Dividends - Part 3 – Dividend Growth

Dividend paying companies tend to increase their payouts roughly in proportion to their increasing earnings per share. Not all companies follow this guideline but many do. Generally, those that increase their dividend in line with their earnings are the better run companies – the ones you can count on. Growing dividends are not the only signal of quality; you still need to do your homework.

Dividends provide two opportunities; first, the opportunity to reinvest them in the same company or elsewhere; second, an income stream that increases over time and probably outpaces inflation.

Bonds, Treasury Bills, CD’s, and Money Markets will not provide an ever increasing income stream. $1,000 invested in 30 year Treasury’s at 3% interest will pay $30 per year the first year and in the thirtieth. But, $1,000 invested in, say, Proctor & Gambol currently yielding about 3% will pay $30 in the first year but could easily pay more than $200 in year thirty.

Of course, some disaster could take down Proctor & Gambol or the company could cut its dividend. It’s happened to many companies recently including nearly all of the financials. But spreading the risk among different investments reduces it. It cannot be eliminated no matter what you do with your money. Put it in your mattress or in Treasury Bills and watch inflation destroy its value. In 30 years, your $1,000 will probably be worth between $100 and $500 in today’s value. But your P&G (or other quality company) stock will likely be priced at more than $6,000 with current value purchasing power of between $600 and $3,000 or more.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts

Dividends – Parts 2 - Reinvestment

You will make a strategic choice from three options when dividends are paid on your stock.

Option (1) – take the cash and spend it. If you are retired this may be the best choice. It provides income and leaves your principle invested and growing.

Option (2) – deposit the cash in an investment account and let it accumulate. This allows you to invest the money where you think best when sufficient funds have built up.

Option (3) – automatically reinvest the dividend in the same company’s stock. This can be set up through most brokerage accounts or through a DRIP account (more on DRIP accounts later). Automatic reinvestment is less flexible but it is very low maintenance and has the advantage of providing the full benefits of compounding.

Shares and fractions of shares are purchased with little or no commissions or fees. In subsequent quarters these shares yield more dividends that are also reinvested. All while the stock continues to appreciate in the market’s normal up & down manner.

I use a combination of Options (2) & (3). I have DRIP accounts set up for two stocks and I bundle dividends with new cash to invest in my current best ideas.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts

Dividends – Part 1 - Introduction

Dividends aren’t sexy. Most people looking for the “next big thing” want to get in on the ground floor of a start-up company and watch it (and their investment) grow to join the Fortune 500 in ten years.

This happens. Today’s Fortune 500 contains many names that had their day as high growth companies; Google, Microsoft, Intel, IBM, ITT, Hewlett-Packard, Ford, General Motors, and AT&T to name a few.

Some of them have taken a different turn lately. But for every company that achieves “Blue Chip” status many others stumble. Picking the right growth stocks is an art form to which many dedicate their careers.

Others say it’s a crap shoot - the answer is diversification. Buy them all and you will buy the successful along with the stumblebums. The long term average growth of the US stock market is around 10% per year. In some years, notably 2008, the stock market goes down. In other years it goes up much more than the 10% long term average. If you buy an S&P 500 or Extended Market index fund and hold it for 30 years you should expect between 8% and 12% compound growth per year depending on the specific start and end points.

Suppose there was a way to buy the stock of less risky, more stable companies and meet or beat the average market growth rate?

Dividends will let you do just that.

Links to the Dividend Special Report
Part 1 - Introduction
Part 2 - Reinvestment
Part 3 - Dividend Growth
Part 4 - Dividend Yield vs Dividend Growth
Part 5 - DRIP Accounts
How to Get Rich Slowly DRIP by DRIP

For My Next Car I Paid Cash

In 1999 I purchased a new Ford Escort on a five year loan with payments of $247 per month. I paid the loan off early but I continued to make the payments – into a savings account. For my next car I paid cash.

Links to Cutting Expenses Special Report
Cutting Expenses - Introduction

Going Out on the Cheap

Linda and I go out on the cheap pretty much every weekend, sometimes twice.

Dinner and a movie are covered for under $28 total. We never go to a first run movie theater. We wait until movies reach our local second run theater. Tickets there for Friday or Saturday evenings cost $2 each. Dinner is $14 to $18 at Panera Bread, $20 at our favorite Mexican restaurant, or grilled chicken salad for $24.

Live theater and dinner can run as high as $45. There are two amateur theater groups in our area plus two local colleges with theater departments. Tickets to these plays run between $10 and $14 each and we go to 6 to 8 plays each year.

Dinner and dancing is around $20. Most of our dancing is done at the American Legion Post where I am a member. These events usually include dinner for a total cost of $10 each. We have also me friends at a supper club with free dancing for the price of a meal. Dinner and dancing at the supper club runs about $25.

Links to Cutting Expenses Special Report
Cutting Expenses - Introduction

Compound Interest – A Natural Law of Money

When asked what he considered the most powerful force in the universe Albert Einstein answered, “Compound interest!”

Compound interest bored me for years. I squandered those years failing to use this natural law of money. George Bernard Shaw’s saying, “Youth is wasted on the young.” is appropriate - few young people save and invest for their future - until the future is now or at least very soon. Those few, however, who persist in saving and investing end wealthy by any reasonable standard.

The natural law of compound interest can work for you. As an example, the table below shows the results if a person invests $100 per month at a 10% rate of return for either 10, 20, 30, 40, or 50 years without withdrawals.

Years End Value
10 ------ $20,484
20 ------ $75,937
30 ------ $226,049
40 ------ $632,408
50 ------ $1,732,439

In ten years this investment plan yields $20,484, in fifty years $1,732,439.

The natural law of compound interest can also work against you; this table shows how a $10,000 debt incurring 10% interest would grow if no payments were ever made.

Years End Value
10 ------ $27,070
20 ------ $73,281
30 ------ $198,374
40 ------ $537,007
50 ------ $1,453,699

The amount owed would grow from $10,000 to $27,070 in ten years and to $1,453,699 in fifty years.

The formulae for calculating present values or future values are well documented. They can be found at here, if you are so inclined.

Renting Cars for Road Trips – Part 2

Linda shops for rental cars by telephone. Once we’ve set the schedule for a trip she will call car companies – usually three to five. She gets quotes from each company and makes a reservation for the best deal.

But that’s not all. It turns out that pricing for rental cars is highly variable. Periodically she’ll call the rental car companies again and get new quotes. If a better price is available she locks it in and cancels the original reservation. The process is repeated until we pick up the car.

Obviously, you need to start shopping weeks before your trip. Typically, Linda reduces our rental fee by 50%. Usually we end up with a total rental cost less than $0.20 per mile.

Links to Cutting Expenses Special Report
Cutting Expenses - Introduction