In This Article:
- How to Turn a Thousand into a Million
- What’s a DRIP
- Compound Interest: The Most Powerful Wealth Building Secret Known to Man
- It’s Investing, Einstein
- The Rule of 72
- Starting a Dividend Reinvestment Program
- One Stock to Start Your DRIP
What did one penny say to the other penny?
“Let’s get together and make some cents.”
I’ll see myself out.
Now, I’m a dad, and can get away with a “Dad Joke” here and there. But honestly, when it comes to making money, you can’t worry too much about being witty or fashionable.
Some strategies stand the test of time and can easily turn those pennies into dollars without you having to lift a finger.
In order to retire rich, you don’t have to day trade. You don’t have to buy options. You don’t have to speculate on sink-or-swim penny stocks. You just have to be patient.
As other elders have probably told you, the best time to start investing is yesterday. The next best time is today.
Let’s take a quick example from the realm of “what we should have done.”
I know from experience…
- My grandmother bought me savings bonds each year for my birthday and kept them in a special file. Once they matured, she gave them to me to help me buy my first car.
- My grandfather gave me gold and silver coins every year for Christmas — which are now worth far more than when I got them.
- My father regularly bought me stock in several companies, and when I turned 21, he handed them over to me. I thankfully still own most of them today…
So when my son turned four, I gave him the single most boring gift in the world: a stock certificate.
Now, I didn’t buy my son’s stock the “normal way.” I started him on a stock plan called a “Dividend Reinvestment Plan” or a DRIP.
What is a DRIP?
If you invest $4,000 into a DRIP around the birth of a child or grandchild and let it ride — meaning you never even contribute another penny to that investment — that $4,000 will compound to around $1 million by the time they turn 65.
DRIPs allow your dividends to compound like they’re on steroids. So if you want your little one to retire a millionaire, it is rather simple, as long as you start a DRIP plan early.
Just take a look at this chart:
That is assuming a 8% return — which, with most of the plans I’ll recommend, is completely within the realm of possibility.
If you make semi-regular contributions — say as part of their birthday present each year — that number will be far higher.
But the earlier you start, the better.
What is the History of DRIP Stocks?
DRIPs began as a company stock program that was — at the time — only available to employees of a select group of companies. It allowed company workers to purchase shares of their employer — often at a discount.
This was a big success for companies, considering they could create a long-term and stable core of shareholders who conveniently are incentivized to work harder and boost productivity. It was a win-win situation. But there was the issue of what to do with the dividends the companies owed to the employees. The company would have to do a lot of work to calculate the dividends and provide a dividend payment. In the end, a lot of the workers just ended up putting the money back into the company’s stock.
Employees were given the opportunity to just reinvest their dividends into more shares or fractions of shares. Now there was no need to shuffle money all over, the company could count on continued purchases of shares by long-term stable investors, and everyone was happy.
Employees enrolled in DRIPs never had to check their portfolio, never paid trading fees, and didn’t have to fork over 3% of their wealth for a money manager to move around a basket of stocks. Their investment was locked in on autopilot, and they made more and more money every year without anyone having to lift a finger.
Compound Interest: The Most Powerful Wealth Building Secret Known to Man
Compound interest is perhaps the most powerful wealth-building secret known to man. It’s quite simple: your interest payments buy more shares, which raises your stake in the company, and then the interest payments keep growing as you accumulate more shares.
It is a set-it-and-forget-it strategy that will allow you to compound the interest on your stocks without having to do practically anything.
You can think of it as “interest on interest,” and it will make an investment grow at a much faster rate than simple interest. Many of the greatest minds in history knew this and profited from it.
Take founding father, Ben Franklin, for example. He was well known for platitudes like “a penny saved is a penny earned,” “an investment in knowledge always pays the best interest,” and “I’d rather go to bed without dinner than to rise in debt.”
But he didn’t just talk — he put his money where his mouth was.
Way back in 1785, French mathematician Charles-Joseph Mathon de la Cour ridiculed Franklin’s book Poor Richard’s Almanack as being “too optimistic.” He wrote a scathing critique about leaving a small amount of money in a will only to be used after it had collected interest for 500 years.
Little did he know that Ben was listening…
Franklin wrote to Mathon de la Cour and thanked him for such a great idea, telling him that he had decided to leave a bequest to his native Boston and his adopted Philadelphia of 1,000 pounds sterling to each city, with the condition that it was put into a fund that would gather interest over a period of 200 years. That small stake in Philadelphia turned into $2,256,952.05 since Franklin died in 1790.
The bulk of Franklin’s investment will be used to assist recent graduates of Philadelphia high schools in pursuing careers in trades, crafts, and applied sciences. Franklin’s Boston trust fund, however, is worth almost $5 million. Now, Ben Franklin wasn’t the only genius that got behind this idea…
It’s Investing, Einstein
Even Albert Einstein recognized the power of compound interest. He once remarked: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”
Behold, the eighth wonder of the world, it all its glory:
S = value after t periods
P = principal amount (initial investment)
j = annual nominal interest rate (not reflecting the compounding)
m = number of times the interest is compounded per year
t = number of years the money is borrowed for
That’s how Einstein would have written it.
Now, I’ll be the first to tell you that I’m no Albert Einstein, and I like my math problems in easy-to-follow, real-world examples.
So if you aren’t familiar with compound interest, there is an easy way to quantify it so that anyone can understand it.
It’s called “The Rule of 72.”
The Rule of 72
People overwhelmingly go into investing and want immediate and dramatic results.
Unfortunately, this is a dangerous thing to do.
For novice investors, it is very easy to get burned by the market and end up quickly losing a chunk of their initial investment. The simple truth is that you just need to be patient enough to push through the volatility onward to higher ground.
Seasoned dividend investors themselves have known this since the dawn of public exchanges. That’s why the truly rich don’t spend their days glued to the financial news like a bunch of lemmings.
They realize that while most investors think trading is where the action is, investing in high-yielding income stocks is just as rewarding, provided you are smart enough to stick to a steady and persistent pace.
In this style of investing, less truly is more because the biggest component behind this investment strategy is time — the greatest equalizer of them all.
That’s where the Rule of 72 comes in.
The Rule of 72 says that in order to find the number of years it takes to double your investment at a given rate, just divide the yield into 72. For example, if you’re earning a 9% dividend on your investment, it only takes eight years to double your money – and roughly 13 years to triple it.
This compounding effect arises when the dividend yield is added to the principal so that from that moment on, the interest begins to earn interest on itself.
Over time, that process can add up to a small fortune—even with very modest investments.
Starting a Dividend Reinvestment Program
In most cases, you need to have at least one share of the company’s stock registered in your name. That means if you already own shares through your broker and they are holding your stock certificates, you must tell your broker to re-register the shares in your name.
Alternatively, you can acquire your qualifying shares using a direct purchase plan, skipping the broker altogether. In that case, you simply buy the shares directly from the company’s transfer agents for a small, one-time fee. Once you’ve completed this process, you are eligible to establish a DRIP account with the company.
At that point, simply contact the transfer agent or the company’s shareholder relations department and request a DRIP enrollment form. Just fill it out and send it back. Then, you can practically run your retirement on autopilot, making additional contributions as your budget allows.
These days, most major brokerages allow you to start a DRIP with little to no fees.
Of course, the trickiest part of the puzzle is what stocks to choose.
Also, it’s important to keep in mind that picking successful DRIP stocks is not as simple as buying the ones with the highest yield.
It is usually the stocks with the highest yields that often trip up investors the most.
Instead, picking winning dividend stocks that will perform over the long haul usually requires finding candidates with two qualities:
1. They should have a minimal risk of a dividend cut.
2. There should be a high probability that the dividends will increase while you own the stock.
That’s why you should consider dividend aristocrats – companies with at least 25 years in a row of dividend increases. You can find a list of dividend aristocrats right here.
Start with companies that are not only steady growers but have business models that last over long periods.
Here is one example of a great, safe stock return with and without DRIPs…
One Stock to Start Your DRIP
Essential Utilities, Inc. (NYSE: WTRG)
There are a number of ways to play the water arena, but I’ve found one that lets the profits DRIP, DRIP, DRIP into your portfolio. Essential Utilities, Inc. (NYSE: WTRG) is a water play that allows you to take full advantage of a DRIP program.
Not only does it offer free dividend reinvestment on its 2.35% yield, but it also gives you a 5% discount on stock purchased this way.
That is a smooth 7% on top of whatever gains you earn on the stock growth.
Not to mention the trading fees you’ll save. And water is an area that is poised to keep growing…
The obvious fact about water is that people require it for basic survival. While you can go up to three weeks without food, you’d die in a mere three days without water. So those faucets are going to keep flowing.
Utilities, by and large, are profitable in good times and bad. Even in a recession, people are going to pay their water bills before buying pretty much anything else.
Add to that the regulated nature of utilities — where the government basically lets them act as monopolies — and you have a steady place to generate income rather safely.
Simply put, you must have some utility exposure in your long-term portfolio. Water is a great place to start.
The U.S. uses 346,000 million gallons of fresh water every day. Each person uses a whopping 80 to 100 gallons of water per day — mostly through toilets.
Since Essential Utilities provides regulated water and wastewater services in the U.S., we think it makes a great addition to a long-term diversified portfolio — especially if you take advantage of its generous 5% DRIP discount
Essential Utilities also operates regulated utilities that provide natural gas services in the United States. The company also provides non-utility raw water supply services for firms in the natural gas drilling industry. It serves around 7.5 million residential water, commercial water, fire protection, industrial water, wastewater, and other water and utility customers in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under the Aqua and Peoples brands.
In other words, it’s an essential company with a built-in consumer base that isn’t going anywhere.
If you invested $10,000 into Essential Utilities 20 years ago, you’d be sitting pretty:
However, if you’d reinvested those dividends, you’d be sitting even prettier:
Would you rather have $40k or $30k? I thought so…
That doesn’t even account for the 5% DRIP discount you can find with many companies.
If you want to start a dividend investment program, you simply need to visit the investor relations portal on the company’s website. It is that easy.
Most brokers will also set you up fee-free these days, but you'll need to specify that you want to have the dividends reinvested.
Set it, forget it, and let your money make money for you.
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