Wall Street loves to overcomplicate the process of investing.
Throw enough arcane financial terms at a soon-to-be-retiree, ask them to choose between “variable annuities” and “covered call options,” or artificially segment their investing strategies into growth, value, and income holdings and chances are you will confuse your client so thoroughly that they will happily hand over a 2% annual fee to manage their money just so they don’t have to think about it!
Here at The Motley Fool, though, we do our best to keep investing simple. Simple enough that anyone can understand it. Simple enough that anyone can do it. And in that spirit, today I’m going to tell you two simple investing tricks you can use to double your money.
Be forewarned, however: Both these tricks require you to exercise a bit of patience, and to stay the course.
Double the money in your portfolio
Have you heard about the rule of 72?
It’s a very simple formula for figuring out how long it takes for the money in your stock portfolio (or checking account, or savings account) to double. Take the rate at which you expect your stocks to “go up” annually, or the interest rate you are earning on your bank account, and divide that number into 72. The result is roughly how many years it will take for your money to double, assuming it grows steadily at the given rate.
For example, over the past century or so, the stock market has tended to grow about 10% in value annually. Divide 10 into 72, and voila — you can expect a simple stock investment such as an S&P 500 ETF to double in value every 7.2 years. Conversely, if you’ve got all your money stashed in a bank checking account paying you 0.01% in interest, it’ll take you about 7,200 years to double your nest egg.
Hint: This is why here at The Motley Fool we really think you’re better off investing in stocks. You can buy a really big basket of ’em, and limit your risk through diversification, by investing in the SPDR S&P 500 ETF (NYSEMKT: SPY).
Double the money in your dividend check
Do you prefer cash that’s available to use when you need it so that you don’t need to sell a stock to get ahold of it? Here’s another trick to double your usable money — the kind that arrives every quarter in the form of a dividend payment from stocks that you own.
Say you own a stock that pays about a 2% dividend yield today (which is average for this market). Say too that it is growing its profits steadily, and thus able to grow the size of the dividend it pays in tandem. Finally, say it keeps on growing that dividend consistently, year-in and year-out. There are plenty such stocks that do this, by the way. We call a certain segment of them dividend aristocrats, and they include such well-known names as aerospace and defense company General Dynamics (NYSE: GD), retailer Target (NYSE: TGT), and water heater manufacturer A.O. Smith (NYSE: AOS).
If such a stock were priced at $100 a share, it would be paying you $2 in dividends a year per share in the form of four quarterly dividend payments of $0.50 each. If priced at $50 a share, it would be paying you $1 a year per share; if $200 a share, $4 a share.
Now, whatever the actual dollar value of the dividend payment today, how long do you think it would take for that dividend amount to double?
The answer to that question could involve a lot of math, and vary with the size of each year’s dividend increase, the rate at which earnings are growing, and even changes in the stock’s price. But rather than bore you with math, let’s look at some examples of how dividends have doubled in practice (with a little help from the data miners at S&P Global Market Intelligence).
Back in 2012, General Dynamics was paying its shareholders $2.04 per share in annual dividends. Today, it pays $4.08 per share — a clean double in just eight years. General Dynamics’ dividend yield is still just 2.2% — not much more than the market average. Yet it pays its shareholders twice as much money in dividends today as it did eight years ago. (Incidentally, General Dynamics’ stock price has also more than doubled in that time.)
Want another example? Okay. How about Target? From 2012 to today, Target’s annual dividend has grown from $1.10 a share to $2.58 a share — that’s just eight years to get more than a double.
And A.O. Smith? For dividend investors, this is the best story of all. As recently as 2016, A.O. Smith was paying its shareholders a modest $0.48-per-share annual dividend. Today, its dividend stands at $0.90. It’s yearly dividend nearly doubled in size … in just three short years!
Granted, not every stock will grow its dividend as fast as A.O. Smith has done — nor even as fast as General Dynamics or Target. But the dividend aristocrats list shows us that nearly five dozen companies have grown their dividends consistently over time, and given enough time, those dividends can and will double.
Turns out doubling your money in the stock market isn’t so much a matter of “tricks” as it’s really just a matter of “time.”