A worry-free wealth growth strategy

I’m taking some days off and vacationing in Panama this week. So just talk about something boring but relaxing. As many of you know, I’m really fanatic about a boring long-term investment strategy with dividend reinvestment and compounding growth, which to me is almost a worry-free type of wealth building magic. I presented a case study by using MSFT as an example to demonstrate how powerful it can be as long as you give it enough time to work its way out. Now I just saw another demonstration made by a very-well respectful value investor, called Keith, in which he used LMT as an example. Below is just what he presented:

Let’s say you invest $10000 for LMT at $211/share with a current dividend yield at 3.1%.  Assuming the dividend increases by 10% annually and the stock remains flat, you’ll have $14,231 in 10 years. That’s a 42.31% return. It’s not glamorous, but keep in mind that you would have earned $946 in dividends by year 10, which works out to an impressive 9.46% yield… just because you kept your money moving consistently and efficiently. In 30 years, you’d be sitting on $218,208 and a 118.2% return. Most impressively, though, you’d be earning an eye-popping $65,666 in dividends just for that year.

Whenever I’m doing a presentation on this topic, it’s usually right about now that the hands start going up… but what about a declining market? Surely a stock that goes down by 5% each year for 30 years is a losing proposition regardless of the dividend, right? Wrong. Believe it or not, when the price declines by 5% each year but the dividend payouts rise, you actually end up with more money than you’d have if the stock hadn’t lost any value (after a 25% capital gains tax) that amounts to a 392% return on your initial $10,000 investment!

In this scenario, a $10,000 initial investment transforms into a $252,600 holding – or a 2,426% gain in year 30, with an annual dividend at $233,112,698.10.  Got the point?

Here is the key point: for the vast majority of people investing in stocks, the No.1  fear for them is to see their stocks going down in price. But if you are investing in a great quality dividend stock that has decades of track record to increase dividends, you really don’t need to be worried about what the stock is doing on a daily basis. As long as the business is sound in generating enough money to pay increasing dividends, you should be happy to see its stock price to go down if you just reinvest its dividends. All of this can be done automatically without any of your ongoing efforts.

I have been investing/trading in stocks for long time but I must say I was not smart enough to truly understand the compounding power of the dividend reinvestment strategy early enough. Nearly 10 years ago, I started to seriously put money into this strategy and have become addicted to it since then. Right now, my annual dividend income is over $20,000 which is growing every year. This does not include any trading income I also gain by doing short-term trading around the dividend stocks. You may ask what's the big deal with just $20,000+ per year that is at the poverty level in the US in terms of income. Well, two reasons. For one, this is just the beginning and it will be increasing exponentially over time as long as I keep it for another 10-20 year. I think this part of my portfolio may bring me over $100K annually without me doing anything additional.  It is all about the compounding effect that is magnified by time. The second part is related to my personality. I'm a firm believer of "Unpreparedness spells failure (人无远虑，必有近忧)" and I want to manage my life in such a way that even if a disaster hits without notice, my family can still survive well. While I’m certainly not so silly to brag here for this amount of dividend income, I do want to share with you my retirement-related plan, which has something to do with Panama (since I’m writing this from Panama!): I want to have a peaceful mind knowing that my basic needs with a good quality of life is sufficiently funded without fear of stock market crash or depression. A well established dividend reinvestment portfolio can really support this peaceful mind! This brings Panama into play. I’m here with my wife not as a general tourist but this is our “home” visit sort of speaking. I will write more about Panama but briefly, Panama is a retirement haven for us (and many retirees from all over the world actually). This is a country that has a wonderful policy/program to attract people to come to retire here. Simply put, as long as you have a reliable retirement income just $1000 per month, you are qualified to come here to enjoy their retirement residence with a lot of benefits attached (e.g. 25% discount virtually for everything). In other words, you can enjoy a decent life there with merely $12000 per year. So my annual dividend income as of now, while being at the poverty level in the US,  is already double this amount. In theory, if suddenly I lost everything now from my trading accounts, my properties and anything else, I can still enjoy a decent life here in Panama if I’d like to just based on the dividend income. Not mention the annual dividend income will be exponentially soaring after 15-20 years as the example above has shown.  This is really the peace of mind I want to have and I do increasingly enjoy it!

Of course, you may say, even for quality dividend stocks, it is not 100% secure as in theory they may also drop to zero. I agree with your theoretical concern and I’m actually enjoying another non-stock based wealth building strategy that virtually incorporates all the good features you want to have for your money including but not limited to guaranteed compounding growth, legal protection, and tax-deferral or even tax-free if set up appropriately. I’m going to talk more about this in the future but if you want to get more information now, feel free to send me a note.