The stock market, math, and you
It’s funny how math works. The Dow Jones Industrial Average has declined 40% from its high last year of 14,000. Sure, that’s bad if you’re near retirement and had all your money wrapped up in stocks. It’s a fantastic buying opportunity if you’re young.
40% down means a 70% increase when it returns to the same level. 8300 is 60% 14,000, but 14,000 is 168% of 8300!
The Dow closed Friday 8/10/2008 at around 8300 points. It’s a five year low. When it hits 14,000 again, that represents a 69% increase from Friday’s closing price. If it takes five years to return to the 14k level, that’s a very respectable 14% increase per year, not including reinvested dividends. The dividend yield on a Dow ETF (I like DIA) is 4%, but even at 2% your five year return is increased another 8% for a total of 77% gain. A 4% yield would increase your five year return to 86%.
Consider the following table showing a 2% yield reinvested year over year:
1 $10,000.00 0.00% 2 $10,200.00 2.00% 3 $10,404.00 4.04% 4 $10,612.08 6.12% 5 $10,824.32 8.24% 6 $11,040.81 10.41% 7 $11,261.62 12.62% 8 $11,486.86 14.87% 9 $11,716.59 17.17% 10 $11,950.93 19.51%
Let’s not forget that the yield is a stock’s current dividend compared to price. Your yield might be a lot higher. How so?
If you buy stock in, say, Verizon at yesterday’s closing price (around $29), your dividend yield would be 6%. Not too shabby. $0.46 per share per quarter is $1.84 annually. $1.84 / $29 = 6%.
But what happens if VZ increases their dividend two years from now? Instead of paying .46 they start paying .52 per share. Yield on your investment at $29 grows to over 7%! The price of the stock may rise and new investors might still get a 6% yield, but your money is now earning 7%. If they increase the dividend again two years later to .57, your yield relative to the price you paid will increase again to nearly 8%.
This blog post cannot be considered investment advice for anyone. Consult your own financial adviser and be sure to diligently research any investment you’re thinking about making. Just know that math is on your side should you invest wisely.