I also adhere to the thinking of Dr. Jeremy Siegel who advised investors in his latest book, The Future for Investors, to re-invest all dividends back into the solid companies I buy.
Here's a prime example of one of the companies I or my girlfriend invested in during the Housing Crash, the Credit Crisis and the recent most market crash:
Name of Company: Suburban Propane Partners, LP
NYSE Stock Symbol: SPH
As Suburban Propane supplies gas to more than 1/2 of Key West via bottled propane, I dug into their financials to see if I should buy "something I know" and something I figured would be a "necessity" during any major Recession or Depression.
On Jan. 17, 2008 I bought 100 shares for my girlfriend's Roth IRA. We paid $39.96 per share (and that's with the $9.95 trading fee figured in too.)
Now get ready. We're going to have another one of Rock's "The Beauty of Compounding" lessons in real life.
How Exponential Growth Works For You
Below, you will see a small table showing what those hundred shares are worth today without accounting for any dividends.
Date: 1/17/08
Amount of shares purchased: 100
Share Price: $39.96
Original cost for all 100 shares: $3,995.94
Value of same 100 shares at close of market yesterday: $4,588.00
Gain on 100 original shares: $592.06
Percentage gain: 14.82%
Okay, so the original 100 shares have gained 14.82% in just 18 months. I'll take that kind of gain anytime, especially when passbook savings across America are lucky to pay you 1/2% at this moment. (You might get 2% on your money if you can stash $10,000 in a CD).
Anyway, let's get back to what happened to these 100 shares of SPH with dividends paid out and reinvested (Our online brokers does not charge us to reinvest dividends).
Below, I list the $dollar amount of the dividends and that will be followed by the amount of fractional shares those dividends reinvested in . . .
You will see a slow exponential growth take place right before your eyes.
2/8/08 - $76.30 1.9210 fractional shares bought
5/13/08 - $78.99 1.9290 fractional shares bought
8/12/08 - $83.08 2.2280 fractional shares bought
11/10/08- $85.39 2.4440 fractional shares bought
2/10/09 - $87.90 2.2230 fractional shares bought
5/12/09 - $90.26 2.2500 fractional shares bought
Notice that the amount of the dividend increased every single quarter. One reason is the total amount of shares owned is increasing quarterly and compounding at an ever increasing rate due to exponential growth. Another reason is Suburban has been increasing its dividend quarterly (although by a half-cent for the past five dividends, still it all adds up) since it started trading on the NYSE a few years ago.
You might wonder, "Why was the largest odd lot of fractional shares bought in November of 2008? Should the fractional shares bought not be increasing every quarter?"
No. And the reason is this: On November 10, 2008, due to the market crash, Suburban Propane shares closed at $31.91 per share. Hence, the dividend paid had more "buying power" when it was reinvested.
For instance, on May 12, 2009, Suburban Propane shares closed at $41.50, or almost $9.50 higher than they were back in November. Hence, eventhough there was more dividend monies to buy fractional shares this past May, those fractional shares cost more money.
(If this doesn't make sense to you, leave comments below, and I'll help you out with basic dividend reinvestment investing.)
How We Doubled The 14.82% Gain By Reinvesting Dividends For 18 Months
That said, with all these "free" fractional shares taking an elevator to "Compounding Heaven", what do you think about this total gain on these original 100 shares of Suburban Propane?
1. The original 100 shares have grown to 112.9950 total shares owned
2. The original cost for these 100 shares was $3,995.94 (including trading fee)
3. Yesterday, SPH shares closed at $45.88 per share
4. In that my girlfriend owns 112.9950 shares, we multiply that by $45.88 per share to find out these shares are worth a total of $5,184.21.
5. Total gain at this time (were we to sell all 112.9950 shares) would be $1,188.27
6. Total percentage of the gain in just 18 months is 29.74%
Now, we might wake up Monday and find out a Black Swan event such as the CEO of Suburban Propane was photographed buggering children or snorting cocaine and the stock could take such a hit, we'd be out of all gains. But then again, another dividend period rolls around in August, and if the shares were cheaper, our 112.9950 shares would have more buying power. Meaning, once this hypothetical scandal passes, and Suburban started ascending the elevator again, our compounding would be all the more extraordinary.
Just remember this little lesson when people tell you you can't make money with Buy and Hold in the stock market any longer. That's a load of rubbish.
We're up 30% in the last 18 months on just this one stock. We have many others just like it. We diversified into "necessities" of life stocks.
And by the way, during those 18 months the Housing Bubble hit full tilt boogy, the Credit markets crashed, and the stock market almost lost 60% since its October 2007 highs.
And here we are. Invested in stocks which pay dividends, which have increased dividends yearly and sometimes quarterly for years, and invested in companies which supply necessities of life such as electricity, propane, pipeline shippers of oil and natural gas (I love these), consumer staples, etc.
You gotta eat. You gotta drink. You gotta shower. You gotta use electricity to read the Internet and turn on your lights.
Water, Oil, Gas, Electricity, Food, Razor Blades. You use them everyday in modern life. Why take chances with insolvent banks, satellite radio, tech companies, green companies, etc., when the tried and true is still outperforming those companies dependent on discretionary spending?
Simple macro-economic thinking has helped us beat the markets by wide margins. And when you toss in other hedges such as our 2003-2005 American Gold Eagle (Proof) coins, we have enough money to put down a sizable downpayment on a home somewhere other than here...hell, we could buy a house for cash in certain areas of this country. (On average, our real gold coins have gained more than 300% since 2003 to 2005, accounting for the rise in the price of gold and the numismatic ratings on these coins).
That's it for today's lesson. And oh by the way, when I discuss stocks here, know that these stocks we own are in Roth IRAs. None of the dividends are taxed. And whenever we wish to bring this money out in our retirement years, we do so with no taxes taken out for the gains.
On top of this, we can use any amount of our Roth IRA money for a downpayment on our first home purchase as long as the account was open for at least 5 years. (Both are). This downpayment money will not be taxed, nor is there any penalty. And unlike the normal Roth IRA distribution rule of legal withdrawals from age 59.5 years old, we could take out as much Roth IRA money as we need for a downpayment before we hit that age.
In that I do not believe we've seen the bottom of the Housing Crash, I will not be thinking about touching this Roth IRA money before I hit 59.5. I just hit 57 a few weeks ago. I'll just keep feathering my retirement account with $100 weekly. Same with my girlfriend.
That said, would we rather be in an upside down mortgage on a house decreasing by double digits for the past three years? Or would we rather be sleeping like babies, letting our money multiply faster and faster through dividend reinvestments in companies which won't be going out of business even in a Depression?
What do you think?
Caveat Emptor,
Rock Trueblood
p.s. Do I think the stock markets could go down hard from here? Absolutely. And I'd be surprised if they don't tank again. But I'm not selling. Read the following link to one of my favorite Jeremy Siegel articles of all time titled "Beware The Growth Trap". When markets go down and you are positioned in great "Orphans and Widows" stocks, it pays to let their dividend reinvesting compound even harder.
And while I'm at it, be sure to view the 8 part series I laid on here a few days ago titled "How Simple Arithmetic Shows Us Exponential Growth Cannot Be Perpetual Without Running Up Against Finite Resources." It is a brilliant look into the "Law of 72" which shows us how compounding exponentially works against us (such as when you borrow money from banks or credit card companies). But what isn't explained in this lecture is how to turn compounding around to favor you. And you do this by "saving" and "investing". End of story.
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