On Monday, Steve Sjuggerud covered an important idea… that the recent market decline isn’t the start of some “Big Bust.”
I agree with him.
Low interest rates are helping the economy improve… America is producing huge amounts of cheap energy… manufacturing activity is picking up… and corporate balance sheets are as strong as they’ve ever been.[ad#Google Adsense 336×280-IA]That’s why I encourage you to see the recent decline not as a reason to panic… but as a great opportunity to buy world-class compounding vehicles at cheap prices…
Regular Retirement Millionaire readers know that compounding with great businesses is a safe, time-tested way to build wealth.
Remember, compounding wealth with a great stock involves buying an investment and directing the interest or dividends you receive toward buying more of that investment.
Repeated over many years, compounding allows you to safely build tremendous wealth.
Let’s say you find a stock you like that pays a 5% yield.
You buy 100 shares and make sure to reinvest your dividends every year. Total cost: $1,000. For simplicity, we’ll assume the share price and the dividend stay fixed for a long time at $10 and 5%, respectively.
At the end of the first year, you’ll receive $50 in dividends (5%). You take that payment and buy five more shares… This increases your position value to $1,050. In Year 2, you earn $52.50 in dividends. You reinvest this, too. Repeat this process for 12 years. In the 12th year, your position is worth $1,795.86, and you’ll make $85.52 in dividends. That’s an 8.6% dividend yield off your initial $1,000 investment.
Accountants call this “yield on cost.” Your dividends turn into stock, and this extra stock then produces dividends of its own. Your cost was just $1,000, but you’re now earning 9% instead of just 5%. The compounding of extra dividends is one of the strongest ways to build wealth in finance.
But we can super-charge this process if we pick companies that raise their dividends regularly and buy back shares. Say the dividend grows 14% (a high, but not unreasonable expectation) and the stock increases by 4% in value each year… The value of your position explodes exponentially. The 5% dividend yield turns into a 120% yield in the 12th year.
Imagine if you could find companies that increased their dividends 14% a year. You’d double your money in Year 7. And your yield on your initial investment would rise steadily. Keep doing this, and by Year 25, you’ll have $11 million and your dividends would equal $6.6 million.
The key to safely compounding wealth this way is to buy high-quality businesses for good prices. Right now, those opportunities are available. Some of the world’s best dividend-paying stocks are on sale…
For example, consider Chevron (CVX). Chevron is one of the best-managed oil companies on earth. It has increased its annual dividend payment every year for the past 26 years. Just last month, Chevron traded for $125 per share. Now, it trades for $111 per share…
If you buy the stock now, you get in line to receive a 3.6% (and growing) dividend yield. Plus, when the stock goes back up to $125 per share, you’ll gain another 12% on your money, since the stock is on sale today.
This is the greatest way I know to build significant wealth in the stock market. And because of the recent selloff, we have a great opportunity to buy some of these stocks at prices we haven’t seen since early 2013.
As I said, all the factors that have led to this bull market are still in place… rates are still low, the economy is still growing, there’s still an abundance of cheap energy, and corporate balance sheets are still strong…
I don’t think these discounts will last very long… So don’t panic with the rest of the crowd. Take advantage of the fear and buy world-class businesses while they’re still cheap…
Here’s to our health, wealth, and a great retirement,
Dr. David Eifrig Jr.[ad#stansberry-ps]