I had a discussion lately with a friend about dividend investing. He said that is not the right method for him. It will take too much time to really be effective. He wants returns, preferably high ones with low risks, and of course in a short amount of time. When he said this, I looked at him and told him (with a big smile) to go to the casino. There he has the most opportunity to realize his dream.
We, as DGI’s, know that dividend investing will not give you amazing return in the first ten years. But after ten years the snowball will really get some momentum and will grow bigger and bigger. And the eight wonder of the world, compound interest, will really kick in!
In the first ten years you have capital gains and your dividend as a great supplement. Your Yield on Cost (YOC) (see the great article of Lanny from The Dividend Diplomats) will be low in the first couple of years. But if you reinvest your dividend and the dividend is raised every year, your YOC will be great after ten years. And amazing after 30 years.
I showed my friend, with a little math, the power of compounding. I said if he invest € 1,000 in one year and he has an average return of 10%, his initial investment after 5 years will be worth € 1,610. This is not that spectacular. But after 10 years it is € 2,593 and after 30 years € 17,449.
And all he has to do is nothing! Just let the money (and interest/dividend) do its thing. He only gazed at me. The figures made sense to him. I told him that the results would be even more amazing if he puts fresh capital in, in the first 10 years.
A week a so later, I ran into my friend again. He told me he has done some serious thinking about what I told him. And he was thinking about opening a broker account and start investing. He said that I showed him how he could create a college fund for his kids.
And that put a really big smile on my face 😉