How To Use Your Dividends, And The Decades In Your Life, To Build Your Own Wealth

BIG PICTURE

“To enable more families, from more countries, to use the strategies of Inter-Generational-wealth creation, through the stock market, to create more wealth, for more family members, on a revolving basis”

Takeaways

In this Newsletter we reinforce, and emphasize, how the stock market can

  1. Grow some wealth for you in two ways, and 
  2. outline the step-by-step procedure through which to make it happen so that                                         

you can start building some wealth and sleep well at nights.

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It is not true!

The presentations on the stock market in the evening news in our various countries, can make it appear as though;

  1. You have to be super smart to be a successful investor
  1. That only rich people can be investors but, 

we want to emphasize …….

  1. …….. that that impression is not true. It is ‘form over substance’!

In other words, if we follow the template laid down by all the experts who have researched and written on the subject, we, too, can do it. We can become successful stock market investors too!

As is  explored in another Newsletter, we just need what I call the mindset for wealth. Our own wealth, and we can do it too.  This means we are not sitting back and waiting for ‘manner, or cash, to fall from above’! Instead, we agree to believe that the responsibility for creating our own wealth is a personal one and we are going to embrace it. Put another way, as of now, we are owning the responsibility for creating our own wealth. The only question is  how do we do it?!

As emphasized in Newsletter#2, some concepts and strategies will be repeated deliberately because, we want to enrich a constituency, ours, wherever in the world we live and work, since we might never have been fully exposed to the benefits of the market prior. That is to say….

  1. There isn’t a practicing investor among family, friends or acquaintance from whom we could be sensitized about the benefits of the stock market. This is called mentoring
  1. We have been relying on what we have always heard, that is, “to make it in life, we must learn, pass our exam and get a good job so that we can work and earn the money we need”, or
  1. For whatever reason, we have not yet had the interest, or taken the time, to explore  what the market calls financial literacy, meaning, we may not be aware that,
    1. just like how we spend our years working for money, 
    2. we, in turn, can also send our money to work for us 
  1. In this Newsletter #3, we want to explore some of these concepts and, in the main, respond to both A and B as promised in the Takeaways

C: Two ways we can  create our own wealth

The basic premise of wealth creation will remain the same wherever in the world you, or I, live, be it South Africa, Kenya, England, North or South America, or the Caribbean. Simply put, in the event we don’t get an inheritance from somebody (like a parent) we will have to make the sacrifice   to do it ourselves and, two intertwined ways of doing it are;

  1. Invest in any asset that ‘throws off’ periodic cash flow. (For us to do this might mean changing some priorities in our own life); and,
  2. Re-invest that ‘thrown-off’ periodic cash flow back into the same asset that pays it

Note: Especially when we are young and have all the decades in our life ahead of us, it might neither  be easy, nor be the in-thing, to put scarce cash flow to work for us (in the stock market) and this is one reason why George Bernard Shaw said as far back as 1935  that “youth is wasted on the young”  So, we accept that doing C1 and C2 are easier said than done

The asset class in which we invest could be raw land, rental property, commodities like oil or precious metal but, for our purposes, I am proposing dividend paying companies in the stock market because, with stocks, we tick many of the boxes of wealth creation that we want to put to work to build some wealth for ourselves. 

D: What are these boxes which we want to  tick?

While many things will impact every investment (and you will recall our constant reminder that there are no guarantees in the stock market) the important boxes which are ticked when we buy a dividend paying stock are;

  1. Basic share price, (and remember stock value tend to increase over time)
  1. Since it is dividend paying, it will ‘throw off’ a cash flow (dividends) for as long as the stock is held
  1. These cash flows (dividends) will be re-invested into the stock that just paid it to buy more of its shares. This will provide a compounding effect and act as a kind of internal growth accelerator to increase the value of our investment
  1. But, that is not all. There is still one more very powerful box that is not yet ticked. This is the time ‘in our lives’ box, yours, and mine. Remember George Bernard Shaw’s comment? If we can recall the days back at school, we will remember the profound impact that time (as measured in decades) had on the outcome of the compounding exercises that we did. Now, substitute the many years (decades) in your own life in our wealth building formula and the net effect is that you are using the years in your own life to help grow your wealth. There might be more boxes to be ticked but, right now, you could say we have ticked all the main ones that will help us, you and I, to grow our own wealth. In fact, we could even say, that this time in our lives (decades) has the potential to give a kind of turbocharging impact on our investment. 

E: How the system works

In the following sections, we look at the actual mechanics of the process of 

  1. Buying the dividend paying stock and 
  1. Using the cash it ‘throws off’ (quarterly dividend payments)
  1. To grow the investment over time (which is to imply ‘grow with us’)

In other words, we are now dealing with Part B in the Takeaways. In reality, companies ‘throw off’ cash (pay dividends) quarterly but, depending on the size of the portfolio (Is it below, equal to, or above the basic minimum stipulated?) it (company) might only communicate with you once per year.

For ease of reference, let us agree that your company participates in the process of allowing its small shareholders to re-investment in their shares (not all companies do.) In that case, all that we would now need are two facilitations as follows

  1. A way to initiate the process by setting it up, and
  1. Another to actually monitor/count the entitlement of each shareholder based on the established criteria

F: It is all done ‘inside’!

The real beauty, and benefit to us, of using our dividend to grow our initial stock market investment i.e. participate in a Dividend-Re-Investment Programme are many but, maybe, the most important two, from our perspective are;

  1. Ease of operation (we don’t have to lift a finger because, everything is done internally, and
  2. Probably most important, it is either 
  1. Free of cost to us, or
  2. The operational/administrative cost is highly subsidized by our company

Two key operatives are usually involved in what is really a complex operation that we, investors, are spared. These two operatives are the company’s  registrar and tranfer agent.

They attend to all the backroom administrative details and, at the end of the process, send us a statement that tells us, among everyything else

  1. How many shares we had before dividend payment
  2. How much dividend our shares generated (which we can easily verify)
  3. How many new shares, including parts thereof)  our dividend purchased
  4. What our new total number of shares are
  5. The new value of our investment based on share price on the day that the  statement was generated

G:  Summary

From the above account, it is not far fetch to conclude that we, too, (you and I), from anywhere in the world where we live, and work, can, if we set our minds to it, grow some wealth for ourselves over time. It requires only that we do the following, among other things;

  1. Make the sacrifice to start an investment, however small the amount of money that we have. Later on, we can always ‘up it’, but start! ‘A journey of a thousand miles begins with the first step’
  1. Whatever we invest in must have the ability to ‘throw off’ some periodic cashflow
  1. We will have the option to do many things with that  ‘thrown off’ cash flow like
  1. Consuming it, or
  2. Reinvesting it
  1. If we re-invest it in the asset that produced it (actually in any asset!) we immediately incorporate the powerful concept of compounding which is one of the major power-house of wealth creation
  1. Also, if, along with re-investing our dividends, we  leave it to ‘grow with us as we age’, we would be incorporating another wealth-building factor (the time in our own life) that, especially over many decades,  has a kind of turbo-charging impact on the growth  of our investment (Think of buying a dividend paying instrument @ age 30 and leaving it to compound until age 70. That is 40 years of compounding and turbo-charging!)
  1. Finally, all of the above will, and can be done without our intellectual or physical involvement. So, if we want to, we could actually tell those guys on the evening news ‘a thing or two’

H:  Caveats

The facilities for Dividend-Re-Investment Programmes, DRIP, are not necessarily present in every market and, or, to the same degree. This is another reason why, as a new investor, I recommend the mentoring and guiding presence of a Registered Investment Advisor, (RIA). Ofcourse, you are always to tell him/her about your wish to  buy a dividend-paying stock.

Posted on Oct 15, 2022 by Lloyd-Vermont

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