Investing 102

[GregWeld]

I cut and pasted this from a longer article I was reading. I think it shows younger investors ---- that you don't need to chase Bitcoin --- or Faceybook --- in order to retire "wealthy". You just need to INVEST.... and stick to it.







For younger investors with long-term investing horizons, the reason for this comes down to the reasonable certainty of return from a dividend stock with higher yield, versus the more uncertain return from capital growth that lower yielding dividend stocks are dependent on. This is a return that is highly reliant on "Mr Market's mood."

Companies like McDonald's (MCD), the Coca-Cola Company (KO), Pepsi Co (PEP) and Kimberly-Clark Corporation (KMB) all offer dividend yields of near 3% or more. For investors in these stocks, dividend return contributes a significant amount to the total return that an investor derives. Further, an investor is able to accelerate their investment growth and dividend income by reinvesting that dividend income over time.

In contrast, stocks like Visa, MasterCard, American Express (AXP) and Moody's (MCO), which have provided reasonable dividend growth over time are far more reliant on strong capital returns to generate total return for investors. These stocks all offer dividend returns of 1.5% or less.

The significance of such a strong contribution from dividend income to a investment return should not be understated. Dividend income makes a significant contribution to a stock's total return and can form the basis for close to 50% of a stock's total return on average, and even more so during periods of poor stock market performance.

Additionally, the impact that reinvestment of dividend income makes on a portfolio return should not be overlooked. Consider the example of an investor who had invested in McDonald's 10 years ago. An investment of $10,000 in McDonald's without dividend reinvestment would be worth close to $66,000, and provide you with an annual dividend income of almost $1800. An investor who had reinvested McDonald's dividends back into McDonald's stock would have an investment value of almost $73,400 and an annual dividend of almost $2500.

The power of dividend reinvestment on investor wealth creation can really be seen over a very long term time period. An investor in The Coca-Cola Company who invested $10,000 about 50 years ago would have had a stock value of almost $500,000. If you think that's impressive, consider the scenario where those dividends were reinvested. That same investor would have almost $1.75M in stock investment in The Coca-Cola company.

So younger investors who are able to stick with a long-term plan and reinvest their dividends over the long term will be significantly advantaged in terms of both capital growth and dividend income. Of course this assumes that they retain the conviction and discipline to stick with such a strategy over many years. It doesn't take much to knock this confidence away, such as devastating bear market or recession of the likes that we saw in 2008 - 2009.

The key with any investment strategy is that you can you stick with it long enough to make it work and see the returns. This is where higher yielding, but possibly slower dividend growth stocks should be preferred in a younger investor's portfolio. While companies such as a Verizon (VZ) or AT&T (T) may not have the high growth, high return profile of a Visa or MasterCard, a young investor in these types of businesses is getting the advantage of a stable, reliable dividend from a company, which can be reinvested and put to work.

Verizon and AT&T pay out hefty dividends in the range of 5% and also experience less volatility than the broader S&P 500. In other words, higher-yielding stocks give you an incentive to stick around and give the dividend growth strategy time to work. You get paid to wait, even if there isn't any immediate capital appreciation for some time. Additionally, investors in higher-yielding stocks such as Verizon have experienced handsome longer-term returns; for investors in Verizon close to 9% per annum over the last 10 years.

Not only do you get paid to wait, but more importantly, higher-yielding stocks help provide a buffer against considerable market fluctuations. They help make it less likely that downturns in the market will result in younger investors getting scared by volatility and selling out. This is because these higher-yielding stocks can still generate considerable total return purely from the contribution of a high dividend, in spite of the general turmoil that may be happening in the stock market.