Today I want to talk about a variation of lifetime investing strategy. When you read some of the better investing blogs out there, I have found many talk about buying shares of the company whose products they buy, and they then use the companies’ dividend to pay for their purchases of the products from that company. For example, some people buy a hundred shares of coca cola which will pay over a $130 in dividends in 2015 that they then use for their yearly purchases of Mexican Coke at Costco. Some will buy a thousand shares of Disney and use Disney’s yearly dividend to subsidize a trip to Disneyland. I love stories like that, and I base a bit of my investing strategy on it. I put a twist on it though; I think of my stock purchases as buying a day’s or a week’s income.
When I made my 2014 Roth IRA contributions, I bought a little over a hundred shares of Coca-Cola.* With Coca-Cola paying 33 cents every three months that will work out to me receiving over $120 with me reinvesting the dividends in 2015. The federal minimum wage is $7.25 per hour. If you work 8 hours a day that is $58. So when I made my Roth IRA contribution the equivalent dividend income I will receive from Coke is like a minimum wage worker working his tail off for two days while I sit around watching Game of Thrones marathons, and when I make my way to Target for a shopping trip he gives me his paycheck for those two days. He worked, I relaxed, and I enjoyed a great TV show. That is the power of investing. This becomes extremely important if you are young, since you will be able to compound that money for over 40 years before you hit the retirement age. If you had forty years till retirement and coca cola only increased its dividend by 5% annually, which is well below its historical average, you will be receiving annual checks that have a value of about a thousand dollars every year. If Coke increases its dividend by 8% annually those check amounts turn around to be about $4000. Since that money is in a Roth IRA those dividends come tax free!
When I invest, I always try to think of it as buying myself financial independence by buying an hours, or days, or maybe even a week’s work. This helps to keep me from being discouraged by the small dividend checks that arrive at first. I can look at the checks I receive, and say to myself, congratulations, you have bought X amount of time. Then when I hit the point where these checks can cover a year’s worth of expenses, I can say I have climbed the mountain and seen the Promised Land. I want every single person to hit this point in their life, where they have reached the point where they no longer have to work to receive a check, and can instead use the time they have on this planet doing the things they want with their life.
*As you can see, I’m not a perfect value investor as there were better values than coca cola stock out there. This is not a stock recommendation, and the usual disclaimers about how I am not responsible for your life can be inserted here. You should also be aware that this approach can lead you to yield chasing where you buy the stocks that have the highest yield. DON’T DO THAT!! Just look at a company called Seadrill and what happened with its dividend. Also some of the highest yielding securities you can buy are instruments called master limited partnerships (MLPs), and if you don’t know what those are, or why dividend yields don’t apply to them, you should stay the hell away from them. Only buy things that you understand, and for many people that is an index fund; there is no shame in that. Don’t expose yourself to excessive risk when it comes to your financial independence.