I received my monthly money market account statement the other day. My wife and I don't expect much out of the money in there -- it's our emergency fund in case one of us loses our job or we unexpectedly have, say, twins. Diaper-destroying, clothes-demanding, formula-sucking twins.
Anyway, the money market account pays paltry interest -- or so I thought until I opened the envelope and saw that we had earned nearly $70 in the previous month. Wait just a second, I thought. That's not too bad. If my money in that account makes $70 a month, that's $840 a year. In a decade, that would amount to an extra $10,000.
Who needs stocks?
You need stocks
Fortunately, my wife tackled me before I cashed out our 401(k)s and sold all of our individual stocks. Because while $70 seems almost like real money for doing nothing every month, and $840 in annual interest doesn't sound too bad, it's a mere shadow of what we can earn by picking smart companies that pay dividends. As my colleague Tim Hanson wrote in Build Your Dividend Dynasty, dividends do two things: First, they put real money into shareholders' pockets. Not promises, but cold hard cash. And they indicate that management is confident that its business model is generating substantial amounts of cash.
So before clicking the sell button on my Sharebuilder account, I did a little experiment. I found the issue of Motley Fool Income Investor that newsletter advisor Mathew Emmert put out one year ago. One of his picks was JPMorgan Chase (NYSE:JPM), which is the second-largest bank in the United States.
JPMorgan rewards shareholders with a 3.22% yield and has delivered a total return of 21.2% since that time. This compares favorably with the S&P 500's 3.69% return.
So what would have happened, hypothetically, if I invested the amount in my money market account in JPMorgan stock? Well, I could have purchased 452 shares. Since then, JPMorgan has paid $1.36 per share in dividends -- or what would have been $615 for the year to me.
Yes, that's less than my money market's annual payout.
But dividend-paying stocks offer something that money market accounts simply cannot: The opportunity to increase in value. And increase is exactly what JPMorgan's stock price has done -- to the tune of 17%. So, in addition to earning $615 in dividends, my investment in JPMorgan would now be worth $18,708. Add back the dividends and in just one year, my dividend-paying stock has earned $3,323.
That, of course, puts the money market account to shame.
The money eater
Granted, I need to keep my emergency fund liquid -- for those "just in case" occasions. And granted, we invest for the long haul, not for one-year returns. And granted, dividend stocks tend to be less volatile than their non-dividend paying brethren, but they are far from guaranteed.
But your chances for amassing real wealth are far greater if you invest your hard-earned money in great companies than if you store it in a money market account that pays something only slightly better than pocket lint, by comparison.
This is particularly true in the inflationary environment that we live in today. As Dr. Jeremy Siegel of the Wharton School proved, "Over long periods of time the evidence is overwhelming that the price of stocks will keep up with rising prices of the goods and services firms produce." And intuitively, this is true. If you're a shopper, then you see the price of everything constantly rising. In fact, Anheuser-Busch (NYSE:BUD), Coca-Cola (NYSE:KO), PepsiCo (NYSE:PEP), and Wrigley (NYSE:WWY) are just a few of the companies that have increased the prices of their branded commodities over the past few years.
So even though I'll be earning $840 per year in my money market account a decade from now, that $840 won't have $840 worth of purchasing power. In fact, it will only be worth about $670 of purchasing power, and that value will continue to decay over time. JPMorgan, on the other hand, will have likely raised its dividend a number of times by 2016 and the stock (hopefully) will have further appreciated -- making me money and easily beating inflation in the process.
The Foolish bottom line
Money market accounts and savings accounts should certainly have a place in your investment repertoire. They're excellent for stashing short-term emergency funds, but they aren't good as long-term investment vehicles -- inflation just eats away at the interest too much over a long period of time.
If you fear the volatility of the stock market, consider learning more about undervalued dividend-paying stalwarts such as JPMorgan. Not only do they pay you cold hard cash every year, they're also the best stocks for the long run, and the best way to beat inflation.
If you'd like specific dividend-paying stock recommendations, Income Investor has 50-plus companies that yield more than 4% on average. Since inception, those picks are beating the S&P 500 by nearly five percentage points. Click here to join the service free for 30 days.
Roger Friedman needs stocks, and he's not afraid to show it. Roger is the author of Nipple Confusion, Uncoordinated Pooping and Spittle: The Life of a Newborn's Father . He does not own shares of any company mentioned in this article. Anheuser-Busch and Coca-Cola are Inside Value picks. Wrigley is an Income Investor pick. The Fool'sdisclosure policyis like a rock.
