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Why Dividend Investing?
I will make you a great nation, I will make your name great, and you will be a blessing. I will bless those who bless you and curse those who treat you with contempt. Gen: 12: 2-3
Seeing Only In Part
During the decade of the 90's and part of the new millennium, the dividend yield from stocks in the S&P 500 had reached a multi-decade low under 1.2%. Because of this, very few people were concerned about the return on a stock purely based on dividend growth. In fact, most people looked toward high growth based on their stock price going up (rising capital gains). However, the powerful bull market that primarily took place from 1995 to 2008 (with the exception of the tech wreck that occurred in 2000-2001) was more the exception than the rule. Historically, the S&P 500 delivered total returns of 10.5% yearly between 1926 and 2004. Of this total return, capital appreciation (rising share prices) accounted for 6.1% while the remaining 4.4% was due to dividend payments - a much larger amount than most investors realized. It is in this combination we see the greatest difference between a standard non-dividend paying stock or bond (or other fixed income instrument) and high dividend stocks. The dividend paying stock not only may appreciate over time with rising share prices, but can also provide additional income by paying out dividends. Bonds simply cannot match that upside potential. Moreover, bonds are much more susceptible to interest rate fluctuations, as rising rates can quickly erode the value of their fixed interest payments. This is even more pronounced when one is invested in a bond fund, as the value of the fund share price plummets drastically as interest rates rise. This is why dividend reinvestment is smarter than going the "bond route".
The Blessing of Compound Growth
To best understand the power of compound growth, let's use an example as related to the graph above. Suppose an investor buys 1,000 shares of "Company X" at a purchase price of $10 per share. This would be a total of $10,000 invested in "Company X". Let's assume the company is paying out a conservative 6% dividend and the shares increase in value at an 8% annual rate. Since most dividend paying companies pay out their dividends 4 times a year (quarterly), the first dividend payment will result in $150 profit (derived from $10,000 x 0.6 -which is the multiplier for 6%- divided by 4 (quarters in a year). This amount would be sufficient to purchase 15 additional shares of "Company X" ($10/share x 15 = $150). After one year, an additional 60 shares are purchased simply based on the profit the dividend pays out (15 shares x 4 quarters/year = 60). In addition, the shares increase in value 8% year, therefore we see a 14% total increase in "Company X" by the end of the year. This does not take into consideration the dividend acheived by the 60 additional shares acquired each year (not included in this example due to arithmetic complexity within each given year).
No Dividend Reinvestment
If you take the dividend income from "Company X" and use it for income each year, your share price will still increase. In fact, after 30 years, assuming a 8% yearly share price increase, each share should eventually appreciate to $100. However you will still only be left with the same 1,000 shares after the 30 year period. Therefore, your 1,000 shares will have appreciated 1,000% in 30 years to be worth $100,000. And your accumulated dividend payout as income would be $73,408, which is how we arrive at the middle figure of $173,408 as shown in the chart. Still not shabby.
With Dividend Reinvestment
However, if you reinvest all your dividends into purchasing company shares instead of using it for income, after 30 years your stake in "Company X" would have grown to 5,743 shares. Again, assuming a conservative 8% yearly compounded annual growth rate, the shares should be worth $100 per share! The net result is that with dividend reinvestment via share purchases the total value of your investment increases to $577,948, more than 57 times your initial investment of $10,000 after 30 years!
If you began investing with this plan at age 40 and decided to begin spending the dividend income from these high dividend stocks at age 70 for retirement purposes, you would receive annual dividend payments of about $34,000 per year. Incredibly, this yearly income would amount to more than 3x the initial $10,000 outlay for "Company X". And this calculation assumes a mere 6% dividend yield. Consider investing in our three highest paying Israeli "High Dividend Achievers" with an average yield of 17.2%, and the amount saved after 30 years would be well over $1,000,000 with a potential yearly income of over $70,000! And this would be based on only a $10,000 initial outlay.
There is no doubt that this type of investing can be extremely prosperous. It is in this example that we admonish younger individuals to begin investing with as little as $1,000. The above example gives the impetus for doing so. Even an amount as little as $1,000 will still increase in value 57x the amount invested for a total of $57,795 after 30 years. And in the case with our three Israeli high dividend stocks, this amount could well be over $100,000! This is very significant. If a family would be able to catch this vision of investing, the cumulative returns could well border on the miraculous. Think, just investing $1,000 yearly in this manner for 30 years would yield well over a million dollar income after 30 years!
A Caveat
We do need to provide a realistic caveat to this example. It would be wonderful if we could assume a continuous 8% growth rate for this company year in and year out for the next 30 years. However, life is never so consistent nor positive. No doubt, there will be years when market downturn(s) reduce the value of an equity. For example, in the recent "credit crunch" downturn that took place in 2008, the average loss in the S&P 500 was 36%. With other stocks it was even higher, some approaching even a 90% loss of valuation. This means a $100,000 valued portfolio following the S&P 500 would have been reduced $36,000 to a value of $64,000. Ouch! To help offset this possibility, it is imperative that one use protective stop loss settings on all your stocks. Again, this is one of the benefits we offer to our subscribers, guidance regarding stop loss values. Nonetheless, since the 2008 downturn, the S&P 500 has rebounded approximately 60% from its low. This would raise the value of the $64,000 portfolio back to $85,600. With a recommended 15% stop loss protection plan in place, you would have only lost $15,000 during the downturn, and your portfolio would be well above $100,000 if you re-entered the market at the proper time. Let Bless Israel Investments help you achieve stellar investing results, while at the same time blessing Israel, through our dividend reinvestment services.
Why Dividend Investing?
$400,000
$500,000
$900,000
$600,000
$600,000
$700,000
$100,000
$200,000
$300,000
$1,000,000
$174,034
$577,948
$1,000,000+
Company X @ 8%
Company X @ 14%
Israeli Companies @ 17%
No reinvestment
Dividends Turn $10,000 Into $577,948 and even over $1,000,000
Reinvestment
Reinvestment
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