Put $100,000 into undervalued, dividend-paying stocks
today. Through a combination of capital gains and reinvested
yields, the market could turn that single lump sum into a $1
million fortune over the next 15 to 20 years.
While that's solid advice for any new investor, it can be
hard advice to follow. First, $100,000 is not the kind of
money most folks just have lying around. I know
Idon't. Second, which stocks would you invest that
money in if you did? There are more than 3,000 dividend
payers trading on the U.S. markets alone, and there's no way
to tell at a glance which are good buys.
The good news is that we can work around these
limitations.
Invest more
There are fewer barriers to investing today than ever
before. Opinions on stocks are a dime a dozen online, and
discount brokerages make it possible to buy and sell shares
for as little as a few dollars from the comfort of our own
homes.
Those are wonderful developments for individuals who seek
to build a secure financial future. You don't need $100,000
to start investing. You can start with as little as $350 --
the amount needed to keep commissions at 2% on a $7 trade.
What kind of returns can you expect from such a small
investment?
Good ones.
Constant consistency
Wharton finance professor Jeremy Siegel has
demonstrated that it's reasonable to expect a real return of
about 6.5%. That's what's known as Siegel's constant -- and
as he told the Fool in a recent visit, he's pretty proud to
have a constant named after him. Add inflation to that 6.5%,
and you're looking at a nominal return of approximately 9%.
Using the nominal rate, the stock market could deliver you a
tidy $400,000 nest egg after 25 years of investing $350 each
month. Not bad for only $105,000 of principal invested.
High yields and low prices
The key to earning that return -- as Siegel points out
in his research -- is reinvesting dividends. And the power of
those dividends can be profound.
According to Siegel, the best-performing stock of the
original S&P 500, which began in 1957, is
Altria and its incredible 19.8% annualized
return. Why has it done so well? Reinvested dividends.
Investor distaste for tobacco and fear of lawsuits has
kept Altria's price depressed while the company continued to
pay out huge amounts of cash -- the yield today is 7.5%. That
meant investors could reinvest their dividends at lower
prices, thereby supercharging returns.
Today, given the volatility of the stock market, a number
of stable dividend payers are on sale with better-than-market
average (2.7%) yields. That includes ...
Company
Current Yield
Novartis (NYSE: NVS)
3.7%
Intel (Nasdaq: INTC)
2.8%
Kraft (NYSE: KFT)
4.1% Continued... |