Get Rich with Dividends. Lichtenfeld Marc
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escaping the rat race, moving to Ashland, and opening a pizza place. We've repeated that conversation on trips to Banff in the Canadian Rockies; Asheville, North Carolina; and even Tel Aviv, Israel.
Considering that I know nothing about the restaurant business, would not be happy if not in close vicinity to a major American city, and am a lousy cook, the pizza joint remained a happy fantasy.
But for the purposes of this book, Marc Lichtenfeld's Authentic Italian Trattoria will serve as an example of a business with revenue and profits. We're also going to assume that I'm your brother-in-law (your sister was always a very good judge of character) and you've agreed to become my partner in the business.
One day I come to you, my favorite brother-/sister-in-law, with my plans for the restaurant. I have the space lined up. It's in a popular location with a lot of foot traffic. I've been talking with a wonderful young chef who is eager to make an impression on local diners and critics. All that's missing is start-up capital.
This is where you come in. In exchange for a $100,000 investment, you will receive a 10 % ownership stake. I show you my projections: The restaurant will break even the first year and make $100,000 in the second year and $200,000 in the third year.
One of the questions you may have is how will you get your money back. Do you have to wait for the restaurant to be sold, or will you receive some of the profit each year?
If I tell you that my goal is to build the business to $1.5 million in sales and then sell it for two times sales ($3 million), where you'll receive $300,000, your response might be very different from what it would be if I tell you that half the profits will be invested back in the business with the other half split up among the partners in a yearly payout (dividend).
Your decision on whether to give me the money will depend in part on your goals. Are you willing to speculate that you'll receive the big payoff in several years when the business is sold, or would you rather receive an income stream from your investment but no exit strategy (plan to sell the restaurant)?
When buying stocks, investors have to make similar decisions. Do they buy a stock with the sole purpose of selling it higher down the road, or do they buy one that provides an income stream and opportunities for income growth in addition to capital gains?
I don't know about you, but if I'm investing in someone's business, I want to see some money as soon as possible rather than wait for an exit strategy.
Here is another factor that might affect your decision to invest in my trattoria: Instead of offering to pay you your cut of the profits every year, I might offer to reinvest that money back into the restaurant and give you more equity. That way, your piece of the profits gets larger each year. Eventually, you can start collecting a significant cash payout annually, or receive a bigger slice of the pie when you sell your stake in the business because your equity has increased above your original 10 %.
This last scenario is the same as reinvesting dividends, a method that is the surest way I know of to create wealth.
And what I love about this strategy is that it works (and has worked) no matter who is President of the United States; what happens in Europe, Iran, or the Middle East; how high unemployment and inflation are; and so on. Sure, those things will affect your short-term results, but over the long haul, they mean nothing and in fact could help you accumulate more wealth, as I'll explain in the section on bear markets in Chapter 3.
The Numbers
Investing in dividend stocks is the best way to make money in the stock market over the long term.
But don't just take my word for it. Harvey Rubin and Carlos Spaht II, both of Louisiana State University in Shreveport, write, “For those investors who adopt ten and fifteen year time horizons, the dividend investment strategy will lead to financial independence for life. Regardless of the direction of the market, a constant and growing dividend is a never-ending income stream.”4
Just a few pages ago, I told you that dogma doesn't work, yet here I am sounding fairly dogmatic. The proof that dividend investing creates wealth is in the numbers.
First of all, investing in the stock market works. Since 1937, if you invested in the broad market index, you made money in 69 out of 76 rolling 10-year periods, for a 91 % win rate. That includes reinvesting dividends.
The seven 10-year periods that were losers ended in 1937, 1938, 1939, 1940, 1946, 2008, and 2009. The periods 1937 to 1940 and 1946 were tied to the Great Depression. The 10-year periods ending 1936 to 1940 were brutal with an average decline of 40 %. The decade ending in 1946 was much tamer with a loss of 11 %. The 2008 and 2009 10-year periods each lost 9 %.
Paul Asquith and David W. Mullins Jr. of Harvard University concluded that stocks that initiated a dividend and increased their dividends produced excess returns for shareholders. Additionally, the larger the first dividend payment and subsequent dividend raises, the larger the outperformance.5
And research shows that dividend stocks significantly outperform during market downturns.
Kathleen P. Fuller and Michael A. Goldstein of Babson College concluded, “Dividend-paying stocks outperform non-dividend-paying stocks by 1 to 2 % more per month in declining markets than in advancing markets.”6
In recessions, the outperformance is even more pronounced. During the recessions of 2001 and 2008, the Dividend Aristocrat index (more on Aristocrats in the next chapter) outperformed the S&P 500 by 6.45 percentage points annually, according to Albert Williams and Mitchell Miller of Nova Southeastern University.7
Later on in the book, I'll show you how you can achieve double-digit yields, which would nullify the effects of even the weakest historical markets performance and enable you to make money regardless of what the overall market is doing.
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