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This Time-Tested Strategy Could Be Your Winning Lottery Ticket

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."

Even after he got absolutely roasted last year buying Groupon (NASDAQ: GRPN) shares, he still couldn't wait to load up on Facebook (Nasdaq:FB) when it debuted.

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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  1. Mark | March 1, 2013

    I applaud your nephew Sam, he is young and does not want to spend his life beening a F-ing slave. He wants it all right now, help him. I know young people don't want to listen, just keep planting the seeds, I would suggest that he takes his dividends and learn to trade options with the money. Which is a whole nother can of worms. Selling options seems to work better than buying them. Uncle Steve needs to always be availibe, to guide him. I think I would give my left nut for another 45 years, but only if I didn't have to do a 9-5 job, for many people this is like living in hell. I hope he has access to Money Morning. I beleive everyone that invests has done the exact same mistakes he did, that's how we learn. When he is ready you mentor him. That's what family does. My kids have all been much smarter that I ever realized, I'll bet he is no different. My daughter at 24 puts 10% of her check into her 401k with a 3% match, My son at 26 puts 175 a month into a Roth, he has no retirement plan at his work. I planted the seeds. They do this stuff on their own. I know they know I'm not the sharpest tool in the shed, yet for some reason, they are doing what I suggested once a year in passing conversation. Maybe the younger you start the more money will be wiped away in a market correction, I'm not a genius, I just want them to plan now for when SSI ends, Both have told me they already know that.

  2. Franklin D. Lomax, Sr. | June 4, 2013

    Thanks Steve; Your article is amusingly, even refreshingly "smarty pants", about your innocent Nephew, but contains relevant advice, for us, as we are now watching our Fabulous Four Grandkids prepare to follow their Mother's, and Her Brother's incredible honors graduations, from Princeton, in the last years of the last century, as Aerospace/Mechanical Engineers. We are wondering most, about when, and how, to best begin their investment experience as we set up their inheritance trusts. We intend to begin, by asking their occasional help and advice, as we continue to age out of control of their future inheritances, while secretly teaching these children who appear to be unbelievably smarter than us, to review our ancient shares of CVX and other inherited stocks, all of which we intend to put into their future family inheritance trusts, with some of the older shares in those accounts showing from 20% annual dividends, on their inheritance year basis, to untold hundreds of percent dividends, on the single digit share prices that our inherited CVX et al, may well have been purchased for, over half century ago. Those old accounts will perfectly illustrate your Rule of 72 recommendations, just as we learned them since my Beautiful Bride inherited those amazingly long held CVX shares as we have been simply watching them prove the inherent doubling nature of serious dividend payers, if held over several generations, with today's DRIP dividend reinvestments.

    We are amazed, like Mark, the first comment author, at the incredible minds our grandchildren are proving they have, now already apparent, and of course, their Mother/Uncle will replace us as their trustees and investment teachers, as we old folks begin to fear we may forget all the details that drove us to use the rule of 72 compounding, and keep it in action forever.

    We'd love to see serious analyst's, speak more often, about the benefits inherent in our DRIP'ing dividends now over a half century in some of our families accounts, as well as new favorites, like GGN, one of the Gabelli Family of funds, with all of their funds worth some $30 billion, and GGN paying us 12.5% dividends from the day we got in, at $18/share. The April Fools Day lies about paper gold prices incented us to add a great deal to those GGN share positions, as we expect GGN shares to follow physical gold prices back up, about the same as they have dawdled down, from our entry $18/share, to Mid-April's $12 when we kicked our position up to the dollar equivalent of some 100 ounces gold, in Buffett style hopes that 12.5 % of 100 ounces would add a monthly ounce of gold equivalent, pouring up to a hundred or more GGN dividend shares DRIP'ing into our accounts, on the 24th of each month, for the next century.

    Unable to get Steve, or others to comment on the Gabelli Fund families potential to last at least as long as Google says they have already lasted, over all our lives, we were pleased to see our estimates exceeded, when the first increased dividend DRIP'ped in 139+ GGN shares, due to a Fidelity DRIP dividend reinvestment price of $10.74, far lower than our $12.12 position enhancement buys. That fluke of catching the lowest GGN price we'd ever seen, led to an increase, in the May 24th dividend, with closer to 140 GGN shares reinvested at $10.87 as GGN shares appeared to follow the liar's prices for non-existent paper gold back up, just as they have dawdled along, following it down over the past years, but never failing to pay us twelve cents per share every month.

    It would please us greatly to read your Steve's analysis on whether GGN's Buffett approach, of selling covered calls on the fund's some $1.3 Billion in strong gold and energy producers, and passing along a twelve cent/share monthly dividend, can be expected to continue adding over an ounce of gold equivalent, monthly for our grandkid's coming century, as our ancient CVX has reached a 20% annual dividend over the decades, and both may well continue to do, for the ongoing Bernake Real Great Depression generations.

    We expect that Steve's GGN analysis, and those first 31 days of dividend increases from $1502.46 equivalent to 1.036 ounces of gold, at the $1450 price of gold, on April 24, to $1523.57 on May 24th equivalent to 1.102 ounces of gold, on May 24th, could convince those amazing children, that the Rule of 72 can make astounding returns, for the rest of their lives.

    We are amused by the fact that at today's June 4th gold price, of $1398, those two months dividends, of $3026.03, are equivalent to 2.164 ounces of gold, contrary to Buffett's constant comments that precious metals investments pay no dividends. In fact, even without the first month's demonstrated increase, of over $20 monthly, six times those two months equivalent ounces equals 12.98 ounces, plus and additional $20 or more increase, all added to our first 100 or so ounces equivalent of GGN share investments, this year.

    We want, of course, to pass a serious Steve's analysis on, along with our untouched family trust accounts, while we enjoy watching both our future generations learning about the compounding miracle, when they begin managing the trusts, and advising us how best to extend those ancient gifts to them and their future generations.

    We are mostly interested in how to use these ancient accounts to teach our amazing kids to inherit and multiply every share of these permanent family retirement accounts, so that future generations of their own children will also be privileged, as we have become, at least until the abominable Bernake Real Great Depression destroys our US Dollar, and the American Republic, to work hard, add some of our earnings every month to the family investment accounts, and remain able to keep those savings untouched, and working for our entire family, forever.

    Our kids may have a half century to enjoy, and learn from our new position in GGN, as hopefully, it will mimic the long held CVX, and other positions amazing dividends DRIP'ing into our, and eventually their, inherited retirement accounts, that only Bernake's abominable deflation, depression, and hyperinflation could keep us from passing on, untouched, to add to their family trusts.

    By the time we pass away, our grand kids will have up to a quarter of a century of DRIP'ed compounding to watch, and hopefully learn from, as well. Spared the anguish Steve jokes about due to his college graduate nephew's innocence about financial matters, we intend to insure that our genius kids, and their own kids, all of whom appear as smart, or far smarter than us, can be learning, year after year, as they review their trust's accounts, about their accounts proving Einstein's compounding miracle for well over a half century to date.

    Hopefully that learning will include forever holding on to one of their Great Grandmother's bequeathed homes, gardens and curtilage, at the center of her Cabarrus County, NC, park. The park was donated by Mom, along with every penny of her wealth, to support it, and is labeled: Elma C. Lomax Incubator Farm Park, at 3459 Atando Road, Concord, NC. It is comprised of the remaining acreage of Mom and Dad's homestead farm, except her curtilage, homes and gardens, that she left us. Hopefully, as they enjoy their inheritances, and learn to take their turns as trustees of their families trusts, they will continue our careful leasing of Mom's homes and gardens to the County, with that notional rental going into our Active trading accounts, for decades, as my NC State alma mater's agricultural experts teach the modern version of sustainable farming, that I learned, on my Grandparent's homestead, in the years Dad was still deployed at Naval Air Stations, after the Korean war, and before my own post active duty GI Bill vacation of 33 months, that it took for me to earn my Nuclear Engineering Degree, at NC State, in Raleigh, NC.

    Thanks in advance, for your analysis of GGN, and any advice on how we can do as you clearly intend to do, and teach our families kids Rule 72 investing.

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