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.
That's the best advice I can give to a new investor, but
it's hard advice to follow. First, $100,000 is not the kind
of money folks just have lying around. I know I don't.
Second, which stocks would you put it in if you did? There
are nearly 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
approximately 6.5%. That's Siegel's constant -- and as Siegel
told the Fool, 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.
High yields and low prices
The key to earning that return -- as Siegel points
out in his research -- is reinvesting dividends. 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.
Investors' distaste for tobacco, and fear of lawsuits, has
kept Altria's price depressed, even while the company
continued to pay out huge amounts of cash. (The yield today
is 7.6%.) That meant investors could reinvest their dividends
at lower prices, thereby supercharging returns.
And the rest of Siegel's S&P best are a pretty good
group of dividend payers:
Company
Annual Return (1957-2003)
Current Yield
Altria
19.8%
7.4%
Kroger (NYSE: KR)
14.4%
1.6%
Procter & Gamble (NYSE: PG)
14.3%
3%
Hershey (NYSE: HSY) Continued... |