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Value Investing Series

Value Investing for Your Retirement - 1

January 17, 2009

One of the objectives for your investment is to accumulate enough money during your working years so you will have a worry free life after your retirement. You cannot rely on your social security paychecks to achieve that goal. Most of us know that social security paycheck may only cover one third of your needs or even less. Another investment principle is to investment early. The earlier the better. Two basic investment strategies: Investment in "Growing Companies" and investment in "Income Companies".

Looking for share price appreciation is the main purpose to invest in a growing company. Putting money in Microsoft, Dell, Oracle and such technology companies during their early high growth stages are good example of this investment strategy.

Looking for stable dividend is the main purpose to invest in an income company. Here, we do not care about the day-to-day stock price fluctuation. What we care is whether the company can provide a stable and attractive dividend.

In general, if a company has a strong fundamentals and has a history of providing stable, growing and higher-than-bank-interest dividends, that will be a good long term investment candidate. You can buy and hold it for 10, 20, 30 years and will obtain very high return. Many retirees are very interested in the second type of investment because they can get a stable yearly income to serve their retirement needs without the worry of the stock price swings. In general, if a company can provide 5%+ stable annual dividend, that will be a very attractive investment.

Here is the Catch: Do you believe it if I tell you that there exists a company, in which you invest $100,000 early and can receive more than $100,000 stable annual dividend now.

This is not a fiction at all.

One example is Bank of New Year Mellon Corporation (BK).

The company went public in September 9, 1984 and closed at $17.94 that day. If you invested $100,000 that day, you can have 5574 shares of its stock.

The company started its quarterly dividend distribution from October 19, 1987 and never stopped paying it during the next 21 years. The dividend has been growing in recent years from $0.23246/share in 1988 to $0.960/share in 2008. See the chart:

Further more, its shares split four times during the years: 3:2 in 1986, 2:1 in 2004, 2006 and 2008 respectively. If the dividends were all used for re-investment, one share in 1984 will become 26.3824 shares now. Therefore, the original investment on 5,574 share of BK has become 147,055 shares now.

If the company can maintain the same level of dividend this and later years, you will get $141,172.80 yearly dividend. What is more, your asset on the original $100,000 BK investment is valued at $5.341 million (the stock closed at $36.32 Friday 01/15, 2009) now.

That is, if you BUY-and-HOLD this stock for 25 years with no single trade, your initial $100,000 investment can give you more than $100,000 stable annual dividend and your total asset gained over 50-baggers at the same time. How wonderful it is.

You might say, that is the thing of the past. Do we still have such good investment opportunity now? The answer is YES and we may not need the 25 years to achieve the same level of return now. Thanks for the financial crisis. It gave us the rare opportunity you may never find it again.

That is, you may invest $100,000 in a company now and will receive a stable $100,000 annual dividend in just few years, may be in as llittle as 5 years.

Do you believe it? I will present one such example to you in the next article in this series. Stay tuned.

 

   
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