As a parent, the health and safety of your child or children is paramount. You work hard to shape strong, independent people with character to send off into the world and hope you’ve done everything you can to prepare them to thrive. When they’re young, it may feel like their first years of college is a lifetime away, but what about their first years of retirement? It may seem like a stretch to plan 60 years into the future, but with small recurring investments, the planning you do now can help your child retire with millions. In fact, it’s relatively straightforward.
Children can grow very rich—very easily—because they have time on their side. It’s as easy as one, two three:
1. Buy one Share of a DRIP Stock = $51.00. (We based this example on one share of Hormel Foods (HRL) which currently does not have a service fee for DRIP enrollment, see the parenthetical note below for more details.)
2. Invest $25 per month for 65 years = $19,554.05.
(Total amount invested over the period of 65 years)
3. Total Value at Retirement = $1,974,393.97.
(Assumes average annual return of 10% including dividends)
(Note: This illustration is simply to capture your attention by demonstrating the effect of compounding over the long term. We are not suggesting that any one stock will produce an average annual return of 10%. Rather, we suggest that you invest in a basket of companies in diverse industries. Your Total Value at Retirement will depend on the number of companies you are funding and the amount you are investing in each. In our illustration we invest just $25 per month. You would achieve proportionately higher returns based on committing more funds — rotating investments among stocks in a diversified portfolio.)
So How Does $51 Become Almost $2 million?
Time is an investor’s greatest ally. It is the key element in the power of compounding, and combined with investments in the stock market (where the average annual return has been nearly 11% since 1926), the results can seem like magic.
Compounding at a good rate of return over a long period of time makes it really easy to create millions. Here is another example of the power of compounding: A child who invests $50 a month from age eight to age 13 (a total investment of only $3,600 over the six year period) will end up with more money at age 65 ($1,302,154) than someone who starts investing at age 26 and invests $2,000 EVERY YEAR until he or she reaches retirement age. Those results are based on an 11% annual return.
The challenge is to put together a basket of stocks that will perform as well as, or better than, the stock market as a whole and to do so on a budget.
While you can potentially replicate that type of performance through a traditional brokerage account, DRIPs offer you two tools that make recurring investments much easier: automation and fractional shares. By treating your monthly DRIP investment as part of your monthly budget, you’ll be far less likely to delay purchasing shares or spend that money elsewhere. And, although a few brokerage firms have dipped their toes in the water, so to speak, most firms will not allow you to purchase a fractional share of stock. The recurring DRIP investment allows you to continue regularly investing, even if you don’t have enough for a full share, which helps you avoid attempting to time the market. As most long term investors know, the return on your investments depends more on time in the market than timing the market.
Investing through DRIPs is a great way to plan ahead and help your child retire with millions. Companies that offer direct investing tend to be high quality, large caps that pay dividends. As a group, they produce the products and services that make America great.
A Better Way to Invest
You don’t need a lot of money to set up a diversified portfolio of DRIP stocks. You can start with one share of each company and make small investments to buy additional shares every month (or every quarter). By accumulating shares in this manner, you don’t need to speculate about the right time to invest. That’s because your small regular investments will end up buying fewer shares when prices are high and more shares when they are low. Your net cost will be less than the average cost of the shares during the period. Investing in this manner is called dollar-cost averaging, a strategy that “forces” you to buy low.
Which Companies Should You Select?
When selecting DRIP portfolio candidates, you should apply the same criteria that you would when making any investment, and that will vary by investor. However, a strong dividend history, healthy earnings, and solid fundamentals are really a must, since you’re considering an investment that may last decades, especially if you’re investing for a child that you’re hoping to help retire with millions. This article, “What to Look For When Investing in Stocks if You Want to Profit” can help provide a better understanding of certain key metrics that investors look at.
An Added Bonus
One consideration that has little to do with the strength of an investment, and more to do with the investor (or prospective investor), is brand interest. You can help create investing interest in your child by investing in a company or product that they enjoy. General Mills (GIS), for example, offers a strong dividend, and a huge portfolio of products. A young investor may not care about the strength of a dividend, but letting them know that they own a small piece of the company every time they enjoy a bowl of Lucky Charms can build an early interest in investing that will set them on the path to retire with millions.
While the these companies may not be right for every investor, the following companies have previously been featured in Wall Street’s Best Investments, as strong DRIP candidates.
3M Company (MMM) is a diversified company with strong positions in the consumer, office, graphics, electronics, telecom, health-care, security and transport spaces. Foreign sales account for two-thirds of total revenues. Consensus estimates call for the company to earn about $8.53 per share this year. The company has total debt of $19.4 billion, cash of $7.7 billion, and operating cash flow of $5.4 billion. The dividend has been increased for over 50 years and provides a 3.6% yield.
AFLAC Inc. (AFL) is the world’s largest underwriter of supplemental medical insurance, doing business in the United States and Japan. The company earned $4.43 per share in 2019, which was a 17% increase year-over-year. Analysts are expecting it to earn about $4.83 per share this year. The dividend has been increased annually since 1983, and the current rate of $1.12 per share provides a yield of 3.01%. Return on equity has averaged over 15% for the past decade.
Caterpillar Inc. (CAT) is the world’s largest maker of earth moving machinery. Its products include tractors, bulldozers, scrapers, lift trucks, graders, loaders, compactors, pipe laying machinery, and off-highway trucks. The company also manufactures diesel and turbine engines for its products. Foreign sales account for two-thirds of annual revenues. CAT is expected to earn about $5.44 per share this year. CAT is currently paying a total annual dividend of $4.12, which yields about 2.5%.
General Mills (GIS) is a global manufacturer of consumer foods sold through retail stores and is also a supplier of branded and unbranded food products to the foodservice and commercial baking industries. The business is organized into three operating segments: U.S. Retail, International and Bakeries & Foodservice. Its products include ready-to-eat cereals, refrigerated yogurt, ready-to-serve soup, dry dinners, shelf stable and frozen vegetables, refrigerated and frozen dough, dessert and baking mixes, frozen pizza, and a variety of organic products. Consensus estimates call for the company to earn about $3.66 per share in 2020, and GIS will pay a total annual dividend of $2.04 which represents a 3.37% yield.
Hormel Foods (HRL) operates 29 food-processing plants and its brand names include Hormel, Spam, Dinty Moore, Top Shelf, Little Sizzler, Chi-Chi Salsa, Kid’s Kitchen and Mary Kitchen. Dividends have been increased in each of the past 46 years. The Hormel Foundation owns 48.3% and officers and directors own 3.4% of the 264 million outstanding shares. A strong balance sheet and conservative business practices make Hormel not only a defensive hedge but a high-quality growth stock. Hormel has offered a regular dividend, although the yield has varied slightly in recent years. This year, the quarterly dividend has been $0.233, which gives Hormel an annual yield of 1.88%.
Johnson & Johnson (JNJ) is one of the world’s largest manufacturers of healthcare products, including oral-care, skin-care, pharmaceuticals, medical devices, and diagnostics. With a strong balance sheet and a diversified product portfolio, Johnson & Johnson is the prototypical consumer staple. The dividend has been increased annually for over 50 years, with a current annual payout of $4.04 per share resulting in a 2.84% yield.
Paychex Inc. (PAYX) provides payroll services, automatic salary check deposit services, automatic payroll tax services and tax return filing services to over 560,000 small businesses nationwide through 100 offices in 36 states. It earned $2.86 per share in 2019, and is expected to earn $2.82 in fiscal 2021, followed by $3.07 in fiscal 2022. The quarterly dividend of 62¢ per share results in a yield of 2.98%. Paychex has little outstanding debt, so its financial position remains very strong.
Procter & Gamble (PG) has operations in over 140 countries worldwide and its brand names include Bounce, Cheer, Comet, Downy, Ivory, Mr. Clean, Tide, Bounty, Charmin, Pampers, Old Spice, Crest, Head & Shoulders, Prell, Noxzema, Cover Girl, Clearasil, Vicks, Iams, Crisco and Gillette. The company continues to extend its consecutive years of dividend increases, with current payout of $3.16 per share providing a 2.22% yield. Net profit margins usually average about 10 -18% per year.
Verizon Communications (VZ) is one of the largest telephone systems in the world, providing communications, information and entertainment service to over 92 million customers. Verizon recently increased its quarterly dividend to $0.627 which annualizes to $2.51, a hefty 4.3% yield. Consensus 2020 earnings, including Q4 estimates are expected to be $4.85 per share and consensus estimates call for Verizon to earn about $5 per share next year.
By starting to save fore retirement early, your children will be well on their way to retire with millions. To learn more about exactly how much you’ll need to comfortably retire, click here.