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Published: March 15,
2010
The main character in Kurt Vonnegut, Jr.'s
1965 book, God Bless You, Mr. Rosewater, is an eccentric
philanthropist. He thinks it's unfair that babies don't all
start with an equal playing field.
"I think it's a heartless government that will let one baby be
born owning a big piece of the country, the way I was born, and
let another baby be born without owning anything." To rectify
this perceived injustice, he sends one share of stock to each
newborn child in the country.
Wouldn't that be a nice start.
Don't get me wrong. I know a single share of stock doesn't
amount to much. Even a share of $500-plus Google (Nasdaq:
GOOG) stock wouldn't go too far if you had to live off of
it.
But there is a well-known way that you can stretch your
investment -- even if it starts as a single share -- to where it
can more than provide for any needs you might have.
Unfortunately, it's my experience that not too many investors
take advantage.
So how can you make your investment -- no matter how small
initially -- turn into something that you can actually afford to
live on? Simple: Reinvest its dividends.
I know. It's not groundbreaking. But are you actually doing it?
Unless you absolutely need the cash now, reinvesting is
invaluable.
Dividends are one of the most powerful wealth-building tools in
an investor's arsenal because of the phenomenon of
compounding. By reinvesting your dividend checks (instead of
cashing them), you can buy more shares, which leads to even
larger dividend checks. These larger checks can then be used to
buy even more shares and so on. In time, even a small stake in
such stocks can grow into a tidy sum.
(Reinvesting your dividends is a cinch. In fact, many dividend
payers do it automatically -- and if they don't, just give your
broker a call and he'll take care of it for you in a matter of
seconds.)
Take a look at my chart below to see what happens to a $20,000
investment earning a 7% annual yield that's reinvested.
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As you can see, steady compounding yields
amazing results over the long haul.
Thanks to the power of reinvested dividends and dividend growth,
after 10 years your portfolio could be generating $5,299 in
annual income -- that's +278.5% more income when compared to an
investor who doesn't reinvest.
In fact, it could be generating an
effective yield of 26.5% based on your initial $20,000
investment after 10 years.
It doesn't take Warren Buffett to see how quickly your income
stream can grow when you invest this way.
That's why my $200,000 real-money portfolio for
The Daily Paycheck always reinvests dividends. I know
it's tempting to take the cash -- and I know that many readers
use regular dividends to fund their daily expenses. But I also
know that a little patience will only lead to larger paychecks.
There is a little trick you can use to make the entire process
go a little faster. If you look at my chart above, you'll notice
that the tallest column (representing the most income) is
"cheating" a little.
You see, it represents your income if you reinvest... and your
investment sees +5% annual dividend growth. Investing -- and
then reinvesting -- in stocks with rising dividend payments
essentially puts your income growth into overdrive.
But if you have a portfolio full of stocks with steadily rising
payments, it also means you're costing yourself even more if you
don't reinvest your payments. Keep that in mind the next time
you're checking up on your income portfolio.
Amy Calistri
Editor
StreetAuthority's
Stock of the Month
The Daily Paycheck |
