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 those investors do it?
In two easy steps
First, they picked the right stocks. But these weren't the hot-shot fads of the day. Oh, no. A look at the portfolios revealed almost nothing but blue chips such as Coca-Cola and Procter & Gamble
Second, they let their investments compound over long periods of time. Most of the fortunes were started by family patriarchs or matriarchs who didn't live 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 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 Coke or P&G lately. That's because they haven't more than doubled in value over the past two years like Google
Yet many of the nine-figure portfolios each had holdings 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 modestly better than what P&G 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 Name (2003) |
Accumulation of $20,000 over 47 Years |
Annual Return |
|---|---|---|
|
Abbott Labs |
$26.3 million |
16.5% |
|
Pfizer |
$21.7 million |
16.0% |
|
PepsiCo |
$17.7 million |
15.5% |
|
Colgate-Palmolive |
$15.6 million |
15.2% |
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 to never 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 are just a click away. They find and recommend companies with quality management and a history of growing dividends. In other words, stocks worth holding for 50 years.
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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. Colgate-Palmolive, Pfizer, and Coca-Cola are Inside Value selections. The Motley Fool has an ironclad disclosure policy that even the USS Monitor couldn't knock out of the water.
