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:
- Go look at your combined 401(k) and IRA balance
- 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
- Open a calculator app, type the result from step #2 above — your current retirement savings dividend income, and multiple it by 1.63.
- 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.
- 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.