In a previous job, I helped manage a few nine-figure fortunes -- which was intimidating at first. I mean, an errant mouse click while making a multimillion-dollar trade, and you're fired. But eventually, the sweats subsided, and I learned the secrets behind this enormous wealth.
How did the holders of these fortunes do it?
In two easy steps ...
First, they picked the right stocks. But their picks weren't the hotshot fads of the day. Oh, no. A look at their portfolios revealed almost nothing but blue chips such as Johnson & Johnson (NYSE: JNJ) and General Electric (NYSE: GE).
Second, they let their investments compound over long periods of time. Most of the fortunes got their start with family patriarchs or matriarchs who never lived to see the nine-figure promised land. (They did, however, live to see eight figures, which still isn't shabby.) Now, as a result of their wisdom and foresight, the family has a financial legacy to pass down over subsequent generations. In fact, many of the beneficiaries of these fortunes live quite comfortably off the dividends from their inheritance.
As much fun as watching paint dry
Now, you probably haven't heard much about the returns of J&J or GE lately. That's because they haven't grown 12,000% (or 62% annually) over the past 10 years the way Celgene (Nasdaq: CELG) has. Instead, Johnson & Johnson has returned 10.2% annually over the past 10 years, and GE has offered a 9.2% annual return.
Yet many of the nine-figure portfolios had holdings in both companies in excess of $10 million -- with a cost basis of $20,000. That's close to a 50,000% return. Sound impossible with this boring fare? It's not. It just takes time.
For a $20,000 investment to reach $10 million in 50 years, it needs to grow at an annualized rate of 13.2% -- just a few percentage points better than what J&J has achieved over the past 10 years. According to Wharton professor Jeremy Siegel's most recent book, The Future for Investors, those returns are easier to get when you buy dividend payers and reinvest their payouts. Fully 86 of the original S&P 500 stocks achieved that 13.2% benchmark from 1957 to 2003. For example:
|
Company
|
Accumulation of $20,000 over 47 years
|
Annual return
|
|
Altria (NYSE: MO)
|
$95.5 million
|
19.75%
|
|
Fortune Brands (NYSE: FO)
|
$12.3 million
|
14.65%
|
|
Kroger (NYSE: KR)
|
$11.2 million
|
14.41%
|
|
General Mills
|
$7.9 million
|
13.58%
|
Not coincidentally, most of the nine-figure fortunes had bought and held some of these very companies for 50 years or more. In some cases, the patriarch instructed his heirs never to sell these positions because they would be the only stocks they'd ever need.
Finding the winners
If you're ready to build your own financial empire, you'll need to start with today's best dividend payers. If you want some help in that quest, James Early and his Income Investor team can help. They find and recommend companies with quality management and a history of growing dividends -- in other words, stocks worth holding for 50 years.
Give the service a shot with a free 30-day trial. There's no obligation to buy, so what do you have to lose -- besides an empire?
This article was originally published on Aug. 10, 2006. It has been updated.
Todd Wenning does not own shares in any of the companies mentioned. Johnson & Johnson is an Income Investor choice. The Motley Fool has an ironclad disclosure policy impervious even to the broadside blows of the Monitor and the Merrimac.
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