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Investment Tip of the Day
Growing Rich By Boring (Re)Investing
Although it may seem counterintuitive on the surface that a company who distributes dividends to shareholders will, in the long term, net you bigger gains than a company who focuses solely on growth with higher share prices by reinvesting every dollar back into its operations, it is a well-studied fact.
Investors tend to not realize this and simply assume it’s all about rising stock prices or market capitalization that determines ones returns completely forgetting that your investment should also include cash paid out.
One popular example is of IBM vs. Standard Oil from 1953 to 2003. If one had invested $1,000 back in 1953 in each company and looked to reinvest any distribution then in 2003 your Standard Oil shares would be worth about $300,000 more than your IBM shares despite the fact that IBM had bigger growth in this period. The difference lies in the amount of money that was distributed as dividends back to its shareholders. Standard Oil had been very generous during their rise and in the process the savvy investor would have made quite a larger fortune.
So although growth stocks may get all the headlines it is usually the less noticed, more boring, types of dividend distributing stocks that focus partly on growth and rewarding their success to their shareholders that ultimately gives one the biggest gains in the long term.
Most people think their only chance of becoming a millionaire is by way of winning the lottery but the reality is the chances of hitting the jackpot is 14 million to 1. The truest and most certain way to become a millionaire is actually much simpler and we’ve discussed it here. It’s through a slow, but consistent saving, investing, and reinvestment approach over time. So although it comes off boring it all comes down to proper discipline and patience that determines ones future financial well-being.