/Getty Images)My nephew Sam -- fresh out of college -- would rather chase the latest big momentum stock than actually work to build true wealth over time.

But despite his rookie mistakes, he does have the most valuable investment asset of them all. It's called time. Here's a look at four solid dividend-paying stocks and a long-term strategy that could make him rich.

And the best part is he doesn't need to be a star trader or market timer to get there. All Sam needs to do is use what Albert Einstein once called "the most powerful force on earth."

It's the safe, sure road called "compounding" -- and anybody who tries it can become a millionaire if they are smart enough to stick with it.

Let's say Sam invested $10,000 in Altria Group (MO) instead of wasting his time chasing some high-flyer. That initial investment would buy him 357 shares, each earning a dividend yield of 5.8%.

Fast forward 31 years, and this same example would earn Sam a million-dollar payday -- if he reinvested his dividends, added $400 a month to his account, and the underlying stock appreciated just 4% per year. At age 53, he'd be set.

What's more, if Sam stuck to this program for 14 more years, he'd hit the jackpot -- collecting $206,000 a year in streaming income to go along with a nearly $4 million dollar nest egg at age 67.

That's why compounding is often called "the royal road to riches." For a guy like Sam, investing in four solid dividend payers from different sectors of the market would be a smart approach.

With that in mind, here are three more stocks -- in addition to Altria -- that he could buy on his way to financial freedom:

A diversified chemical giant, DuPont Co. (DD) is a global enterprise with operations in 90 countries. The company has consistently been paying dividends since 1904 with a payout ratio of 46%. DD pays a 3.5% yield with a forward price-to-earnings ratio of just 11.03.

Going long oil and natural gas is an easy one. With a price-to-earnings ratio of 9.34, ConocoPhillips (COP) is trading at just 1.47 times book value. The fourth-largest integrated oil company in the world, COP -- which is planning to split into two publicly traded stocks -- pays a 3.6% dividend that's up 83% over the last five years.

The largest provider of residential, commercial, industrial, and municipal waste services, Waste Management (WM) operates a business that's never going away. With high barriers to entry, WM also has a virtual lock on the industry. The company currently pays a 4.4% dividend.

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Tags: COPDDMOWM
5Comments
Dec 9, 2011 6:19PM
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Investing loves to throw out big numbers but once you figure inflation back you see it isn't so big.   The 4 million and $200k per year is 45 years in the future.

 

Using the last 45 years(1966 to 2011 as our base for the next 45 years) you will find that the 4 million is about $575K in 2011 dollars and the $200k is only a bit less than $29k.  

 

Inflation is always the key and it destroys your money's value.   If you get good returns you can grow you money but if you need your money at the wrong time when markets are down you can see very little ROI after inflation.

 

So invest of "investing" in stocks and such invest in yourself and start a business.   For $10,000 our author's relative could start a business and pay others to run it if he can make more working else where.  The key is to build businesses that others can run for you that still leave you with a profit so you have income.

Dec 9, 2011 6:20PM
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if you invested $10,000 in DD ten yrs ago you'd have $10,000 +$3,200.

you'd have been better off in bonds or a conservative etf.

Dec 13, 2011 11:21AM
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Using the last 45 years(1966 to 2011 as our base for the next 45 years) you will find that the 4 million is about $575K in 2011 dollars and the $200k is only a bit less than $29k.
still not bad considering he started out with $10k...  Wish I had that crystal ball...
Dec 12, 2011 10:01AM
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"For $10,000 our author's relative could start a business and pay others to run it if he can make more working else where.  The key is to build businesses that others can run for you that still leave you with a profit so you have income."

And for the rest of us without business degrees and entrepreneurial aspirations, there are the public equity markets.  That way, you can pick a business that already exists but does what you would do if you started your own business.  Also, you already have a management team and a board so you don't have to run the business.

Just because most people buy stocks of companies that are too expensive and/or are managed incompetently and/or treat their investors like crap, doesn't mean that every public company is like that.
Dec 13, 2011 2:54PM
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What amazes me at these articles is what is your target audience is this for millionaires or the commom man.

Who leaves college and has 10,000 dollars to invest Who????

Secondly what if i die it took 31 years to becaome a millionaire. and what if the stock you invest in go down or company goee bankrupt.

I know there are a alot if if's

 

But what I wnat to know is who leaves college with 10 grand to invest.

Investing in the stocks with less than 10 grand is not worth it you cannot make a reasonable gain.

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