Every time I talk to my nephew Sam, I realize youth really is wasted on the young.
Fresh out of college, what my brother’s son knows about the real world couldn’t fill a thimble.
At age 22, he just doesn’t know what he doesn’t know yet. He’s brash, idealistic, a bit hardheaded, and ends up making a lot of rookie mistakes — especially when it comes to the stock market.
Like most young bucks, he’d much rather chase the latest big momentum stock than actually work to build true wealth over time…
When I try to nudge him toward a portfolio of solid dividend payers, all he really wants to talk about are the “hot stocks,” or what I call “the flavors of the month.”
Even after he got absolutely roasted as a Green Mountain Coffee (NASDAQ: GMCR) shareholder, I almost spit out my beer on turkey day when he told me that he was buying Groupon (NASDAQ: GRPN) next.
And since a 150 P/E ratio on Groupon’s 2012 earnings couldn’t stop the lad, I figured I probably couldn’t, either.
I just hope that after awhile, some of these hard lessons will finally begin to take before it’s too late…
The Time to Start is Now
Sam still has the most valuable asset of them all. It’s called time, and it’s every serious investor’s best friend.
The problem is most of us don’t have enough of it.
Sam doesn’t realize it yet, but he has a solid 45 years ahead of him before he retires.
The best part is he wouldn’t need to be star trader or market timer to get there. All Sam needs to do is use what Albert Einstein once called “the most powerful force on earth.”
It’s the safe, sure road called “compounding” — and anybody who tries it can become a millionaire if they are smart enough to stick with it.
Thanks to the Rule of 72, this is one lottery ticket that simply can’t miss.
The Rule of 72 says that in order to find the number of years it takes for you to double your investment at a given rate, just divide the yield into 72.
For example: If you are earning a 9% dividend on your investment, it only takes eight years to double your money and roughly 13 years to triple it.
This compounding effect arises when your dividend yield is added to the principal. From that moment on, the interest begins to earn interest on itself.
Over the long haul, that process can add up to a small fortune… even with very modest investments. All it takes is time.
But what young folks like Sam don’t realize is time disappears much faster than you think.
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It contains full details on why dividends are an amazing tool for growing your wealth.
Chase Reality, Not Fantasy
Let’s say Sam had invested $10,000 in Altria Group (NYSE: MO) instead of wasting his time chasing Green Mountain Coffee to the bottom…
That initial investment would buy him 357 shares of MO at today’s prices, each one earning a dividend yield of 5.8%.
Thirty-one years later, this same example would earn Sam a $1,020,997.07 payday — as long as he reinvested his dividends, added a mere $400 a month to his account, and the underlying stock appreciated just 4% per year.
At age 53, he’d be set.
What’s more, if Sam stuck to this program for 14 more years, he’d hit the jackpot… collecting $206,000 a year in streaming income to go along with a $3,912,040.71 nest egg at age 67.
That’s why compounding is often called “the royal road to riches.”
Spread the Risk
Savvy investors also know how important it is to limit their risk.
Instead of putting all their eggs in one basket, they are smart enough to diversify their portfolios by investing in stocks that are not closely correlated.
For a guy like Sam, investing in four solid dividend payers from different sectors of the market would easily be enough to do the trick…
With that in mind, here are three more stocks he could buy on his way to financial freedom:
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DuPont Co. (NYSE: DD): A diversified chemical giant, DuPont is a global enterprise with operations in 90 countries. The company has consistently been paying dividends since 1904 with a payout ratio of 46%. DD pays a 3.5 % yield with a forward P/E of just 11.03.
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ConocoPhillips (NYSE: COP): Going long oil and natural gas is an easy one. With a P/E of 9.34, COP is trading at just 1.47x book value. The fourth-largest integrated oil company in the world, COP pays a 3.6% dividend that’s up 83% over the last five years.
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Waste Management (NYSE: WM): The largest provider of residential, commercial, industrial, and municipal waste management services, WM operates in business that’s never going away. With high barriers to entry, WM also has a virtual lock on the industry. The company currently pays a 4.4% dividend.
As a bonus pick, there’s Boeing Co. (NYSE: BA).
If Sam had bought Boeing when I recommended it to Wealth Daily readers two months ago, he would already be up 15.5% and own one of the greatest companies in the world.
Instead, he’s stuck waiting on Green Mountain Coffee to get back to $77.00 a share just to break even.
Judging by its earnings, Sam could be in for a long wait.
At 14X forward earnings of $2.62, GMCR is a $36.00 company at best — and that’s being generous.
But Sam is prepared to wait it out…
Kids. They think they have all the time in the world.
Your bargain-hunting analyst,
Steve Christ
Editor, Wealth Daily
