Finance

A twenty-somethings’ greatest asset

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What is every young person’s most valuable asset?

Hint: It’s what we want the most but use the worst (thank you, William Penn). It’s something of infinite potential. It’s TIME.

This doesn’t just mean that young people can become whatever they dream and accomplish whatever they set their hearts on. (Which is totally awesome!–and, of course, only possible because of a cool principle called liberty on which this cool nation called America was founded.) It means they can contribute to America’s economic growth for the long-term.

A family friend who is retired started investing in companies in his early 20s using dividend reinvestment plans (DRIPs). DRIPs, offered typically by larger companies that pay dividends, let the investor purchase shares directly,–without a brokerage and with minimal fees, if any–and automatically reinvest their dividends. 3 factors contribute to the growth of a DRIP: company growth, compounding due to dividends, and optional cash purchases.

  • Dividends are paid throughout the year according to the company’s payment schedule; amount differs by company but annual yield is generally in the 2-4% range.
  • Historically the U.S. stock market has grown. It has always recovered from recessions. If you invest in a solid, proven company (I’m talking companies like the Dow 30 and S&P 100), it wouldn’t be unreasonable to expect growth more often than not. (Just remember, the past can never predict the future.) Diversifying helps lower risk.
  • DRIPs allow you to purchase additional shares at minimal fees whenever you choose.

Say you invested $100 in a DRIP with Caterpillar Inc., which has a dividend yield of 4%, and you purchased $300 in additional shares each quarter. Assume 7% growth in stock price. Thanks to the miracle of compounding and to the small but steady additions on your part, in 40 years you would have $630,000! Not bad by any means, considering you put only a total of $48,000 at risk!

–Wait, Uncle Sam needs his 15% of your dividends!–so your investment would turn out to be worth $540,000. That’s still an impressive outcome (but let’s just hope the government spends that $90,000 of your dividends wisely…).

If you google “dividend reinvestment plan calculators” you will find tools that let you manipulate dividend yield, tax rate, number of years spent investing, etc. to see the effect on your investment.

Remember, earnings from DRIPs are not free money because you still need to research companies and risk your own capital. But clearly the miracle of compounding has created a great opportunity for an investment of any amount, from tens to hundreds to thousands of dollars, to grow surprisingly large!

An old saying claims that youth is wasted on the young. That is false. Youth’s greatest asset is time, and the market provides too great an opportunity to let some of the vast potential of time become a thing of the past.

 

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