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 novice investors, 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-paying stocks, all he really wants to talk about are the "hot stocks," or what I call "the flavors of the month."
And since Facebook's astronomical P/E ratio couldn't stop him, I figured I probably couldn't either.
I just hope that after a while, some of these hard lessons will finally begin to sink in.
Every Investor's Best Friend
You see, 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 a star trader or market timer to get there comfortably. 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.
Let's say Sam had invested $10,000 in Altria Group (NYSE: MO) instead of wasting his time chasing Groupon to the bottom. That initial investment would buy him 297 shares of MO at today's prices, each one earning a dividend yield of 5.22%.
Thirty-three years later, this same example would earn Sam a $1,087,634.19 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 55, he'd be doing pretty well for himself.
What's more, if Sam stuck to this program for 12 more years, he'd hit the jackpot… collecting $154,240 a year in streaming income to go along with a $3,232,026.47 nest egg at age 67.
That's why compounding is often called "the royal road to riches."
Three More Stocks for the Long Haul
Of course, 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:
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 58%. DD pays a 3.7% yield with a forward P/E of just 10.90.
ConocoPhillips (NYSE: COP): Going long oil and natural gas is an easy one. With a P/E of 9.85, COP is trading at just 1.48x book value. One of the largest integrated oil companies in the world, COP pays a 4.54% dividend that's up 83% since 2007.
Waste Management (NYSE: WM): The largest provider of residential, commercial, industrial, and municipal waste management services, WM operates in a 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 3.9% dividend.
Now admittedly life doesn't come with a guarantee. That's why you can't take your eye off the ball. But these are exactly the kind of stocks Sam should be investing in for the long haul.
Instead, he's stuck waiting on Groupon to get back to $20.00 a share just to break even.
Judging by its lack of earnings yesterday, Sam could be in for a long wait. But maybe he's prepared to wait it out.
Kids. They think they have all the time in the world.
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