4 Things a Dividend Farmer Needs: Time

With good ground and seed money, a dividend farmer needs time for his crop to grow and mature.  The earlier the investing process starts, the longer the growing season, the larger the harvest.  This is true even if the seed money to start isn’t a lot and the additions over time are small as well.

Below are a few examples demonstrating the effect of time on the growth of your investment.

In the first case, a fresh college graduate is gifted $1,000, investing it at an annually compounded rate of 7%.  This is the approximate long-term average return of the stock market.  Assuming the student graduates at the age of 23, retires at 67, and simply lets her $1,000 investment compound between those ages, she’ll have $21,565 at retirement which is 21.5 times the amount of her original investment.

Conversely, if she didn’t invest $1,000 until 10 years later when she was 33 and let the principle compound at 7% as in the first example, her total would be only $10,730 at retirement.  Delaying the start of her “growing season” by 10 years caused her yield to fall to just under $11,000.  She reduced the time in which to grow her crop by 23% and shrank her harvest by almost 51%.  In this case, her return is only 10.7 times her original investment.  Now you have an indication of how important time is in growing a strong crop.

What happens if an investor regularly adds money as he goes?  The next case provides valuable insight as well.

In this case, a new college graduate is gifted $1,000 and invests it at an annually compounded rate of 7%.  This investor graduates at 23, works until he’s 67, and adds $50 per month to his principle.  Doing this over the course of his working life nets him $197,832 at retirement or 197.8 times his initial principle of $1,000.

However, if our intrepid grad delays his investment until he’s 33, adding $50 per month until age 67, his retirement take will be only $94,134 – over $100,000 less!  By reducing his growing season 23%, his crop yield declines by more than 52% relative to what might have been had he started saving and investing at 23.

Another way to look at the situation is to ask yourself how much extra will you have to invest if you wait to start farming?  If we return to our original investor example and ask how much extra would have to be invested at age 33 to receive the same $21,565 at retirement that she received by starting at 23, we get a remarkable answer.

If she invested $2,010 dollars at the age of 33 and let it grow at 7% she would receive $21,568 at retirement.  In other words, waiting 10 years to start farming means she has to invest more than twice as much as she did at the age of 23 to get the same result. 

Alternatively, she could start with the same $1,000 and add $6.50 per month to her account during the same period and receive $21,573.  This monthly increment doesn’t sound like much, but it means she needs to add $2,652 to her original $1,000 investment starting at age 33 in order to match what she would receive if she simply invested $1,000 at the age of 23 and let it ride.

These cases may seem like a lot of math to an individual investor.  Fortunately we have excel spreadsheets with a simple financial function that computes the future value (FV) of a sum of money given today’s value as a starting point and adding an interest rate, the number of compounding periods in the investment horizon, and the amount of additional payments made, if any, along the way. 

Every farmer has a number of tools at his disposal with which to tend his crops.  For dividend farmers, a good spreadsheet and basic understanding of a few formulas are invaluable.  Knowing about these tools and how to use them fall under the category of patience and care in the next post.

The thoughts and opinions expressed here are those of the author, who is not a financial professional, and therefore should not be considered as investment advice.  This information is presented for education and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.