The following quote on Chevron Group (NYSE:CVX) that I read tonight really confirmed what I have been thinking for some time and wanting to convey to younger investors:
I could not more highly recommend (CVX) as a long-term, core holding. I have owned the stock since March 1970 when I purchased 100 shares of Std. Oil of California for $4,400. After four 2 for one splits, we own 1600 shares valued at about $174,000. In the intervening 42 years, we have received roughly $100,000 in sweet cash dividends. Now 85 years old, the annual dividend helps us live a stressless and secure retirement. 'Tortoise #1' (7 March, 2012)
The value of investing in good dividend paying stocks, which demonstrate long term potential for capital growth, supported by a dividend reinvestment plan and regular contributions, should be a core strategy for all young investors in terms of their retirement planning. By retirement planning for young investors, I mean implementing a strategy as soon as you start earning your first regular pay check - whether that be at age 14, age 18 or age 21.
I believe that the changing environment of investing for retirement, and government's (globally) unwillingness to fund retirement pensions, will firmly place the onus on supporting oneself in retirement (as it should be). I believe that Generation X (Gen-X) and Generation Y (Gen-Y) have the potential to posture themselves for retirement far better than the Baby Boomers (Boomers) have been able to. I propose that that all young investors portfolios should include a core weighting of consistent yielding dividend stocks, and that if we look at history's example, there are plenty of tricks 'old dogs' can teach the 'young dogs'.
The Changing Retirement Investment Landscape
Boomers grew up in a much different environment to younger investors. Get a college education or a trade (what suited your skills best), find a good job, and stay with the company a long time - this was important, if they had a good pension fund (I will use the term "pension fund," as it is generic, and this article isn't meant to focus solely on the USA). Buy a house (within your means) to raise a family and pay it off. Maybe take an opportune investment in a stock or two as money allowed.
Gen-Y (and now, by the changing economic landscape, Gen-X) have experienced a much more interconnected and dynamic work environment. Global work opportunities are as prevalent as domestic ones. It's not unusual for young people to work for a number of different employers by the time they are 30 years old, or even multiple employers at once, if they have a skillset they can subcontract. It is unlikely they will have a dedicated pension plan, but may be contributing to an industry fund, setting money aside (or not), or the more financially-minded may be starting their own self-managed superannuation fund [SMSF]. To an extent, Gen-X has an advantage over their peers; they have the benefit of both environments I have described, and many early Gen-X may already have defined benefit pension plans, as well as switching to SMSF as they change careers in their late 30s or early 40s.
For Gen-X and Gen-Y, one thing is clear, regardless of where you live. Social security, as a (ponzi) scheme is dying, if not already dead and withering on the vine. It's a failed delusion of ideology that will only serve the poorest of poor, the laziest of idle people, or the genuine unfortunate. it is best if the youngsters follow a different plan for a retirement of fun, frivolity, family and good health.
What Can That Old Geezer Teach Me?
For starters, plenty... a lot in fact. If you are young and can be patient for five minutes, that older man and older lady can teach you more than you think. Not any old man or lady mind you, rather, the successful self-made millionaires that you walk by everyday. You've seen them growing up, they're just not as obvious until you know what you're looking for. A mentor, someone to guide you, someone who can show you the way, but they're not going to do the work for you. If you are fortunate, your parents will be good mentors to start with. But a mentor is different to a parent; you don't have an emotional stake in them / past history, etc, and they don't have one in you. If you ask for advice, they'll give it, but they won't care one dollar if you take it or not. You, on the other hand, should pay attention to good advice that is offered freely (you need to ponder it, analyze it, and see if it suits you and your investing style).
Why Are Dividend Paying Stocks Important to Young Investors?
For the Boomers, property investing was a sure fire way to get rich, but in the case of imploding housing bubbles and easy credit, you can see the importance of not having all your eggs in one basket. However, you do need a house to live in and raise your family, so getting one and paying it off as quickly as possible is a definite front runner for a lead investment. What if you have a transient lifestyle (military, mining) or are keen to work and travel while you're young? Or what if you don't know where you want to settle down, so you don't want to commit to property? Well, building a stock portfolio and reinvesting dividends is a sure fire why to build your capital until you need it to buy a house, or as your financial circumstances change, to build a tax effective investment portfolio. Don't believe me, refer to the quote at the top of the page, and then look at the following one for another reason:
Thirty years ago, I set up an IRA for my wife. (She is now my ex). She was not happy about it, because she thought we would be better off having that money to spend. We were married 15 years before we got divorced. She took her IRA and I took mine. She kept on funding it--even though she wasn't crazy about the idea. She focused on building positions in dividend paying companies for the most part with the exception of one three bagger that she bought.
Long and short is she became disabled later in life. Her IRA has been a lifesaver for her, because of the dividends that were reinvested. She has KO with a yield on cost of 31%. She has MO, RAI, PG, COP, PEP, T, VZ, APPLE (capital appreciation winner) and a few others. She has thanked me for setting this up for her because without it, she would have had nothing but SS disability to live on. She doesn't live large, but she lives a heck of a lot better than most folks.
'Gunny' (17 June, 2011)
A Foundation For Your Portfolio
To build a house, you need a strong foundation to build upon, and the same goes for a diversified investment portfolio. I'm not saying that your portfolio goal overall should be completely comprised of dividend paying stocks, but it should be part of your foundation (for argument's sake, lets say 50%). There will be other non-dividend paying stocks you may wish to invest in, purely for potential capital growth, such as the next Apple (OTC:APPL) or the next Facebook (NASDAQ:FB). I would recommend a good core holding of dividend paying stocks that have affordable entry prices, a demonstrated history of paying consistent dividends, and that demonstrate potential for growth (capital and dividend yield). An example would be 8 - 10 core stocks as follows (for diversification):
(Ticker / Price at Close 7th March / $ Dividend / % Yield)
- BHP Billiton (NYSE:BHP) / $72.92 / $2.02 / 2.86%
- Chevron Group / $109.46 / $3.09 / 2.90%
- Coco Cola (NYSE:KO) / $68.79 / $1.88 / 2.69%
- INTEL (NASDAQ:INTC) / $26.91 / $0.78 / 3.23%
- Lockheed Martin (NYSE:LMT) / $87.96 / $3.25 / 4.02%
- PPL Energy (NYSE:PPL) / $27.95 / $1.40 / 4.76%
- McDonalds (NYSE:MCD) / $100.18 / $2.53 / 2.52%
- Microsoft (NASDAQ:MSFT) / $31.84 / $0.68 / 2.62%
- Female Health Company (FHCO) / $5.02 / $0.20 / 4.43%
NB: Prices from Seeking Alpha, Dividend Yields from Morningstar
Building Wealth One Old Brick At A Time
"I can't afford to buy a house, it's too expensive, I don't have enough savings... I can't afford to buy stocks, they're overpriced at the moment, I'll wait till the market comes back".... Sound familiar, youngsters? Yet I'm amazed at many young people who say these things, live in an expensive rental, drive the latest car (on finance or hire purchase), have high credit card debt and eat out five nights a week.
Buying a house, investing in stock, building a retirement portfolio, all takes time and it must start somewhere, so why not follow the 'self made' example and start small with a dividend growth portfolio and contribute to it regularly using a dedicated savings plan, and by reinvesting your dividends? Save your money and buy stocks in parcels of $1,000 - $3,000 (to reduce commission costs) and set your DRP up so it occurs automatically. You'll be surprised at what you can achieve within as little as one to two years.
Building a diversified portfolio is easy this way, one brick at a time. Of note, the above companies are only examples to illustrate a point; you need to do your own fundamental analysis to identify which companies stocks meet your own investment requirements, desired dividend yields, and your investment timeline.
Summary - My Two Cents
I have tried to outline in this article an investment strategy dedicated to young investors, which builds on the lessons that our elders (and some successful young investors) have taught us. And by young, I mean within the age bracket 18 - 40 years. Don't worry, if you are 40 and haven't started yet, it's not too late to start The key thing here is to to start young to maximize your investing time frame, use the power of compound growth on your portfolio, and to ensure that when retirement rolls around you never have to rely on social security (which will be a museum exhibit) or charitable handouts. Even more important is that you should be doing something, anything, to start you on your journey to financial freedom. If you are a young investor, its never too early to start (my 7 year old daughter already splits her pocket money into three jars - spend / save / charity), and I already contribute $1 per day into each of my daughters accounts to help them save for their first house, or university (The catch is they will have to match what I have saved to get it.)
I was raised in a working class rural background, but have taken the lessons I learned to improve my own life, and to provide a better one for my family. That said, I wish I had a good financial mentor earlier in life, who showed me the potential that a strong dividend focused stock portfolio could provide for me. Hopefully, this article provides the incentive for the young dogs to start, the patience to listen to the old dogs, and the impetus for the old dogs to share their tricks.
This article is dedicated to all the financial & life mentors who have kindly given me their time and wisdom when asked (and sometimes when not), freely and without reservation, over the last 30 years.
Disclaimer: This advice is general advice only. You should seek your own independent professional financial advice prior to making any investments of your own. If you have a parent or mentor who gave you a financial head start in life, remember to thank them, and to share that knowledge.
Note: BHP is a long term favorite of mine, which I have been in and out of over the years. 'The Big Australian' will always be a mainstay of my portfolio as a blue chip with a consistent paying dividend (incidentally, for a great read on the company, get a copy of 'The Big Fella').