Compound Growth

Wisdom!

Growth is good.  Compound growth is better.  A related post outlines the difference between average annual growth and compound annual growth.  In this piece, I wanted to explore the benefits of compound growth in more depth.

One important characteristic of compound growth investors often find difficult to wrap their heads around is that compounding isn’t a straight line path to a wonderful stream of cash.  The greatest effects of compounding don’t happen right away, but at some point in the future.  The growth rate of a compounding investment accelerates over time producing a curvilinear path rather than a straight line.  This curve appears somewhat exponential, but isn’t exactly. 

While this type of curve produces solid results, it requires patience to stay the course until reaching the inflection point on the growth curve; the point at which compounding really begins to take off.  Unfortunately, many investors don’t stick with it until that acceleration point is reached, bailing out before harvesting the true gains they might have otherwise.

Here is an example of what I mean.

In this example, an investor started with $1,000.  She put her money into a dividend stock having a distinguished history paying 8% annually, letting dividends automatically reinvest each year.

You’ll notice that at the end of Year 1 she received $80 in dividends so we’ll call that 1x.  In Year 10 she received $160 dollars which was twice what she received in Year 1 so we’ll call that point 2x.  In Year 15 she received $234 which is nearly three times her Year 1 dividends in which case we’ll call that data point 3x.  Year 19 saw our investor receive $320 which is four times her Year 1 dividends so we’ll refer to that point as 4x. 

Since you get the drift, I won’t use more words, but instead post a chart.

Dividend Multiples	Years
1x	1
2x	9
3x	15
4x	19
5x	22
6x	24
7x	26
8x	28
9x	30

You’ll notice it took our investor 8 years to double her year 1 dividends, 6 more years to triple those divs, 4 additional years to quadruple them, and three years to reach 5x.  After that, she added another multiple to her original payment every 2 years. 

In the first 15 years her dividend stream compounded to triple her year 1 total.  In the second 15 year period, she saw the effects of compounding take off with her annual dividend multiple reaching 9 times hear year 1 dividend payment. 

This is what I mean about the powerful effect of compound growth not occurring out of the gate but somewhere down the track.  Consequently, it’s important for investors to stay the course.

It’s important to begin investing early and letting compound growth work for you for this reason.  If you’re a young investor or you have small children who’ll need college money in 15 to 20 years, you can do yourself a favor by putting money away early, even if it’s not a large sum.  Compounding can take a small sum and turn it into something big in the end.

By the way, if you’re wondering what the underlying principle was at various points along the way, below is a chart in which I’ve added that data.  Notice that during the 30-year period her final total is more than 10 times her original value.

Dividend Multiples	Years	Principle
1x	1	$          1,080
2x	9	$          1,999
3x	15	$          3,172
4x	19	$          4,315
5x	22	$          5,436
6x	24	$          6,341
7x	26	$          7,396
8x	28	$          8,627
9x	30	$        10,062

Having said all that it’s true that not all dividend stocks pay 8%, nor can you be guaranteed they’ll pay out at that rate 3 decades into the future.  It’s also true that inflation will eat into the figures above.  Although nothing in life is guaranteed, some things are more likely to occur than others.  Dividend streams from solid, blue chip dividend companies are about as reliable as you’ll find in the investing world.  If they remain consistent and you are patient, the math of compounding will take care of itself and you.

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

Powerful Investment Growth with Compounding

Have you dreamed of making money without doing anything?  You know, just laying around the beach with an umbrella drink in hand, knowing money is falling into your bank account as you lounge in a cabana overlooking the surf?  What if the money pouring into your bank account next week was much greater than the money going in today without so much as ordering another umbrella drink?

Ah, the life!

Ok, back to reality.  While it may not be as spectacular or compelling as the vignette above, Dividend Farming does function much the same way thanks to compounding, albeit over a longer period.  Check out the charts below to see what I mean.

The first chart shows what happens when you start with $10,000 invested in year zero at a rate of 7%.  Your money is compounded annually with a 30-year horizon.  Yes, it’s longer than a week, but stick with me.

7% Compound Growth Curve

As you can see, your nest egg has gone from $10,000 to more than $75,000 during that period.  It’s grown more than 7.5 times and you did nothing; just watched it grow. 

The next 2 charts provide insight into the power of compound growth by measuring the slope or rate of growth during 10-year intervals along your investment curve.

In the chart above, I stripped out the investment figures for the years between 0, 10, 20, and 30 leaving a clean, straight growth line for each period.  With a simplified curve, I calculated the slope of each 10-year interval as shown in the chart below.  The change in investment value between any two points was divided by 1,000 to reduce their scale making it easier to see and understand the differences in slope.

During the first 10-year period, the slope of investment growth was 1.0.  During the 2^nd 10-year period, the slope of the line grew to 1.9, nearly doubling.  In the 3^rd 10-year period, the slope of the investment growth nearly doubled again, reaching 3.7.

Here’s the key takeaway.  The power of compound growth, like that available with strong, consistent dividend paying stocks, increases over time.  The longer your investment horizon, the greater the strength you can harness. 

Exercising this power requires the patience of a Dividend Farmer.  It doesn’t mean you’ll be sipping a cool drink on a pristine beach today or tomorrow while Benjamins pour into your bank account.  However, the power of compound growth available with dividends automatically reinvested means living that beach life down the road is possible.

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.      

 

Investment Diversification: Is more better?

Investment Egg Basket

As mentioned in the post 5.5. Reasons Dividend Stocks Beat Index Mutual Funds, the prospect of buying a huge basket of stocks in an index fund doesn’t really provide better risk mitigation than could be had with a compact basket of 20-30 stocks – probably even fewer.  In this case, the risk being discussed is that your invested funds disappear courtesy of an unforeseen business disaster on the part of the company in which you invested.  The general premise of this piece is laid out below.

Scenario #1:  Your money is invested entirely in Company A which has a 10% chance of going out of business for various reasons.  This means you have a 10% chance of losing your entire nest egg.

Scenario #2: You split your investment portfolio evenly across Companies A and B.  Both firms are in unrelated segments like transportation and health care in which case the probability of either entity going under is independent of the other doing likewise. 

The probability of Company A going out of business remains 10% as in the first scenario.  The probability of Company B going belly up is also 10%.  What now is the probability of completely losing your shirt because both companies tank at the same time?  The companies are in unrelated industries in which case the probability of one going out of business is independent of the probability of the other going out of business.  The probability of two unrelated events happening simultaneously is determined by multiplying the probably of A times the probability of B: 

Probability A (10% ) x Probability B (10%) or .10 x .10 = .01 or 1%.

By spreading your investment pool from one company to two companies in divergent industries you’ve reduced your risk of losing everything from 10% to 1%.

Scenario #3: You think to yourself that if investing in 2 companies reduces risk, then investing in 3 companies has to be better still.  (It is, to a very small degree.)  Therefore you spread your wealth across three companies (A, B, C) each with an independent probability of going out of business of 10% because they are all in unrelated industries.  Now the risk of losing your life savings is calculated by multiplying the risk of A x B x C shown here:

Probability A (10%) x Probability B (10%) x Probability C (10%) or .10 x .10 x .10 = .001 or one-tenth of one percent.

By spreading your investment pool from two companies to three you’ve reduced your risk by nine-tenths of one percent.  The risk reduction generated isn’t large but the added workload in monitoring the third firm is, relatively speaking.

Carry this math across 15 or 20 firms and you’ll see the risk reduction becomes excruciatingly small while the management workload increases greatly in proportion.   

The math means that an index fund with hundreds or thousands of companies held within it produces no meaningful risk below that of a small, selective portfolio of quality companies as far as I’m concerned.  It does, however, generate a lot of extra work OR management fees for the index mutual fund.  Brokers and money managers like that fact.  It works to their advantage when millions of investors aren’t paying attention.

Investopedia does a nice job summarizing investment risk.  Systemic or market risk which can’t be diversified away (think inflation) and unsystemic risk which is germane to a specific company.   The unsystemic risk is what diversification is designed to mitigate.  As you can see from the examples above, the law of diminishing returns is prominent rendering moot the advantage of holding hundreds or thousands of firms in a single fund and paying a fee for the privilege of doing so.

Andrew Carnegie once said “The way to become rich is to put all your eggs into one basked and then watch that basket.”  I’m not comfortable with that advice nor am I comfortable with the current wisdom endorsing investors to put a little money into every basket and watching none of it.  Let the pros watch it for you – for a fee.  With a little work and a few tools, it’s possible you can cultivate good ground somewhere in between.  You can concentrate on solid, dividend paying companies in a diversified portfolio of 20 to 30 holdings, maybe fewer, avoid annual fees, and succeed.  It’s worth investigating, right?

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.       

5.5 Reasons Dividend Payers Beat Index Mutual Funds & ETFs

Index?  Mutual?  Dividend CCC!

Over the past couple months I’ve covered a host of reasons I think investing in strong dividend paying companies is better than parking money in real estate, precious metals and collectibles, non-dividend stocks, annuities, and target date mutual funds.  Therefore, I thought I’d tackle the reasons dividend stock investing is superior to index mutual funds or ETFs.  I’ve had a lot of coffee today and it’s probably a good thing, so here we go.

1) Compound growth is more reliable with dividend stocks than it is with index mutual funds and ETFs in general.  When individually held dividend stocks pay out their dividends, those dividends turn directly into additional shares of the company, assuming you’re enrolled in a Dividend Reinvestment Plan (DRIP).  Many, but not all, index funds and ETFs will retain dividends paid, increasing the Net Asset Value (NAV) rather than turning those dividends into additional shares of the fund for you.  I hold a couple such index funds in a 529 plan for my kids and a 401k so I’m well aware of this fact.  I don’t have much choice in either case.  Otherwise, neither would be in my portfolio.  NAV can fluctuate up and down given the market movement of the stocks it holds, irrespective of dividend payments.  In comparison, directly held dividend payers don’t subtract shares from your bucket unless you sell them.

2) Management fees erode your returns.  When participating in the DRIPs of dividend paying companies, or automatically reinvesting dividends from stock held in your brokerage, you don’t suffer the penalty of management fees.  The same cannot be said of index funds or ETFs.  This is particularly true if you’ve blundered into a managed index or ETF in which case your fees can be as high as a half-percent per year.  That may not sound like much, but once your portfolio reaches $100,000, you’ll lose $500 every year.  Those losses add quickly, particularly when you factor in the power of compound growth foregone.

3) Visibility and manageability of your holdings is much better with a select portfolio of dividend payers.  An index fund or ETF attempts to hold the same companies, in the same proportion, as found in the index it tracks.  Consequently you could own thousands of firms, most of which you’ll care little about – if you know about them at all.  To find out what you own in an index fund you have to sort through multiple pages and potentially thousands of lines of the index fund prospectus to know what’s in your basket.  That’s too much for most amateurs to manage in which case you’ll pay fees for a manager.  Brokerages like this.  See item #2 regarding management fees.

4) Investment diversity is frequently argued as a simple, brilliant form of risk mitigation.  The financial industry has taken the argument to the nth degree by selling the proposition that a fund of hundreds or thousands of companies offers greater diversification i.e., less risk, than a smaller grouping of individually held dividend paying stocks.  But is this true?  I can get considerable diversity or risk mitigation with 20-30 holdings in a well-chosen selection of dividend payers.  Adding hundreds of additional companies doesn’t reduce my risk much beyond that smaller holding – particularly if all those holdings are wrapped in a single package delivered by one financial institution.  In a future post, I’ll take a brief look at the probability underpinning the maxim of investment diversification. 

An index fund allows you to hold many, many companies at once providing the touted investment diversification.  However, I would argue that a vast array of companies is not necessarily better.  Warren Buffett agrees.  Or better, I’m of the same opinion as Warren, who said “diversification is protection against ignorance. It makes little sense if you know what you are doing."  The theory is most investors don’t know a post hole from their pie hole and should buy a huge basket of everything to limit risk rather than learning something about a few things and sticking with what they actually know.  The argument is great for the croupier class taking tine pieces of considerable investment activity via small management fees tacked onto index funds and ETFs.

5) Selective quality with individually held dividend stocks is much great than it is with an index fund or ETF.  Consider the estate sale in which a box of unknown stuff is auctioned off with little or no inspection by the bidders.  Bidders are attempting to buy the box at the lowest possible price hoping they’ll find a diamond among the rubbish they know they’ll get otherwise.  When you buy an index fund or ETF, it’s the same principle.  You’re buying thousands of companies in one fell swoop hoping the handful of gems more than offset the dregs and millstones you’ll invariably get.  It's less risky to pick and choose what you're putting your money into than throwing it over the wall and hoping for the best.

5.5) Additional thoughts:  Advocates of index funds and ETFs argue that diversification for small investors is easier with an index fund than individually held stocks.  This is true if you have only a couple hundred bucks to invest.  Once your investment basket has climbed above a few thousand dollars, I’m not sure that argument still holds.

A second argument is that index funds allow people to invest in with little risk, but complete ignorance.  Investors don’t have to read, research, or even think to participate safely in the market, or so goes the story.  I’m not sure this is a stellar idea to propagate but it’s a thing none-the-less.  It's better to put in a bit of effort when participating than diving in completely unaware.  Contrary to the old axiom, ignorance is not always bliss, particularly when investing for your future.

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.  

7 Aerospace Dividend Champions, Contenders, Challengers

It’s been said flying is the second greatest thrill known to man and landing the first.  I’m not sure I agree with that order, but having learned to fly 25 years ago and holding a valid flight instructor certificate today means I’ve invested considerably in that arena.  I’ve received a wonderful return on that investment during that time. 

Aerospace Champions, Contenders, and Challengers.

Given that perspective, I wanted to share 7 firms in the Aerospace industry that are Dividend Champions, Contenders, or Challengers.  As with the Agriculture CCC, the aerospace firms can be found at www.DRIPinvesting.org.  Companies shown in this post were members of their respective lists on 9.28.18.  Brief profiles were excerpted from company information found on Yahoo.finance.

Champions

General Dynamics:  Dividend years - 27.  Yield 1.82%. 

General Dynamics Corporation operates as an aerospace and defense company worldwide. It operates through four business groups: Aerospace; Combat Systems; Information Systems and Technology; and Marine Systems. The Aerospace group designs, develops, manufactures, service and supports business-jet aircraft; and provides aircraft services, such as maintenance, aircraft management, charter, fixed-base operational, and staffing services.

Contenders

HEICO Corp.:  Dividend years - 11.  Yield 0.13%.

HEICO Corporation, through its subsidiaries, designs, manufactures, and sells aerospace, defense, and electronic related products and services in the United States and internationally. The company's Flight Support Group segment provides jet engine and aircraft component replacement parts; thermal insulation blankets and parts; renewable/reusable insulation systems; and specialty components for aerospace and industrial original equipment manufacturers, and the United States government.

L3 Technologies Inc.:  Dividends years - 15.  Yield 1.51%

L3 Technologies, Inc. provides aerospace systems, communication, electronic, and sensor systems used on military, homeland security, and commercial platforms in the United States and internationally. It offers simulation and training, night vision and image intensification equipment, and security and detection systems; and components, products, subsystems, and systems, as well as related services to military and commercial customers in various business areas, such as total training solutions, power and propulsion systems, aviation products, precision engagement systems, and security and detection systems.

Lockheed Martin:  Dividend years - 16.  Yield 2.54%.

Lockheed Martin Corporation, a security and aerospace company, engages in the research, design, development, manufacture, integration, and sustainment of technology systems, products, and services worldwide. It operates through four segments: Aeronautics, Missiles and Fire Control (MFC), Rotary and Mission Systems (RMS), and Space.

Northrop Grumman:  Dividend years - 15.  Yield 1.51%.

Northrop Grumman Corporation operates as a security company for government and commercial customers worldwide. It provides products, systems, and solutions in autonomous systems; cyber; command, control, communications and computers, intelligence, surveillance, and reconnaissance (C4ISR); strike; and logistics and modernization. The company operates through three segments: Aerospace Systems, Mission Systems, and Technology Services. The Aerospace Systems segment designs, develops, integrates, and produces manned aircraft, autonomous systems, spacecraft, high-energy laser systems, microelectronics, and other systems/subsystems.

Raytheon Company:  Dividend years – 14.  Yield 1.68%

Raytheon Company develops integrated products, services, and solutions for defense and other government markets worldwide. It operates through five segments: Integrated Defense Systems (IDS); Intelligence, Information and Services (IIS); Missile Systems (MS); Space and Airborne Systems (SAS); and Forcepoint.

Challengers

Boeing Company:  Dividend years - 7.  Yield 1.84%.

The Boeing Company, together with its subsidiaries, designs, develops, manufactures, sales, services, and supports commercial jetliners, military aircraft, satellites, missile defense, human space flight, and launch systems and services worldwide. The company operates in four segments: Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital. The Commercial Airplanes segment provides commercial jet aircraft for passenger and cargo requirements, and fleet support services, principally to the commercial airline industry.

Piper Archer

The flight time I’ve cobbled together in my logbook consists primarily of Cessna, Beechcraft, and Piper aircraft which are Textron companies or built by privately held firms.  As a result, none are in the CCC list.  However, the degree to which I’ve been involved in aviation compels me to keep an eye on Dividend stocks in the aerospace sector.  Who knows, maybe someday I’ll own the stock equivalent of a Boeing 737 aileron?

If you have a sector of dividend stocks in which you’re interested from an investment perspective, you can certainly explore multiple opportunities in the universe of Dividend CCC.

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. 

7 Agriculture Dividend Champions, Contenders, and Challengers

The name of the blog is Dividend Farmer so I thought it fitting to highlight a number of companies in the agriculture sector that are Dividend Champions, Contenders, or Challengers.  These firms have paid consecutive dividends for 25 or more years, 10-24 years, or 5-9 years respectively. 

Dividend Farming is Financial Agriculture

You can find the list of Champions, Contenders, and Challengers at www.DRIPinvesting.org.  Companies shown in this post were members of their respective lists on 9.16.18.  Brief profiles were excerpted from company information found on Yahoo.finance.

My investment research generally starts here since I prefer solid, dividend paying companies with long histories of consecutive payments.  It’s rare that I purchase dividend payers that aren’t on this list, but it does happen for various reasons e.g., diversification requirements.

Champions

Archer Daniels Midland:  Dividend years - 43.  Yield 2.67%. 

Archer-Daniels-Midland Company procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients in the United States and internationally.

Contenders

The Andersons, Inc:  Dividend years - 16.  Yield 1.75%.

The Andersons, Inc., an agriculture company, operates in the grain, ethanol, plant nutrient, and rail sectors in the United States and internationally. The company's Grain segment operates grain elevators; stores grains; and provides grain marketing, risk management, and corn origination services to its customers and affiliated ethanol facilities.

Bunge Ltd:  Dividends years - 18.  Yield 2.91%

Bunge Limited operates as an agribusiness and food company worldwide. It operates through five segments: Agribusiness, Edible Oil Products, Milling Products, Sugar and Bioenergy, and Fertilizer.

Limoneira Co:  Dividend years - 10.  Yield .96%.

Limoneira Company operates as an agribusiness and real estate development company in the United States and internationally. The company operates through six segments: Fresh Lemons, Lemon Packing, Avocados, Other Agribusiness, Rental Operations, and Real Estate Development.

Lindsay Corp:  Dividend years - 16.  Yield 1.24%.

Lindsay Corporation, together with its subsidiaries, provides water management and road infrastructure products and services in the United States and internationally. The company's Irrigation segment manufactures and markets center pivot, lateral move irrigation systems, and irrigation controls under the Zimmatic brand; hose reel travelers under the Perrot and Greenfield brands; and chemical injection systems, variable rate irrigation systems, flow meters, weather stations, soil moisture sensors, and remote monitoring and control systems under the GrowSmart brand. 

Challengers

AGCO Corporation:  Dividend years - 6.  Yield .99%.

AGCO Corporation manufactures and distributes agricultural equipment and related replacement parts worldwide. The company offers high horsepower tractors for larger farms, primarily for row crop production; utility tractors for small- and medium-sized farms, as well as for dairy, livestock, orchards, and vineyards; and compact tractors for small farms, specialty agricultural industries, landscaping, and residential uses.

Ingredion Inc:  Dividend years - 8.  Yield 2.4%. 

Ingredion Incorporated, together with its subsidiaries, produces and sells starches and sweeteners for various industries. 

The agricultural companies above don’t include farm-related stalwarts like Oshkosh Corporation which builds trucks, General Mills or Kellogg Co., both of which process grain into cereal among other things, or J.M. Smucker Co. which makes tasty jelly!  These firms are all found among Champions, Contenders, and Challengers, but aren’t classified in the agricultural industry.

Full disclosure:  I own a small stake in Archer Daniels Midland.  It’s a Dividend Champion and I needed a solid agricultural firm in my portfolio for investment diversity.  So there’s that…

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. 

6 Reasons Dividend Stocks Beat Gold, Silver, and Collectibles

Warren Buffet on Gold:

Value Producing?

“It has no utility.”

“The gold itself doesn’t produce anything.”

“Gold has two significant shortcomings, being neither of much use nor procreative.”

Gold, silver, and collectibles all share two important characteristics.  They sit passively.  They represent an arbitrary degree of stored valued.  That’s it.

The stored value, denominated in a currency, fluctuates up and down.  However, none of these investments ever creates additional value on its own.  Ever.  Therein lies a major problem. 

If you invest in a precious metal or collectible you’re effectively betting that any price you paid for it will be exceeded in the future with a price offered by a buyer more desperate to own the item than you.  This is called market timing at best (buy low, hope to sell high) and gambling at worst.  However, I wouldn’t call it investing.

Dig in further and you may find as I did there are 6 Reasons Dividend Stocks Beat Gold, Silver, and Collectibles.

1) Value Production:  As noted above, a lump of gold or silver just sits there.  It doesn’t grow, multiply, divide, conquer or anything else.  If you owned an ounce of gold at the beginning of time you would own an ounce of gold at the end of time.  That’s it.  Between those points, you have to hope that somebody is willing to pay a higher price for the chance to possess it than you did.  As has been said many times before by innumerable people – hope is not a strategy – and shouldn’t be the basis for your financial future.

Companies with solid histories of dividend payments have demonstrated through time they can produce value, increasing it as they go.  This fact becomes even more evident with dividend paying companies that have raised their dividend payments on a regular basis e.g., annually.  Gold and silver sit.  Companies produce.  Faced with choosing a sitter or a producer, I’ll take the producer.

2) Storage:  Storing a few hundred silver dollars requires considerable, secured space.  As of this writing, a silver dollar from the early 1900s can run from $25 (circulated) to $70 (uncirculated) and weigh roughly an ounce each.  Therefore, if you owned $100,000 at $25 per coin, you need to securely store 4,000 of them.  That’s about 250 pounds of metal sitting around your pad.  You’ll need a big safe.

On the other hand, you can easily own $100,000 worth of dividend paying stock, all of which is stored in your brokerage account.  No safe and no armed guards required on your part.

By the way, if you have to move your coin stash, you’ll find it’s a lot more difficult to move hundreds of pounds of metal than change the address with your broker to reflect a move for your dividend paying stocks. 

3) Compound Annual Growth:  Precious metals and collectibles do not produce compound returns.  You don’t start with one stamp, baseball card, or bar of silver and after “x” years you have 2 of any of them.  However, as noted in 7 Reasons Dividend Stocks Beat Real Estate Investments, the automatic investment of dividends produces additional shares of the business for you.  You can actually start with 1 share of a dividend paying stock and after “x” years find yourself with 2 (or more!). 

4) Insurance:  If you own and store collectibles at home, you should have insurance for them.  You’ll need to buy a sturdy safe.  You’ll also need to cough up money for the extra rider on your homeowner’s insurance policy to protect you if your homestead burns to the ground and melts your coins or turns your baseball cards to ash.  The added cost of the insurance reduces your “investment” return each year as you renew the insurance rider and pay the premium.  Since your precious metal doesn’t inherently produce added value each year, it won’t take long for your “investment” to be under water, figuratively speaking.  And there's no insurance for that.

Conversely, if you own dividend paying stocks, your investments are held and managed by the brokerage.  No insurance rider required.  Should your local broker’s building burn to the ground, HQ retains the electronic records of your holdings and you’ll be fine.  Now, if all of Wall Street is wiped out in a cataclysmic event, that’s a different story.  In that case, finding food will be of greater value than reconstituting your portfolio.  This scenario may be the one instance in which holding gold or silver at home pays off for you.  However, if that’s what you’re planning for then you may want to consider investing in firearms as well since you’ll need them to fight off the zombies while protecting your gold.   

5) Valuation:  When it comes to things like coins or collectibles, valuing them becomes difficult.  You have to know the different classifications and quality schemes associated with each in order to assess their worth.  For instance, you may need to regularly consult a publication like Numismatic News to decipher the value of your coins.  Even with a great pub like this, it’ll be difficult to get to the bottom line, so to speak.  I’m sure similar conditions exist for stamps, baseball cards, and other collectibles. 

At least with gold and silver you can readily access per ounce values through a number of public resources and the figures provided are easy to gauge e.g., $16 is larger than $15 which is where silver may have been the week before.  Have fun generating a similar conclusion with a San Francisco or Philadelphia minted coin from 1909 that may be Fair, Good, Excellent, Uncirculated, or of any number of other conditions affecting the price a buyer is willing to pay for it.

Investing in dividend paying stocks offers investors a bonanza of publicly available information through nearly unlimited channels with which to value a company.  On any given day your broker or independent third-party sites like Yahoo Finance can put nearly all the information you need to make an investment decision at your fingertips.  Do you need to know if a company generated more money this year than last?  Was it more profitable than its peers?  Does it have a high debt to asset ratio?  Even better, how long has it paid dividends?  How often or consistently does it raise its dividend payment?  All these metrics are fairly objective, readily discovered, and digestible by anyone with basic math skills allowing them to do a better job determining the value of an investment than can be had with collectibles or precious metals.

6) Better Performance:  1.02 vs 2.95….  That’s the compound annual growth rate for gold vs the Dow Jones Industrial Average from February 1915 to February 2018 respectively.  Both are indexed for inflation during the respective periods.  Source: Macrotrends.

The numbers don’t look like much, but the rate of return on a basket of stocks (producers) vs a basket of gold (a sitter) is nearly 3 to 1 over the past century.  Truth be told I couldn’t find a 100 year return on dividend paying stocks so I went with a proxy.  However, nearly half of all stock investment returns are the result of dividends if you believe the folks at Hartford Funds. 

In other words, the dividends alone outperformed gold.  Anecdotally speaking, my dividend paying portfolio has realized a CAGR of 10.5% over the past 2 years while the CAGR for gold has been a paltry minus .15% during the same period according to Macrotrends.  I’m not sure about your math, but mine says 30 or 40 years at even 5% is far better than gold – or other precious metals and collectibles for that matter.

Labour was the first price, the original purchase – money that was paid for all things.  It was not by gold or by silver, but by labour, that wealth of the world was originally purchased.  –Adam Smith

In short, producers produced before sitters could do anything.  That’s why Dividend Stocks Beat Gold, Silver, and Collectibles.

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.