How To Give Yourself a Perpetual Pay Raise Every Week. . . As Long As You Reinvest Your Dividends

Perpetual Weekly Pay Raises
(Exponentialsim 101)

Posters on the boards for the Motley Fool Rule Breakers Newsletter know me as an investor who likes highly volatile stocks such as Blue Nile (Nasdaq: NILE), Akamai (Nasdaq: AKAM), and Exelixis (Nasdaq:EXEL).

Today, Blue Nile is more than a double in my portfolio. Akamai is about a four bagger. And Exelixis is only up double digit percentages . . . but I am still holding 200 shares "forever" as I believe this company will become a 21st Century type of early Pfizer story with a focus on cancer fighting drugs.

As mentioned in an earlier post on this blog, I also took a flyer on 500 shares of Calpine (Nasdaq: CPNLQ) for .28 cents a share. Today, those shares are now roth over $3.00 each.

Yes, I like my surfing on fast moving lava flows and hitching rides on rocket ships when it comes to riskier growth stocks.

But the stocks I really enjoy most for buying and holding long term are those sleep-on-the -beach and never worry class of stocks we know as dividend payers.

Enter the “Weekly Pay Raise” part of the portfolios I manage.

I check my portfolios of stocks usually at the end of every month. And when I click on the “history” button to see which stocks paid out dividends the last 30 days . . . cha-ching. . . I always have a new list of updated fractional shares for certain stocks which show increasingly larger dividend totals!

This kind of no-brainer money growth excites me. Recently, I’ve taken these growing quarterly dividends and started dividing them by 13 to see how much extra money is paid out as a weekly pay raise during the past quarter.

Let me illustrate this look by using just one real-life holding I manage in my girlfriend’s Roth IRA.

We bought her 200 shares of Eagle Shipping (Nasdaq: EGLE) in September 2005 @ $14.26 per share for a total of $2,852.00 (not including the small trading fee).

Last Friday's closing price of $21.91 would give those 200 original shares a new worth of $4,383.00, for a total gain of about 53.65 % in 20 months time. I don't know about you, but I’ll take that kind of return any day of the week, any month of the year.

But as Ron Poppel would scream, “Wait, that’s not all. There’s more!”

EGLE paid monstrous dividends during 2006 and during the first two quarters of 2007. The dividends were for .57, .50, .50, .51, .51 and .50 cents respectively over those six quarters.

Let’s look at these just passed quarters and their fractional share growth in 2006 and 2007 as applied to the 200 shares of EGLE which we purchased in September 2005.

Q4 2005 – 200 share purchase

Q1 2006 – 208.8490 shares (8.8490 new shares purchased with free dividend money)

Q2 2006 – 216.3290 shares (7.4800 new shares purchased with free dividend money)

Q3 2006 – 223.9180 shares (7.5990 new shares purchased with free dividend money)

Q4 2006 – 230.8150 shares (6.8770 new shares purchased with free dividend money)

Q1 2007 - 237.0420 shares (6.2270 new shares purchased with free dividend money)

Q2 2007 - 242.3160 shares (5.2730 new shares purchased with free dividend money)

Notice how the returns multipled as the stock price was still ascending?

So, my girlfriend started with 200 shares of EGLE in September 2005 and now has a little over 242 shares?

Here we go!

Before accounting for reinvested dividends, we were already up 53.65% share price gain. Remember?

But look what happens to this great 53.65% return when we add in the dividend “free money” to buy those extra 42.3160 fractional shares:

Let’s multiply 242.3160 shares by $21.91 (Friday's closing price). We get $5,309.12.

Divide this latest closing balance of $5,309.12 by our original investment of $2852.00 and we’re now looking at an unbelievable 20 month return of 86.16% instead of the original 53.65% on just 200 shares!

Hence, you now see first hand how Dividend Re-investing is giving bigger returns that you would expect of a growth company which pays no dividends. Damn, this dividend re-investing stuff sure makes sense.

Better yet, my girlfriend’s dividend dollar totals are increasing quarterly: every fractional share added the previous quarter was paying extra dividends to the total the following quarter.

To hell with Existentialism, teach me more of this Exponentialism!

Check out the total dividend payouts multiplied by those burgeoning fractional share amounts:
Q2 2006 - $104.42 total dividends divided by 13 = $8.03 weekly extra pay

Q3 2006 - $108.16 total dividends divided by 13 = $8.32 weekly extra pay w/ .29 cents a week pay raise

Q4 2006 - $114.20 total dividends divided by 13 = $8.78 weekly extra pay w/ .46 cents a week pay raise

Q1 2007 - $117.72 total dividends divided by 13 = $9.06 weekly extra pay w/ .28 cents a week pay raise

Q2 2007 - $118.52 total dividends divided by 13 = $9.12 weekly extra pay raise w/ .06 cents a week pay raise

How Do You Get Bigger and Better Pay Raises Every Week? Buy More Stock in Companies Which Will Never Go Out of Business

Do you see that Magic of Compounding going on here? And when you have a portfolio of great stocks such as Budweiser (NYSE: BUD), Wrigley’s (NYSE: WWY), Colgate (NYSE: CL), and other Steady Eddy dividend payers, you can see how these weekly pay raises translate into a rewarding “wealth effect” which grows forever.

Be your own boss, folks. Diversify your portfolio with great dividend paying companies for the long term. Learn to give yourselves weekly pay raises while you sleep.

p.s. The other day I was speaking to a rep at my local bank, First State Bank. We were talking about routing transfer numbers, so I could send a bunch of my savings into a safe "forever" stock which pays huge dividends bigger than Eagle Shipping.

The woman representing my bank of 17 years wanted to know why I would buy stocks at a time like this instead of investing in CDs at her bank or a Money Market fund.

I told her:

1. Your passbook savings rate is only one-half of one percent. (No that is not a mis-print.)
2. You money market fund is offering only 5.0%
3. Online banks such as Everbank are offering 6.01% on chekcing accounts at this time
4. Your CDs for 6.0% and more would lock up my money for months at a time. Should I need to cash them out for a purchase of an undervalued asset, I would be assessed a penalty by your bank.
5. You are now advertising you have $250,000,000 to lend business and home buyers in the Florida Keys at this moment in time when Real Estate is crashing. I don't like the idea of my hard earned money being distributed to people who don't have a clue as to what an overvalued asset class looks like
6. I have made more than 21% or more in the stock market for the past four years . . . and this year looks to be my best ever as I continue to load up on Blue Chip Big Caps which pay dividends.
7. If the economy crashes, I am hedged with real gold and real silver. Plus many of my stocks are based on commodities which are in a bull market. The last place I want to keep my money is in a passbook savings of a bank which will lose money as more homebuyers turn in the keys to their overpriced Real Estate in Key West.

I was not rude to this woman. I was simply trying to help her understand that some people make money in bad markets and good using their brains to not follow the herd.

She asked me the name of the stock I was buying recently.

Actually, there are more than one, but in a post I will lay here soon, I will give you my two top recommendations for new money now. Both picks pay healthy dividends. And both picks are invested heavily in either energy . . . in particular, Oil . . . or consumer staples.

More later.