Investing for Income -- Two Stories of Two Investors
In 1929, two young men suffered the loss of their parents. Both young men inherited $1000 (a large sum in 1929), both decided to put this money into the stock market for the long term, and both of them entered buy orders to their brokers at the exact peak of the stock market bull market.
But there was a difference. The first young man wanted to get rich quick. He saw the fortunes that were being made through stock market investing. He knew that the fastest growing new companies needed all available cash to expand their businesses, so he bought the largest companies that did not pay dividends.
The second young man also wanted to get rich, and he reasoned that he'd be richer the more shares of stock he kept buying as time went by. Therefore, he bought the largest companies that did pay dividends, and he planned to use those dividends to buy even more shares of stocks. He figured that then those new shares would also pay him even more shares of stock the next quarter.
Two months later, the Black Tuesday October 29 crash happened, and soon the United States slid into the Great Depression.
Both young men managed to keep working, so they did not touch their portfolios -- but between the poor economy and the needs of their families, they were both unable to add any funds to their brokerage accounts. The second young man continued to reinvest his dividends as he planned.
The world went from depression to world war to a police action in Korea to fearing the hydrogen bomb and worldwide communism.
One day in late November 1954 the first man -- no longer so young -- bought a copy of The Wall Street Journal, looked up the stock prices of his portfolio and, using a pencil and a piece of paper, added up their current values. "Let's celebrate," he told his wife. "For the first time in 25 years, I've broken even. I'm worth $1000 again!"
That same night, the second man also added up the value of his portfolio, and was surprised to find he was worth $400,000. He now received nearly $24,000 a year in dividends, far more than the respectable $4,500 his employer paid him per year. "But let's keep reinvesting that money," he told his wife. "We'll be millionaires before I retire. And to think, I started with just $1,000 at the peak of the 20's bull market. Buying dividend stocks and reinvesting the income was the smartest move I ever made in my life." He looked at his wife, and knew he better kiss her fast. "Next to marrying you, of course. Aren't you glad I did both?"
Finance professor and author of STOCKS FOR THE LONG TERM, Dr. Jeremy Siegel compared the 1956 to 2003 return for investing in a high tech growth stock darling (IBM) to a low growth, "old economy" company (Standard Oil) for the same period, reinvesting dividends. Although IBM did indeed grow fast and furious, as predicted in 1956, reinvesting dividends back into Standard Oil was the winning strategy.
Investing for growth beats investing for income only during the most manic peak of a bull market bubble (such as 1999). That was probably the greatest stock market bubble we'll ever see in our lifetimes. If you missed buying Amazon and Yahoo! when they were only $5 a share and selling them later for hundreds of dollars (before the crash), you must look at the stock market and world and U.S. economies as they are today, not then.
With today's financial markets as uncertain and unstable as they are, traditional buy and hold, and pick winning stocks, strategies don't promise much return. You must rely on luck, and that's not reliable over the long term. Stocks have gone nowhere since 1999. Yet people who invest for income have received regular quarterly dividends.
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You don't have to wait decades for the market to go up before making money. By investing for income, you assure yourself of quarterly dividend checks whether the stock's price goes up or down. Learn the secrets to getting a high yield with maximum safety. Don't sit on your hands while your portfolio goes nowhere.
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