I remember when I was a small boy with the television as a babysitter. A science show came on. I can't remember which one; this was the late 80s. The host said to go to your parents and talk to them about making your allowance a penny. Then every week have them double the allowance and your parents would "owe you" over one million dollars by week 27. Of course this didn't work when I went to my father; he started laughing and told me to go ask the babysitter.
The point of the show was to demonstrate the power of compounded interest. By now we should all know how compounded interest works, and yet when we invest, we are always looking to make as much money as possible as quickly as possible, even though we know that slow and steady wins the race.
My wealth has come from a combination of living in America, some lucky genes, and compound interest - Warren Buffett
The Long-Term Investor
Warren Buffett is arguably the world's best investor. Not because he picks the next stock about to launch, but because he picks great companies at good prices. Mr. Buffett then maintains his position in the company until the company no longer returns what he expects or he finds something better.
The best asset someone has for building wealth is time. The second best asset is capital. Why? Because anyone, even with only a few thousand dollars, can create wealth as long as they have time. Compounding gains, even small gains, over time and adding to that amount year after year is a surefire way to build wealth.
Many of the portfolios that are available to the public do not necessarily showcase how this compounding occurs. We see how much a stock pays out or we see when someone initiates or closes a position. We do not see how reinvesting dividends over time and adding to a position when relevant increases wealth.
As you read above, the process I want to illustrate is the compounding of interest; or in this case, the compounding of reinvesting dividends. Currently there are three positions in the portfolio Coca-Cola (NYSE:KO), International Business Machines (NYSE:IBM) and Wal-Mart (NYSE:WMT).
All three of these companies have a couple things in common;
- All three have solid share repurchase programs.
- All three have pay dividends for over 30 years, as well as having a strong history of increasing dividends.
- All three companies are leaders in their industry.
Instead of showcasing the equity of the portfolio, I am going to showcase the shares of each company in the portfolio. I plan to reinvest the dividends to demonstrate over time, how one can generate wealth, even with a small investment.
I allocated a set amount to purchase shares into each of the above companies. My focus is not necessarily on what price I am buying the shares at as much as it is how many shares I can reasonably buy.
I am structuring the portfolio in this manner, because if I place a dollar amount on the portfolio, others might become hesitant or intimidated. I am allocating what I can to this portfolio. If someone only has a few thousand a year to invest; it should not stop them from initiating a position in any stock they may like.
Buy the Dips!
At this time, I plan to make one purchase a year into a position. The standard I am setting is the weekly 50 SMA. Essentially, I am keeping an eye on the weekly average for the past year. I will have set the amount I have allocated to the stock, divide that by the current weekly 50 SMA price and will come up with a target amount of shares that I wish to purchase. I will then initiate, or add to a position when the price has come down far enough to purchase the desired amount of shares, or as close to it as possible depending on what I believe the market may do.
Why do this? As I am looking at reinvesting the dividends over a long period of time I want to buy as many shares as possible. When we look at a dividend, we look at the yield, which is fine. However, many do not realize or forget that the dividend is set number, not a percentage. By purchasing as many shares as Mr. Market will allow based on a budget; the investor can maximize dividend reinvestment over decades.
Here are the current positions in the portfolio. Keep in mind the companies that do not show a position have cash waiting to initiate a position at the desired share amount. As you can see a position for both Coca-Cola and Wal-Mart were initiated in Q1 2013 then added to Q2 2013. I was able to increase my allocation to this portfolio and there for made a second purchase in Q2.
There are still some companies on my watch list. These three dipped low enough for me to purchase the amount of shares that I wanted to purchase. I was actually able to purchase one more share of IBM than I originally budgeted for due to the 8% drop a few weeks ago.
I plan on updating the portfolio when there is a change in shares. I also plan to update when there is a policy change that will affect how the portfolio operates. This is something that I am dedicated to and expect to see happen over the long term.
Disclosure: I am long IBM, KO, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.