When I was 12 years old, I heard something that introduced me to stocks, drove home the awesome power of investing, and changed my future. You see, someone explained to me then that everyday people -- just like you and me -- could become owners in virtually all of the everyday businesses that made the everyday products involved in our everyday lives.
He said I could become an owner in Coca-Cola
That someone was my father, a man of incalculable goodness who, ironically, didn't own any stock at the time but spent all the days of his life working to ensure that I would own some. I did, and I cherish that gift -- as well as all the others he gave me -- along with my memories of him.
A new dawn
Dad taught me what I've since considered the most beautiful thing about investing: Companies pay a dividend. It still sends my pulse racing when I think about it.
At that point, I realized that, not only could I profit from those cans of soda 50 years from now but I could do so every three months -- when dividends are typically paid. More importantly, I could profit in the form of a slight, but very real, check with my name printed in big bold letters right across the front.
As far as I was concerned, Willie Morris could keep his dog Skip, because I had discovered a very good friend that didn't soil the rug. This delightful concept had been completely foreign to me, but I found it incredibly enticing. If I worked hard now, saved my money, and invested it wisely in such companies as these, one day I would no longer have to work. I could instead sit back and cash my dividend checks. How sweet it is.
To a kid who up until then believed he would be a working stiff until age 65 -- and the only income he would ever see was a salary, a pension, and maybe, just maybe, a Social Security check -- this was a heck of a concept.
Who would have thought a snot-nosed, freckle-faced, gangly kid could become an owner in a business and earn income from that business without having to lift a finger to run it? In fact, I could ultimately earn income from a vast number of businesses in which I would never have to be directly involved. Now you're talking.
I immediately began to run the numbers and figure out how many shares I would have to own in order to generate enough dough to fund baseball card and bicycle purchases for the next 40 years. Then I set about developing a plan to make it happen. Now, it wasn't enough for me to simply hear about a few companies that paid a dividend and leave it at that. Oh, no, ma'am. I had to see some proof that this approach would actually turn a relatively modest start into a big finish. As such, I learned all that I could and began to run the numbers to determine what my investment might look like in the future.
Basically, I selected three companies, all with long histories of paying material dividends and a flair for increasing those payouts. I figured this would result in the best of all worlds for my mock portfolio. First, I chose Altria
After making the selections, I went back in time and assumed that I'd made a $1,000 investment approximately 20 years before. I then did my best to determine the current value of that investment. What follows are updated versions of what I came up with, using the same three companies.
If you'd invested $1,000 in Altria in 1980, and reinvested your dividends along the way, today you'd be sitting on shares worth $145,776. Without dividends, you'd have a puny $45,711. Though back then you would have begun with a measly 29 shares of stock, you would now hold more than 2,150 shares through reinvested dividends and stock splits.
That's not bad, but here's the payoff pitch: From that single $1,000 investment, your shares would now provide an annual income of more than $6,300! Twenty-five years may seem a long time, but consider that you would have begun receiving your $1,000 original investment paid out to you annually in dividends in little more than 10 years.
If you'd sunk your $1,000 into PepsiCo shares in 1980, you'd now have $75,074 with dividends reinvested. Without dividends you'd be facing just $39,655. Though you would have begun with about 41 shares of stock, through reinvested dividends and stock splits you would have ended with nearly 1,400. Not bad, but again, consider that -- on your single $1,000 initial investment -- your PepsiCo shares would now provide an annual income of more than $1,270!
If you bought into the Band-Aid argument, $1,000 invested in Johnson & Johnson in 1980 would be worth $69,283 today with reinvested dividends. Without dividends, you'd have a mere $41,417. Though you would have begun with a tiny 13 shares of stock, through reinvested dividends and stock splits you would now have more than 1,000 shares. Again, pretty impressive, but get ready for another income boost, as today your shares would pay you more than $1,200 annually!
Thus, if you had purchased all three companies, making a total investment of just $3,000 in 1980, today you'd be sitting on a portfolio worth more than $290,000 that provided an annual income of about $8,770. The income alone is more than twice your original investment, and that's the power of dividend investing.
The Foolish bottom line
The result of that long-ago lesson is that I'm here writing for you today. It's also why I now share my best ideas for fulfilling this dividend-oriented strategy with my subscribers every month in the pages of Motley Fool Income Investor.
I developed and pitched the concept of a dividend-stock newsletter because I believe in the strategy and practice it myself. It's how I invest, largely how my family invests, and it's how my friends tell me that they invest in order to avoid further badgering.
Of course, I'm still developing my own dividend plan a little bit every day. After all, this can be a lifetime pursuit for someone with a relatively modest beginning. The strategy already results in significant income in my coffers quarter after quarter -- not enough for my fairly aggressive retirement needs, mind you, but then again, I have no plans to retire from this job that I love.
In fairness, I've since come to realize that finding these businesses can -- in itself -- be a full-time job, but that's why I'm here, and I believe that's why you're here, too. Dividend investing just plain outperforms with lower risk, and that's a compelling trait that all investors can understand.
Mathew Emmert is a master at making duck calls. In case you didn't notice the marketing, he's also the author of Motley Fool Income Investor . He owns shares of Altria and PepsiCo. The Fool has a disclosure policy.