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Better Late Than Never 06/23/16

Better Late Than Never

(You Can Still Retire Well…Even If You’re Just Getting Started At Age 45.)

 

We demonstrated in our last submission (May 2016) that “Time” is an important asset when it comes to building wealth. With a long-time horizon until retirement, investments in stock are likely to produce substantial rewards. Our calculations were based on investing only $20,000, which compounds over 47 years to multimillions.

 

But what if you don’t start immediately after high-school graduation? Can you have a multi-million dollar retirement even if you haven’t put anything away so far?

 

Let’s say that you are 45 years old and live a comfortable lifestyle, but you haven’t started to put anything away for your own retirement. You have only 20 years to create enough wealth to allow you to live your same comfortable lifestyle in retirement. But investing in stocks, which we know produces the best long-term results of any asset class, may be risky in the short-term. You may worry that this may be a market top. Getting started as an investor may seem frightening. You don’t want to risk losing your hard-earned money.

 

As a DRIP investor, much of that concern can be eliminated. The time to start is always right NOW—because of the unique advantages offered by these plans: that is, the affordability and ease of establishing wide portfolio diversification and the ability to employ a dollar-cost averaging strategy—by investing on a regular basis to build holdings over time at a variety of price-points. In addition, DRIPs provide a way to bypass investing fees. Every percentage point saved will have a profound affect on the amount you will be compounding over the 20 years.

 

Our calculations were based on a 10% average annual growth rate (which is the long-term results of the market in general as calculated by Ibbotson Research). It may seem unrealistic to assume a 10% average annual growth rate because fees and commissions take a toll on the results achieved by the typical investor. What’s more, the typical investor makes many purchases and sales each year—taking gains and losses. Buying and selling involves fees and commission and it also involves taxes, which also reduce the likelihood that you will achieve the results produced by the market in general over the long term.

 

Of course, our answer to that objection is that we did not base our calculations on the investing patterns of the typical investor. Our calculations were based on a portfolio invested through DRIPs. By investing through a DRIP, you can avoid paying transaction costs and you will be less likely to be buying and selling (really speculating on the short-term direction of the market). It’s more likely that your investments will stay in place, allowing the magic of compounding to take effect.

 

What’s more, as a DRIP investor you are likely to do better than the market as a whole. We’ve compared the results of an Index made up of stocks that offer the DRIP option (the MP63 Index) with the market as described by the S&P 500 Index, the DJIA, the NASDAQ Composite, and the Russell 3000. The DRIP Index was established in 1994 and the results are clear. The DRIP index beat all the other Indices by substantial amounts.

 

The results demonstrate the value of dividend reinvestment along with the quality of the companies that offer this option.

 

 

You can easily establish a DRIP portfolio with representation in a wide variety of industries (consumer products, food, oil, healthcare, utilities, telecoms, tech…). All you need is a single share of the company stock to get started. But which companies within those sectors will provide the best long-term results? Selecting stocks for your portfolio may represent another barrier to getting started.  

 

The challenge is to put together a basket of stocks that will perform as well as, or better than, the market as a whole. The amount better that your DRIP portfolio performs can be considered an extra benefit. The point is that you can get an idea of what you will have by the time you retire based on reasonable assumption and historical data. By following the strategy that produces such results you are in position to reap the extra benefit of compounding wealth based on ever increasing dividend distributions.

 

So, which stocks deserve your faith and your money? Analysts may disagree on individual stocks, but most agree on the following essential elements that determine value (not necessarily in the order shown):  

 

1) The ability to ride through various economic cycles.

2) Histories of increasing earnings and dividends.

3) Leaders in their industries.

4) Healthy cash flow.

5) Low debt.

 

There are numerous DRIP stocks that meet those criteria. Our ambition for this article is to help you narrow the field. To do so, we first looked at the stocks that appear on Executive Editor, David Fish’s listing of companies that have paid increasing annual dividends for more than 15 years. We then applied the five criteria mentioned above and selected only those that offer no-fee DRIPs.

 

In general, when these criteria are in place, and earnings are trending upward, the enterprises will have a better than average chance to prosper and grow. Of course, you can overpay for even the best company and that's why we focus on DRIP companies, which make it easy to buy-in over time (dollar-cost average).

 

How much will you be worth when you retire? That depends on how much you put away and when (be sure you make your investments in time to get the next quarterly dividend, which we have discussed in this space in the past). Look for articles on Ex-Dividend Date.

 

The five companies we selected are shown below. You will notice that the companies are leaders in different industries to provide diversification. Of course, you should always do further research before purchasing any stock.

 

Johnson & Johnson (JNJ)—This healthcare and consumer products company is a leader in its industry It has raised its dividend for 54 straight years and is yielding 2.8% at present levels.

 

General Mills (GIS)—Best known for its cereals, General Mills also produces familiar names like Pillsbury and Yoplait. It has raised its dividend for 13 straight years and is yielding 2.9% at present levels.

 

Exxon Mobil (XOM)—The company is dominant in the oil and gas industry with enough resources to weather any storm. XOM has raised its dividend for 34 straight years. It dividend yield at present price levels is 3.4%

 

NextEra Energy (NEE)—Besides being the parent of Florida Power and Light, this company is a dominant player in the energy market and a market leader in the renewable energy area (wind and solar power). It has raised its dividend for 22 straight years and is yielding 2.9% Polaris Industries Inc.

 

Polaris (PII)—Polaris is a leader in the production of snowmobiles and all terrain vehicles (ATV). It has raised its dividend for 21 straight years and is yielding 2.7% at present levels.

 

If you decide to get started as a DRIP investor and would like to enroll in any or all of the companies mentioned above, you can do so online through the service offered by our affiliate Temper of the Times Investor Services, Inc. Just click on the company name, it will take you to an online form where you can type in the company symbol. When you get to the check out counter, be sure to enter the code “Forb” to get a discount from the amount charged to members of the general public.