The amazing power of dividends along with other investing truths

I came across a very easy to read arti­cle with twelve hard truths about invest­ing and want­ed to make sure you read it. It’s a fas­ci­nat­ing set of points on what peo­ple per­ceive about invest­ing tru­isms. It’s so impor­tant to be curi­ous and ques­tion the things we take for grant­ed in all parts of our lives, but espe­cial­ly when it comes to mon­ey and invest­ing.

I espe­cial­ly enjoyed read­ing this truth:

It’s hard to believe that over the last 100 years the S&P 500 rose 273-fold, but adjust­ed for div­i­dends it rose 18,520-fold. Never has so lit­tle atten­tion been paid to a por­tion of invest­ment returns that mat­ters so much.

Said another way…

It’s hard to be patient, but as you can see in my sam­ple div­i­dend rein­vest­ing port­fo­lio, it only takes a few years to see dra­mat­ic growth in div­i­dends. In under four years the port­fo­lio is show­ing almost 63% growth in div­i­dends, even with $GE fail­ing to raise the div­i­dend last year.

The impor­tant thing, and I dis­cuss this in my book and in this blog post about hav­ing fun invest­ing, is to mea­sure the right things so that you real­ize how well you’re doing in spite of mar­ket volatil­i­ty (which is a men­tal killer).

Anyone can get this sort of growth. After a few years of work­ing and fund­ing a 401(k), when you switch jobs roll-over the 401(k) into an IRA, pick a few div­i­dend aris­to­crats, turn on div­i­dend rein­vest­ing, and sit back to enjoy.

Do the math

Here’s a sim­ple exer­cise:

1. Go look at your com­bined 401(k) and IRA bal­ance
2. Take that num­ber, and mul­ti­ple it by 0.03 (that’s 3%… a rea­son­able div­i­dend return on a port­fo­lio of div­i­dend aris­to­crats)… this num­ber is the div­i­dend income you’d be able to gen­er­ate on your cur­rent retire­ments sav­ings
3. Open a cal­cu­la­tor app, type the result from step #2 above — your cur­rent retire­ment sav­ings div­i­dend income, and mul­ti­ple it by 1.63.
4. Keep hit­ting the ‘=’ but­ton for every 4 years you have left to work — that will keep mul­ti­ply­ing the result by 1.63. If you have 20 years to go, make sure to hit ‘=’ a total of 5 times.
5. Look at the result­ing num­ber, that’s the income your cur­rent invest­ments could be earn­ing in that peri­od of time. Remember, pre­dict­ing the future is hard and uncer­tain, but look at the hard truth above about div­i­dend returns.

It’s impor­tant that you start to think this way, about using div­i­dends as an income stream in retire­ment, because social secu­ri­ty is not going to be there the same way that it has been.