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Today, I want to shed some light on a critical fact, which could mean the difference between becoming a millionaire or having few savings in 20 years’ time.
Many crypto investors have never invested in stocks. They were first made aware of the world of investing in the 2017 coin rush and have experienced some success, depending on their timing, and then endured great pain, depending, again, on their ability to avoid losses in 2018.
The big money, over the course of centuries, though, has always been made by holding a passive ownership position with great businesses:
In every developed country, there are, at any given time, people around you, who are employed in low-level jobs or mid-level positions, yet they are running a secondary engine, to accompany their earned income, which could make them wealthy one day.
They’re building wealth by way of compounding, with very low risk involved and with predictably good results.
I want to show you why it is important to study this investment strategy immediately because it is the surest path to riches in the investment world.
Here’s an example:
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This is a 40-yr chart of pharmaceutical giant, Abbott Laboratories.
Its products include Similac and Glucerna, among others. Nothing could be more boring than owning a business that manufactures baby food and food products for the elderly, but since 1978, shares have gone up 149-fold.
To set your ear straight, that’s enough to take a $5,000 position and turn it into $744,897.
There are thousands of people, who have done this. The trick, of course, is to keep holding all this time. I want to show you how that same $5,000 could have turned into over $5,000,000 for that same investor, had he taken a simple, additional step.
It wouldn’t have required any special skills, or brilliant intelligence. In fact, it boils down to taking just one, extra action step.
Take a look:
In the chart above, you can see that in October of 2013, when the stock traded for $33.56, the dividend per share was $0.14, which translates to a 1.66% yield (0.14*4 = $0.56, $0.56/$33.56 = 0.016). A rookie investor would not get excited by this, dismissing the stock and buying real estate or a high-yield business, instead.
Here’s where the magic begins, however…
Abbott Labs is one of the most valued brands on the planet. It has, since 1888, when Wallace Abbott founded it in Chicago, grown its business faster than the rate of inflation, which means that it RAISES its dividend every year, while earning more and more profits, consistently.
To explain just how rare this is and how valuable it is, consider that Abbott Labs has raised its dividend payment every year since 1971.
In the past five years alone, as the chart shows, it has doubled its dividend distribution. The investor, who bought shares in October of 2013, is now earning a 3.2% return (instead of 1.6%), without any effort on his end, other than having the discipline to HOLD.
So, holding is a critical skill. The current average holding time for a stock is seven months. Imagine how ridiculous it would be to buy a local business in your vicinity, like a pizza place, a laundromat, a car wash, or a coffee shop and then to sell it before even one year went by.
Investors do not understand that stocks represent partial ownership of businesses, and when done right, their patience can be worth millions.
In our example, an investor initially bought $10,000 worth of shares for $33.56 in October of 2013.
His cost, then, was $10,000, for which he received 295 shares, after paying a fee to his broker. Each of these shares paid $0.14 on his first dividend distribution. This is equal to $41.3 (295 * $0.14).
Now, I’ll show you the magic of compounding. This investor took that money and bought shares with it. He began the powerful process of re-investing his dividend to purchase more shares. With $41.3, he could have bought one more share. So, he then owned 296 shares. As you can see in the table above, in Q1 of 2014, Abbott raised its dividend to $0.22, so our investor earned (296 * $0.22), $65.12, a 57% increase!
He took that money and bought two more shares, so his ownership grew to 298. By repeating this process until present day, he now holds 344 shares, a total increase of 49 shares, which cost him NOTHING out of his own pocket, and each of these now earns a $0.28 quarterly dividend distribution, which means he receives $96.32 (344 * $0.28) every quarter.
Remember, only five years prior, he invested $10,000, in exchange for 295 and a quarterly payment of $41.3. Today, he is sitting on $26,000, (344 * $78), and receives $96.32, both of which (share price and dividend payment) will continue growing.
In bear markets, when the share price isn’t rising as much, but the dividend keeps growing, he will be able to buy even more shares, which means his dividend payments will advance even faster.
It is so simple, yet so few actually do this!
Instead, they panic in market corrections or get impatient when the share price trades sideways for a couple of years.
Warren Buffett has followed this re-investment strategy with his 1988 position in Coca-Cola, for example. Every year, the company pays him hundreds of millions of dollars some 30 years later, a yield nearing a 50% annualized return. Think of it this way – it would be akin to buying a $100,000 residential home in 1988, which now rents for $50,000 a year.
One of the best ways to find the best long-term compounding stocks is to watch and follow the complete list of Dividend Aristocrats and begin evaluating them to pick the most attractive one.
Personally, I invest a big part of my net worth in these types of companies, holding for years, and reinvesting dividends, only selling if the company’s competitive advantage is diminished, which puts at risk their dividend increase policy.
A famous story appeared in the newspaper several years ago about a janitor, who used his meager paycheck to buy stocks over his lifetime, using compounding. He died with a net worth of $8.7M, to the surprise of his friends, who thought he was poor and just scraping by. He donated several millions to his local hospital, which was similarly shocked, since they knew him.
There are future-millionaires all around you, who are living frugally, but making giant strides by patiently allowing compounding to work for them.
The facts are clear as day!
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This work is based on SEC filings, current events, interviews, corporate press releases and what we’ve learned as financial journalists. It may contain errors and you shouldn’t make any investment decision based solely on what you read here. It’s your money and your responsibility. The information herein is not intended to be personal legal or investment advice and may not be appropriate or applicable for all readers. If personal advice is needed, the services of a qualified legal, investment or tax professional should be sought.