It has been called the "royal road to riches."
Starting with just $10,000 and a small monthly contribution, any investor can use this method to create their own golden parachute – a million-dollar retirement portfolio.
All you need is time.
Time. That is something nobody seems to have anymore – or really appreciate.
But at 48 years old, I understand how 30 years can slip by in an instant. It may seem like forever, but it's not.
Instead, today it's all about the fast money. In the market, out of the market… this stock, that stock. Nobody has the patience to ride out the rough spots anymore.
However, there is one thing that never changes in the investment world: When you buy solid companies and reinvest the dividends you can build true wealth.
The best part is you'll never have to rely on Social Security to fund your golden years.
Of course, seasoned income investors have known this for years. That's why the truly rich don't spend their days glued to the financial news.
In this style of investing, less truly is more.
Because the biggest factor behind this well-worn strategy is time itself and time never fails.
The Most Powerful Investment Strategy of All-Time
The secret to this approach is in the compounding effect that Albert Einstein once called "the most powerful force on earth."
It's the safe, sure road. And anybody who tries it can become a millionaire if they are smart enough to stick with it.
In fact, this force is so powerful that I think the government is deliberately keeping it from you.
I say that because if the masses actually knew the income this compounding approach could deliver, they would immediately demand an end to Social Security as we know it.
Why is that? you ask.
That's where the Rule of 72 comes in.
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, so that from that moment on, the interest begins to earn interest on itself.
Over time, that process can add up to a small fortune even with a very modest start – say the $10,000 initial investment I spoke of earlier.
Using this simple but effective strategy, you can build a reliable nest egg in just 40 years.
Let's say you took that $10, 000 you have in the bank earning nothing and invested it in shares of Duke Energy Corp (NYSE: DUK).
Doing so, you would be buying about 475 shares of a solid company that also happens to pay a 4.7% dividend yield.
Now admittedly that may not seem like much- but one day it may just be the best investment you will ever make.
That's because at the ripe old age of 25 you make the smartest call of your life. You decide not only to reinvest those dividends but also to contribute another $50 a week to your cause.
When you wake up 40 years later you will have accumulated a $1,029,743.08 nest egg assuming the underlying share price grows a modest 4% a year.
But that's not all. You would also have an investment that now throws off a $44,420.54 yearly income stream if you need it.
Better yet, if you let this investment ride just another five years and decide to retire at age 70, your pile of cash would grow to $1,576,981.27 with an income stream of $68,082.17 a year.
And all you have to do is stick to the plan. That's what it means to be an income investor who understands time.
By comparison, starting at age 25 and contributing the current maximum of $551/month your estimated Social Security check would be just $51,000 a year at retirement. That's it – no cash cushion, no nest egg, and nothing to leave to your children.
How to Pick Dividend 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 most investors, four solid dividend payers from different sectors of the market would easily be enough to do the trick. Warren Buffett typically concentrates over 75% of his dividend investments among just five stocks.
"That's how Buffett got as rich as he did," says Martin Hutchinson, Editor of the Permanent Wealth Investor. "He's never invested much in the tech sector, but he bought stocks in stable areas and held them for decades while they grew, paying him substantial and growing dividends, thus compounding it."
Picking successful dividend paying stocks, however, is not as simple as buying only the stocks with the highest yield. In fact, it is usually the stocks with the highest yields that often trip up investors the most.
Instead, picking winning dividend stocks usually requires finding candidates with the following two qualities:
- The payout should have strong history with a minimal risk of a dividend cut.
- There should be a high probability that the dividends will increase while you own the stock.
In short, look for stocks that are stable enough to push through the downturns.
According to Hutchinson, "The main thing is to look at the company's business and its dividend policy to make sure that it can sustain the dividend through ups and downs, and that you're genuinely buying something long-term, not an annuity that will run out of steam in 10 years."
In fact, Buffett believes you should "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
Now there is a guy that understands time.
Of course, you could always rely on a Social Security check to fund your golden years…if it's still around.
If not, all it takes is that crucial first step.
To learn more about finding these dividend "sweet spots" click here.
News and Related Links:
- Money Morning:
The Income Investments You Need to Focus On Right Now
- Money Morning:
How to Win Bernanke's War on Savers with a 19% Yield