Over the past few months, I’ve written about the advantage of following a dollar-cost averaging strategy—through dividend reinvestment plans (DRIPs), in particular, and holding on for the long term—the longer the better! With this strategy, even the smallest investor can efficiently invest in equities. The advantages are substantial:
First, you can minimize the risk of entering the market at what might turn out to be the wrong time. Additionally, you will naturally “average down” because your regular investments buy fewer shares when prices are higher and more shares when prices are lower.
And most importantly, by holding high quality dividend paying stocks over the long term (particularly ones that routinely raise their dividend payouts), the “magic” of compounding will turn even modest investment amounts into a fortune. We provided examples to illustrate the effect of compounding.
Below are links to my previous articles.
- Compound Interest – The Eighth Wonder of the World
- It’s Time to Get in the Game
- Turn Bad Times Into Good Times With No-Fee DRIPs
I’m happy to report that many Weiss Education readers found these articles very useful, and very interesting, particularly my last article, where we demonstrated the astounding effect of compounding based on an average annual return of 10%.
I received a few emails, asking how we arrived at a 10% average annual return. Well, first, let me explain what “average” means.
Basically, while in some years the market may have plunged and in others it may have soared, the average over the long-term was substantially positive. So, we decided on 10% average, based on the findings provided in the annual compendium published by Morningstar Ibbotson: Stocks, Bonds, Bills, and Inflation Classic Yearbook. According to this source, the stock market has gained an average of 11.3% annually since 1926.
In the November article, we showed that if you start with $10,000 when you’re age 20 and invest $200 a month ($2,400 a year) for 10 years, your $34,000 investment would grow to more than $3 million by age 70.
Even if you delay your start until age 30, you’d have nearly $1.2 million by age 70!
If you are among the enthusiastic readers of my recent articles, my question is… “Have you acted on what you read?” And if you have NOT begun to invest for your future, “Do any of the following checked explanations describe your reluctance to do so?”
1) You think that the process is too complicated.
Let me assure you that DRIP investing Is NOT complicated. You can use the enrollment service we organized in 1986 to help our Moneypaper subscribers enroll in the plans. You’ll be notified when your account is open and, after that, you simply send checks to your account at each DRIP.
In fact, you can even specify an amount that you would like the DRIP administrator to withdraw from your checking account to fund your account on a regular basis. Investing directly couldn’t be simpler, or more efficient.
2) You think you have missed the boat or you’re too old to build up meaningful returns.
While the “magic of compounding” is most dramatic if you start when you’re very young, that doesn’t mean that you can’t get tremendous results if you get a later start. Let’s revisit the compounding illustration to see what happens when you start later. Say you start at 35 years-of-age and in Year One you commit $1,000 to each company in a 10-stock DRIP portfolio ($10,000 invested over the first year).
And, let’s say that you can add a $150 investment into each company every month for 10 years. That’s $1,500 per month ($150 in each of your 10 DRIPs) or $18,000 a year, which while substantial, is not undoable for many two-income families.
What will you end up with? It all depends on how long you can allow your total $190,000 investment to compound: Based on an 10% average annual return over the investment period, your retirement nest egg could grow to $2,104,436 (by 65-years-of-age), $3,389,215 (by 70 years-of-age), and $5,458,365 (by the time you are 75 years-of-age)! Keep in mind that these amounts may be more than you will require in retirement and adjust your investment amounts accordingly.
Here’s the math:
These numbers are just for the purpose of illustration. We did not calculate the effect of taxes on your dividend distributions and we assumed that you are holding your stock for the long term. Otherwise, you would trigger capital gains taxes. Also, keep in mind that the shorter the time period for your investment, the more risk that your average annual return will not mirror the long-term results of the market in general.
3) You think that you don’t have enough money to set aside for investment purposes.
As for not having enough money to get started: Your loose change—or the money you spend on coffee or cigarettes—can set you on the road to a secure retirement. That’s because many DRIPs accept investment amounts of as little as $25 or $50. You don’t have to start with $10,000, but you do have to start! You just have to have the discipline to get started.
So, if you are ready, here are the first steps to consider:
Choose your DRIP companies. Not sure which DRIPs are right for you? Check out our recommended starter portfolios here. Or, you can review our model portfolios to get a better idea. (available in the DRIP Club Members Area). You can also search for no-fee DRIPs at our Website: www.directinvesting.com
Get enrolled. Becoming enrolled in a DRIP is a one-time event, and remember, you can enroll in the DRIPs of your choice. YOU are in total control!
Watch your mailbox for a statement from the companies in which you’ve enrolled. (It usually takes about 4 weeks to set up your plan, so be patient.)
Decide how much you can afford to invest routinely and request automatic investment from your checking account (or mail checks using the tear-off form that come with your statements).
Make a new Year’s Resolution to Start Saving for Your Retirement with DRIPs! It will be the best commitment you can make to yourself and your family, for generations to come!
Until Next Time,
Ms. Vita Nelson is one of the earliest proponents of Dividend Reinvestment Plans (DRIPs) and a knowledgeable authority on the operations of these plans. She provides financial information centered around DRIP investing. She is the Editor and Publisher of Moneypaper’s Guide to Direct Investment Plans, Chairman of the Board of Temper of the Times Investor Service, Inc. (a DRIP enrollment service), and co-manager of the MP 63 Fund (DRIPX).