June is typically a month of gift giving with important milestones for many younger people. There are graduations and weddings—events that mark lifelong commitments and should be commemorated with significant gifts.
Too often we fall back on giving a gift of money, where your gift is distinguished from the next only by the dollar amount. Instead, you might consider giving a gift of a five-stock portfolio held in dividend reinvestment plans (DRIPs).
Your total cost to set up such a portfolio, depending on the price of the stock that you select, is somewhere around $500. In addition to the financial benefit, which is likely to compound to substantial wealth over the long-term (which I will demonstrate below), this gift will provide the recipient(s) with a first-hand experience to a logical approach to investing.
By “saving” in the stock of the companies in a portfolio of DRIPs, your young investor(s) have the opportunity to build wealth by participating in the growth of the economy in the easiest and most efficient manner possible. How much wealth? It could be millions of dollars!
Lets assume that the graduate, the young couple, (or you on their behalf), invest $5,000 a year for the next four years—spread evenly among the five-stock portfolio made up of high-quality dividend-paying companies. Let’s also say that no further investments are EVER going to be made into those accounts. The results will be astounding.
What would your $20,000 (invested over the four years) turn into? The answer is more than $1 million, assuming an 8% average annual return over the 47 years until your graduate reaches 65 years of age.
Is an 8% average annual rate of return realistic? Let’s look at what occurred during the past 47 years. Even though the Dow Jones Industrial Average made no net progress between 1966 and 1982, the DJIA has grown 18 times over since then to the present level of around 18,000. So what can you expect from a portfolio of dividend paying stock over a 47 year period, especially if they are carefully selected high-quality stocks that tend to increase their dividend payouts on a regular basis?
Might you obtain a higher rate of return? Say, 10%. That’s the long-term rate of return of the market in general as calculated since 1926 based on Ibbotson Research. Our portfolio may well provide above average returns compared with the market as a whole, but let’s accept a 10% average annual rate of return. In that case, your $20,000 investment would provide more than $2.5 million.
Here’s how the calculations look:
The reason for such a great benefit is that nothing is lost to investment fees. Once an investor is enrolled in a DRIP, subsequent investments can be made without going through a broker and without fees–and dividends can be automatically used to purchase more shares (and fractions). That way, every penny is used to create a growing stake in the underlying company. What’s more, the likelihood of the investment staying-put over the long term is maximized when the assets are held in DRIP accounts. The “staying-put” part of this equation is key.
The following are the five companies we would include in a long-term portfolio.
- AFLAC (AFL) is a leading insurer that’s maintained after-tax operating margins of over 10% since 2007. An extremely investor-friendly company, AFLAC has paid increasing dividends for 34 consecutive years raising their dividend by 5.1% in 2015.
- Johnson & Johnson (JNJ) has a market capitalization of about $280 billion and its business is split between drugs, medical devices and products on one hand, and consumer goods like Band-Aids, Baby Shampoo, and topical medicines on the other. The dividend has been increased for 53 consecutive years.
- International Paper (IP) is the dominant company in the area of paper and packaging, both in the U.S. and abroad, with almost $23 billion in annual sales and a market capitalization of about $16.5 billion. With a yield of about 4%, it has raised its dividend for 6 straight years (and its latest increase was 10%).
- General Mills (GIS) is a major food processor with products like Yoplait, and Pillsbury. The dividend has been increased for 12 straight years and has never been cut in the 114 years that the company has been paying them.
- ExxonMobil (XOM) is the largest oil company that resulted in the breakup of the old Standard Oil conglomerate (at $333 billion market cap) and routinely logs the largest annual profits of any American company. Its dividend has been increased for 33 straight years.
We decided to limit the selection to five companies that are household names…stocks the recipients are likely to be familiar with and can relate to.
To qualify for inclusion, the company must have a long history of dividend increases. We kept total return in mind, looking for companies with excellent earnings and dividend growth rates as well as sustainable business models. We limited our selections to companies that do not charge fees for investing through the plan, and we sought to diversify the companies in terms of industry.
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 at www.drp.com and www.directinvesting.com. 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).