Excerpt From Chapter 1: “The Compelling Evidence for Dividend Investing”
A CLASSIC DIVIDEND STORY
Example: As the owner of a grocery store in New York City who saved most of what he made during his life, Joe was one of the fortunate people who came through the Depression with any cash. In 1944, he gave $10,000 to each of his 25-year-old twin sons, Robert and Michael. Though $10,000 was a princely sum in those days—almost enough to buy a modest home—his only proviso regarding the gift was that Robert and Michael not spend the money, but instead invest it against a rainy day.
It had only been a few years since the collapse of the stock market and many investors had lost everything. And, if that wasn’t bad enough, we were fighting World War II. Like everyone else, Robert and Michael did not know where to invest the money. Their father suggested that they buy big name companies in the Dow Jones Industrial Average (DJIA) Index, those stocks that had survived the economic collapse. He also told his sons to let the dividends work for them by reinvesting them. In 1944, the DJIA offered a pretty generous dividend yield of 4.47 percent. (To calculate the dividend yield of the DJIA Index, add up all the dividends paid by the 30 stocks in the index and then divide by the total combined prices of all the stocks in the index.) Although Michael didn’t spend the gift, he could not resist spending the dividend income his stocks provided in the first year. He had good intentions to reinvest his dividends in the future but always seemed to find a reason to spend them. Like a lot of people, Michael found that spending his dividends was easier than saving them. As the years went by, Michael enjoyed his lifestyle and the extra cash his dividends provided. His initial $10,000 investment continued to grow and by the end of 2003 had reached $769,000, more than 76 times his initial investment! His dividends also continued to increase, providing him with more income to spend each year. The $483 in dividends that Michael received in his first year grew to more than $16,000 by 2003, providing him with 30 times more purchasing power! Amazingly, his stocks provided him with more than a quarter of a million dollars in dividend income from 1944 through 2003!
Robert also took his dad’s suggestion and bought the companies that made up the DJIA, but unlike his brother Michael, he chose to follow his Dad’s advice about reinvesting his dividends. He allowed his dividends to reinvest until he retired in 1984 when he needed his dividend income to help support his lifestyle. By 2003, Robert’s initial investment increased in value, just as Michael’s had, to $769,000, but the additional shares he bought by reinvesting his dividends grew in value to more than $4.1 million. That’s right, over $4 million! By letting his dividends work for him, Robert’s initial gift increased in value from $10,000 to a total of $4.9 million, almost 500 times his initial investment. His annual dividend income also soared from $492 to over $99,000! Since 1984 he has collected more than $1.1 million in dividends from his stocks. Now that’s inflation protection. |
