How Dividend Investors Cruised Through the Stock Market’s Lost Decade

Marc Lichtenfeld By Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Dividend Investing

I opened up the email and looked at the numbers. I thought my researcher had made a mistake…

So I checked the dates. I ran the numbers myself manually.

How was it possible that during a 10-year period – when stocks went up a grand total of 4% – investors in some of the most boring blue chips saw returns of 70%, 107%, 155% and 238%?

I knew the strategy would work… But I didn’t expect it to produce those kinds of results during the stock market’s “Lost Decade.” A decade when investors made virtually no money due to two booms and busts.

Einstein’s Most Powerful Force

Albert Einstein once said compounding is the most powerful force in the universe.

This is a concept that should be taught in every school in the country!

Compounding can be used to create wealth (if you save and invest) or destroy it (if you get too deep in debt).

Here’s a very brief breakdown of how it works…

Suppose you have $10,000 and earn 10% per year on that money. In Year 1, you earned $1,000 ($10,000 x 10% = $1,000), and you add it to the $10,000 to give you $11,000. In Year 2, you earn another 10%, which now pays $1,100, rather than $1,000 because you’re getting paid 10% on $11,000 instead of 10% on $10,000. And so on and so on.

At the end of 10 years, you end up with $25,937.

The Most Powerful Force in the Universe: Compounding

Year

Starting Sum

10% Growth Per Year

Sum At End of Year

1

$10,000

$1,000

$11,000

2

$11,000

$1,100

$12,100

3

$12,100

$1,210

$13,310

4

$13,310

$1,331

$14,641

5

$14,641

$1,464

$16,105

6

$16,105

$1,611

$17,716

7

$17,716

$1,772

$19,487

8

$19,487

$1,949

$21,436

9

$21,436

$2,144

$23,579

10

$23,579

$2,358

$25,937

If instead of earning interest you were paying interest, you’d pay a lot more money than your original loan. That’s why homeowners often end up paying two to three times more for their house than they actually bought it for. And why lenders make so much money.

Now, let’s go back to those boring blue-chip, dividend-paying stocks. And let’s look at the potential power contained in them…

The Choice of the Dividend Generation

When it comes to stocks, it doesn’t get any duller than Coca-Cola (NYSE: KO). The company has been around forever – 125 years – and it seems its primary innovations these days are new advertising campaigns in its endless “Cola War” with bitter rival Pepsi.

We all know Coke. We either love it, hate it, or think the two brands of caramel-colored, carbonated sugar water are interchangeable. So, Coke’s sales and earnings aren’t blowing anyone’s socks off. They just grow at a slow, ho-hum steady pace.

Yet here’s the exciting part, at least for investors: The company has been raising its dividend every year since 1962.

In fact, over the last 10 years, it raised its dividend an average of 10.1% per year.

This is where the power of compounding comes into play…

As a result of these dividend increases, $10,000 invested in Coke in 2001 turned into $17,092 – a 70% return – today. If you’d just simply held Coke, your share price return would be a mere 28%.

The S&P 500 only moved up just 4.3% during that span.

This is how you’d have amplified your returns investing in Coke…

When an investor reinvests his dividends back into the stock, he buys more shares of stock, which generates more dividends, which buys even more stock, which generates even more dividends… And if those dividends are increasing every year you buy an even greater number of shares, which spits out even higher dividends…

It’s how a boring stock like Coke can generate a 70% return while the S&P climbs just 4%.

And even more boring companies than Coca-Cola would’ve generated even greater results!

  • Procter & Gamble (NYSE: PG), the maker of consumer products like Head & Shoulders shampoo, Gillette razors and Old Spice, generated a return of 107% for investors when they reinvested the dividends.
  • An investor in Exxon Mobil (NYSE: XOM) in 2001 could have turned $10,000 into $25,461 by purchasing shares once and then reinvesting the dividends.
  • And lastly, McDonald’s (NYSE: MCD), due to strong price gains in addition to increasing dividends, returned an incredible 238% during the stock market’s Lost Decade, turning $10,000 into $33,854.

Notice, these aren’t stocks where investors were trying to hit homeruns. They’re not Google (Nasdaq: GOOG) or Apple (Nasdaq: AAPL). These are companies that’ve been around for years – and have raised their dividends annually for decades (companies that I call Perpetual Dividend Raisers).

When I speak about this method at investing conferences all over the world, I call my presentation “The Only Investing Strategy You’ll Ever Need.” That’s because it flat out works.

Every Bull Turns a Dud into a Stud

Everyone is a genius during a bull market.

But how many people do you know saw returns of 70%, 107%, 155%, or 238% between the stock market’s Lost Decade?

This is a strategy that can help you rebuild that nest egg for or during retirement. If you have kids or grandkids, it’s a strategy they need to learn now.

The kinds of numbers I showed you over 10 years pales in comparison to what happens if you hold for 20 years. In many cases you’re talking about $10,000 initial investments that become worth 10 times that amount. Again, that’s by making a one-time investment and doing nothing else other than automatically reinvesting the dividend.

For example, $10,000 invested in Colgate Palmolive (NYSE: CL) in 1991 turned into $112,190.

  • Start implementing this strategy.
  • Start teaching this strategy to those younger than you.

It will be the best investing decision you’ll ever make.

In Wealthy Retirement, we’re going to talk a lot about Perpetual Dividend Raisers, including how they can generate more income for you today and help increase your buying power, as well as maintain your lifestyle over the years.

We’re also going to touch on other subjects that’ll help you prepare for retirement. Or if you’re currently retired, have a better lifestyle than you have today.

And best of all: It won’t cost you a penny. I hope you’ll join us on this journey to your Wealthy Retirement.