Having been a reader of Seeking Alpha for quite some time now, I know the vast majority of Seeking Alpha readers are experienced investors with available funds to invest. However, based on some emails and questions I have received, I also think that on occasion a new or a wannabe investor might stumble on to Seeking Alpha, and upon reading some of the articles, say to him or herself, "I wish I had money to invest," or, perhaps they ask themselves, "How it is these people have all this money," and then add, "I will never have that much money." Well, I am writing this to tell you, yes you do have money to invest, and yes, you can build that money into a significant sum. To assure you that I know what I am talking about, I will tell you that I literally started by saving one dollar a day, and from that humble start, have saved more money than I ever thought I would have.
I have mentioned in previous articles that I bought my first stock when I was 16, but I have to admit, it was something of a fluke. I had some extra money at the time from my youth jobs and thought it would be cool to buy some stock. I bought approximately 20 shares of a clothing company that would eventually go bankrupt. It was not until I was in my mid-20s that I decided I needed to start some serious saving. Like many young males, this occurred shortly after I was married, bought a house and had welcomed my first child into the world. The realization that people were counting on me to provide for them was the kick start I needed to start saving. Unfortunately, I was still early in my work career, my wife had left her job to raise our kids, and house/car expenses, etc., were eating up what little free cash I had. What was a young man to do?
I did some thinking and came up with a plan, the first part of my plan involved saving a dollar a day. I literally would take a dollar every day and throw it in a drawer. On occasion, if I was out and thinking about buying something that was not a necessity, I would tell myself, "Don't buy that. Save the money." I would then go home and put some money in the drawer to reward myself not to spend on something I probably did not need. When the money in the drawer grew to $100 or so, I would invest it into the 20th Century Growth Fund (20th Century Funds are now called American Century Funds). I picked 20th Century Funds because, at the time, they had no minimum investment, and it was a no-load fund. I knew with a small amount of money, I needed to keep fees to an absolute minimum, so 20th Century, which had a history of good returns, no minimum investment and minimal fees is what I went with. I was fortunate that the 80s were a good time to own stocks, as I was able to see my small amount of money grow, which encouraged me to save more. Eventually, the money in the 20Th Century Fund grew sizable enough that I was able to open a brokerage account and invest in individual stocks. To this day, I still throw money in a drawer. It is more than a dollar day, and I only throw it in there once a week, but I still save some cash so that I can add it to my investment account periodically.
The second part of my plan involved saving money at work. Because money was tight at home, I didn't want to reduce my paycheck by too much, so I decided I would start by saving 1% of my salary. My place of employment did not offer a matching contribution, so that 1% would have to work on its own. At the time, I had a choice of three funds, a Money Market Fund, a Bond Fund and an S&P 500 Fund; I put all my money in the stock fund. From that point on, any time I received a pay increase or was promoted, I would increase my withholding by an additional 1%. It didn't take that long before I was saving a significant amount of my check, yet it never hurt, because my check was never reduced. I still received raises and promotions, and my check still increased, just not quite as much. For a number of years now, I have withheld 12% of salary, which keeps me below the tax deferred withholding limit the Government sets. That money is split evenly between an S&P 500 Fund, International Fund and a Russell 2000 Small-Cap Fund.
This two-part plan that I started approximately 30 years ago is still basically in place today. I have maintained the plan through up markets and down markets, because it has served me well. When I started, I knew the one thing I had going for me was time. I knew over time, that stocks would provide a good return and they have. I have since learned that the best investment approach for a long term investor like me is dividend growth stocks. I will have more to say on that later.
It Is Not Easy
If you are a new investor, or if you are thinking about starting to invest, I would like to tell you that it is easy. That all you have to do is save some money, put it in the stock market and watch it grow. But, that would disingenuous, because saving and investing is hard. It is hard to save, there are always things we want to buy, there are new cars, new furniture, nice vacations, any number of things people spend on. You should do those things, but you should do those things responsibly along with saving. Life is short, and you need to live your life, but you also need to plan for the future. If you prepare for the future, life becomes easier, because when you are comfortable financially, you are more comfortable with life.
Investing can be even harder than saving, because there will be times when you will lose money, and it is very hard to look at a computer screen or a paper report and see that you have lost money. You need the discipline to stick through the hard periods, and there will be hard periods. The toughest period I have lived through was the 2008-2009 time-frame, when the market seemingly went down every day. I would check my holdings, and every day they went down, I was losing more money than I ever thought I would, so I told myself to stop looking. I completely stopped checking my account balances. I knew they were probably down, but if I didn't know how much it didn't seem so bad. Even though I stopped looking at my balances, I didn't stop investing, I kept putting money from my check every two weeks into the stock funds, and I kept investing in my brokerage account on a regular basis, using the money to buy more shares. At times, I thought I might be the dumbest person in America, but deep inside I knew the market would turn, and when it did, I would be rewarded. As I look back today at what I paid for shares in 2008 and 2009, I can tell you that I made more money off the shares I bought in 2008 and 2009 than I made off shares bought in the years prior to that. If you are going to invest you have to understand it is a long journey with bumps and valleys along the way, but if you stay the course, you will be rewarded.
So What Should a New Investor Do?
Once you have saved a reasonable amount of money, including enough to cover any personal emergencies, you might want to invest in stocks. I say might, because as I mentioned before, all stocks have some relative amount of volatility associated with them. If you do not have the stomach for looking at a statement and seeing your savings have declined, you should not invest in stocks. Because the worst thing you can do is sell your stocks after a decline. If you decide that you have the desire and the mental fortitude to invest in stocks, the next step is to figure out what to invest in.
I would like to tell you I have a couple hot stocks that, if you invest in them, will double your money, but I don't have any hot stocks to tell you about. In fact, what I will tell you may seem boring, but it is what I believe works. If you want to invest in stocks, but do not have the time, or inclination, to research individual stocks, then you should not invest in individual stocks. I would recommend you invest in an S&P 500 (SPX) Index Fund. The fund invests in 500 of the largest U.S. companies, is diversified across many different industries and accounts for about three-fourths of the U.S. stock market's value. If you invest in an S&P 500 Fund, you should look for the lowest cost provider, which is the Vanguard 500 Index Fund (MUTF:VFINX). I would recommend you invest on a regular routine basis; don't try to time the market, because no one can. By investing on a regular routine basis, you will buy during market high and lows, thus averaging out your cost basis.
If you do have the time to research and follow individual stocks, then I believe you should invest in companies that pay dividends and grow the dividends. This is commonly referred to as Dividend Growth Investing. Many studies have shown that over time dividend paying stocks outperform non-dividend paying stocks. Jeremy Siegel, Professor of Finance at the Wharton School of the University of Pennsylvania has written a book titled "The Future for Investors" which details how dividend paying stocks have soundly outperformed those that did not. The website dividendgrowthinvestor.com recently shared the results of a study performed by the Wall Street firm Ned Davis Research which compared the performance of dividend payers versus non-dividend payers and found that
- $1,000 invested in all dividend payers of the S&P 500 index in 1972, would have grown to $27,110 by the end of 2011.
- The same $1,000 invested in non-dividend paying stocks in the S&P 500 returned $1,940 over the same period.
So as you can see, it is fairly well documented that over time dividend growth stocks outperform stocks that do not pay a dividend. For an investor just starting out, I believe there are a few dividend growth stocks that provide a good foundation for a beginning investor. These are companies that have been in business for a very long time, have paid and raised their dividends for decades and have the financial ability to continue raising their dividend for decades to come. I will tell you up-front, that I own all three of the stocks I will mention, as do many other investors. These are not exciting names, but they are companies I believe will be solid investments for years to come.
Coca Cola (NYSE:KO) - Coca Cola sells beverages throughout the world. Every day, well over 1 billion Coca Cola branded beverages are consumed by the world's population. Coca Cola's goal through its 2020 Vision is to double sales by 2020 (here). Coca-Cola is a Dividend Champion, having increased its dividend for 50 straight years, recently increasing its annual dividend by 8% to $1.02 ($2.04 pre-split) for a yield of 2.59%. Coca-Cola's dividend payout is approximately 50%, leaving room for more dividend increases into the future.
McDonald's (NYSE:MCD) - Every day, McDonald's serves fast food to 68 million people in over 119 countries and in over 33,000 locations. The basic menu of burgers, fries, and beverages are available in all restaurants, but many local menu items are also available in various countries. McDonald's continues to expand opening new restaurants throughout the world. McDonald's is also a Dividend Champion, having increased its dividend for 35 straight years. McDonald's pays a yearly dividend of $2.80, which is a yield of 3.18%. McDonald's should be announcing a dividend increase in November. The payout ratio is approximately 48%, leaving plenty of room for future dividend increase.
Exxon Mobil (NYSE:XOM) - Exxon Mobil is a direct descendent of John D. Rockefeller's Standard Oil, and is the world's largest publicly traded integrated oil and gas company. Exxon has operations around the world, including oil and gas exploration, chemical plants, pipelines, refining, and product distribution. Exxon Mobil is a Dividend Champion, having raised its dividend for 30 straight years. XOM increased its dividend by 21% this year, and now yields 2.57%. Exxon's payout ratio is a low 23%, leaving room for many dividend increases in the future.
All three of these companies have been leaders in their business for decades, all three are financially rock solid, and all three have sustainable businesses that will sell their products to a growing world population for decades to come. Investing in any of these companies would make for a solid start to building a dividend growth portfolio. These are not the only three companies with the above characteristics. I used the above three companies as examples for the type of company a new investor should seek out.
The Moral of the Story
If you are a new investor, I hope what I have written encourages you to develop a plan of your own and to start saving. Thirty years ago, I started by putting one-dollar in a drawer, and from that beginning, I have grown my savings within sight of a number I once only dreamed about. If I had discovered dividend growth investing earlier, I would be even better off than I am. Time is your most important ally, the sooner you start, the more likely you are to reach your goals. You can do it, so get started now.