I think it was George Costanza from Seinfeld who said, “Interest, what an amazing thing!” (Or something like that). Truer words have rarely been spoken. Of course, he meant compound interest and George, not being a “financial wiz,” left out a few “amazing things,” like Exchange-traded Funds (ETFs), mutual funds, monthly income investments and stock dividends!
What is interest? One type of interest is “the cost of borrowing” money; like the interest you pay on a home mortgage or car loan. The kind of interest we want to talk about is: the money you make on money when you invest or save. 99% of the time, this is compound interest or “interest on interest.” Even in a low interest rate environment, it’s still FREE MONEY!
Let’s look at a simple example. You invest $100 in a 3-year GIC that pays 1.9% interest, compounded, year-over-year. After the first year your GIC would be worth $101.90 ($100 x 1.019) At the end of the second year your GIC would be worth $103.84 ($101.90 x 1.019) and at the end of the 3-year term, your GIC would be worth $105.81 ($103.84 x 1.019) If you look closely you will notice that you are earning interest on previous interest – free money!
Is there a place for an interest-bearing investment (Like a money market mutual fund) in your wealth building plan? Maybe; especially later in life, or as you approach retirement. More about interest-related investing can be found on my monthly income blog.
Let’s talk about dividends! What are stock dividends anyway? I call them “profit sharing helpers,” I also call them “wealth building titans!” If you want to build wealth over time (In a passive, relaxed kind-of way) find 2 or 3 dividend-paying company stocks, with long and strong track records and invest in them f.a.s.t. 🙂
Here is a simplified example of how stock dividends work. Let’s say you buy 200 shares of ABC Company. Let’s say ABC has a long and strong track record of paying dividends to its owners; normally every 3 months. Remember, when you bought 200 shares of ABC, you became a part owner of ABC; and as such you share in its good and bad fortunes. And let’s say ABC decides to pay its “owners” 44 cents per share at the end of the next quarter. Dividends are normally paid from profit or retained earnings. For you, that means a cash dividend of (200 x 0.44) $88.00
Now let’s say that you are re-investing your quarterly dividends into more shares of ABC (Commonly referred to as a D.R.I.P.), and let’s say ABC is currently trading at $49.50. You will be granted 1 new share of ABC and the difference ($88.00 – $49.50 = $38.50) will be deposited into the cash portion of your investment account.
Let’s review. As a part owner of ABC, in the first 3 months, you received a FREE additional share of stock and $38.50 in cash. Not bad, not bad at all. Now, imagine when those numbers start to reach $200, $400, $600 in dividends per quarter and your total shares reach 400, 600, 800 and more! It’s pretty much a license to print money. There is an entire section of my money making blog dedicated to dividends! This was only a very simplified and brief introduction.