72 – The Rule of 72Rule Of 72 according to Investopedia:
What is the ’Rule Of 72’
The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:
Years required to double investment = 72 ÷ compound annual interest rate
Note that a compound annual return of 8% is plugged into this equation as 8, not 0.08, giving a result of 9 years (not 900).
Next Up
COMPOUND INTEREST
ANNUAL PERCENTAGE YIELD – APY
COMPOUNDING
RETURN
BREAKING DOWN ’Rule Of 72’
The rule of 72 is a useful shortcut, since the equations related to compound interest are too complicated for most people to do without a calculator. To find out exactly how long it would take to double an investment that returns 8% annually, one would have to use this equation:
T = ln(2)/ln(1.08)=9.006
Most people cannot do logarithmic functions in their heads, but they can do 72 ÷ 8 and get almost the same result. Conveniently, 72 is divisible by 2, 3, 4, 6, 8, 9, and 12, making the calculation even simpler.
The rule can also be used to find the amount of time it takes for money’s value to halve due to inflation. If inflation is 6%, then a given amount of money will be worth half as much in 72 ÷ 6 = 12 years. Nor does the unit have to be money: the rule could apply to population, for example.
Adjusting For Higher Rates
The rule of 72 is reasonably accurate for interest rates between 6% and 10%. When dealing with rates outside this range, the rule can be adjusted by adding or subtracting 1 from 72 for every 3 points the interest rate diverges from 8%. So for 11% annual compounding interest, the rule of 73 is more appropriate; for 14%, it would be the rule of 74; for 5%, the rule of 71.
For example, say you have a 22% rate of return (congratulations). The rule of 72 says the initial investment will double in 3.27 years. Since 22 – 8 is 14, and 14 ÷ 3 is 4.67 ≈ 5, the adjusted rule would use 72 + 5 = 77 for the numerator. This gives a return of 3.5, meaning you’ll have to wait another quarter to double your money. The period given by the logarithmic equation is 3.49, so the adjusted rule is more accurate.
Adjusting For Continuous Compounding
For daily or continuous compounding, using 69.3 in the numerator gives a more accurate result. Some people adjust this to 69 or 70 for simplicity’s sake.
Source:
http://www.investopedia.com/terms/r/ruleof72.asp?utm_term=rule+of+72&utm_content=sem-unp&utm_medium=organic&utm_source=&utm_campaign=&ad=&an=&am=&o=40186&askid=&l=dir&qsrc=999&qo=investopediaSiteSearch
I encourage all to invest in dividend stocks; the sooner the better.
This discussion is created to discover and share their due diligence of those equities. Best2All-Ben
This is a discussion topic or guest posting submitted by a Stock Gumshoe reader. The content has not been edited or reviewed by Stock Gumshoe, and any opinions expressed are those of the author alone.
The Best Internet of Things Dividend Stock Portfolio – See more at: http://long-term-investments.blogspot.com/2016/04/the-best-internet-of-things-dividend.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Long-Term-Investors+%28Dividend+Yields%29#sthash.uyAD6AD5.dpuf
Thanks, Sogjam. I am a big proponent of dividend growth stocks. Einstein once said that compound interest is “the eighth wonder of the world.” For those companies that regularly raise their dividend payments, and by roughly the same percent each year, you can estimate future payments based on the rule of 72. By choosing the right companies, at an average 10% annual dividend increase after 35 years or so you will receive your initial investment as a dividend–each and every year.
At business school I was taught that a company’s dividend strategy is irrelevant to the company’s value, and hence, the share price, and so as an investor we shouldn’t care one way or the other. Over time I’ve learned that is complete bunk. By receiving dividends, we gradually extract value from the investment, thereby protecting yourself from short-term swings in stock price, which could be problematic if you’d otherwise sell a few shares a year to supplement your income. The best place to research dividend growth stocks is a spreadsheet kept by a man named David Fish, which is updated every month and is found here: http://www.dripinvesting.org/Tools/Tools.asp. The spreadsheet includes some terrific info including EPS% payout, past and expected earnings growth, debt levels, etc., which helps you get a sense of those companies most likely to be in a position to continue to raise their dividends. In different tabs, the spreadsheet also includes companies that have raised their dividends for as little as five consecutive years, which includes some growth stocks like Starbucks.
As for me, I’m planning to retire in about 13 years when my youngest graduate from college, and my plan is to be receiving $150,000 in annual dividends at that point. So I can back into what percentage of my portfolio I want to put in these DGI stocks, and which ones are the safest options with the best growth potential.
That may have been slightly off-topic–but it all flows from the Rule of 72 and how you can utilize it in long-term investment decisions.
If there’s any interest in expanding this discussion to identifying the best DGI companies, I’d be happy to contribute my thoughts. Or I guess we can start a different thread for it. Sogjam–your call.
Thank you for your very informative comments and the awesome link, savethemanatee. I am thankful that you mentioned DRIPs which some companies offer 1%-5% discounts on additional purchases once Investor relations has been contacted and you are set up. I’d prefer to continue the discussion here as It shall be consolidated, instead of scattered throughout the site. Best2You-Ben
Some of these H2O utilities are reaching all time highs: http://finviz.com/screener.ashx?v=111&f=ind_waterutilities Even better using DRIPs 🙂
http://www.stockgumshoe.com/2015/11/microblog-water-our-most-precious-resource/comment-page-1/#comment-4695929
Best2You-Ben
Not my intention to promote MF; good dividend article: http://us3.campaign-archive2.com/?u=0d1d0582254b8399936e6130e&id=59d25a400e&e=dda8c5e44d This link is mainly for our Gummunity living down under, Australia. Best2YouMates-Ben
15 Long-Term Dividend Grower With The Highest Operating Margin – See more at:
http://long-term-investments.blogspot.com/2016/04/15-long-term-dividend-grower-with.html#sthash.Ba2hbhjG.dpuf
http://long-term-investments.blogspot.com/2016/04/15-long-term-dividend-gr
ower-with.html
6 Top Dividend Growth Stocks With Yields Over 4%: http://long-term-investments.blogspot.com/2016/04/6-top-dividend-growth-stocks-with.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+Long-Term-Investors+%28Dividend+Yields%29
Apologies in advance if any of what follows is too basic for this community–thought I’d start at the beginning.
The basic premise behind dividend growth investing is to focus on those companies with steadily and consistently growing dividends. The goal is to maximize dividend payments 15, 20, even 30 years from now. Thus, these are, by definition, buy-and-hold investments in companies that you expect to last forever. Since we are dealing with such a long-term horizon, it’s imperative to limit risk, and one good way to do that is to ensure this portion of your portfolio imitates the broad market to some degree and includes companies across all sectors. It’s not unusual for DGI investors to own shares in 40, 50, 60 companies or more. One advantage of these companies, as mentioned earlier, is that you are able to gradually extract value, thereby hedging your vulnerability to short-term fluctuations in stock price. Also, when a company makes a commitment to pay a dividend every year, and increase it regularly, they are flagging their determination to run the firm in a fiscally conservative way and not overspend on needless things, because they will not want to put their dividends at risk. These are the companies you want to invest in–the ones that protect your wealth, and don’t spend money just because they don’t know what else to do with it. It is better, much better, to return excess capital to shareholders, because it keeps management in line.
The dividends paid today are of less importance than trying to project the dividends paid 20 years from now. Thus, the mistake many beginners make is concentrating on the high-dividend stocks without looking at dividend growth rate and whether a company will be able to continue to pay and grow its dividend payments. Using the rule of 72, we know that (depending on your horizon, of course) a company paying a 2.5% dividend today with a growth rate of, say, 10% is a better choice than a company paying a 4.5% dividend today with a 4% growth rate. After 30 years, the latter will be paying out roughly 14% of your initial investment, while the former will yield around 40%. Better still is the stock that will increase its dividend 15% annually. If it starts at, say, a 3% yield, after 30 years you’ll be collecting 170% of your initial investment in dividends . . . each year. Well, not quite every year. The following year you’d be up to 200%. Finding a c company that can raise its dividend by 15% for 30 consecutive years is pretty difficult, but they do exist.
From this you can see that the dividend growth rate is far more important than the initial yield when you are focusing on a long-term horizon.
–So, when analyzing dividend growth stocks, the things to focus on are: How likely is it that this business will continue to grow (and be successful) for the next 30 years?
–What has been its historical revenue growth and dividend growth rates?
–What is its capacity to continue to pay a growing dividend?
–How much debt does the company have (which, in a rising rate environment, could restrict its ability to raise its dividend in the future?
–How long is the company’s history of raising its dividend (companies that cut their dividends during the so-called Great Recession may be quick to cut them again in tough times)
–Is the company in a business that is timeless?
The link I posted earlier, http://www.dripinvesting.org/Tools/Tools.asp, is a good place to begin reviewing these stocks. What’s interesting to note is that while many of these companies are the megacaps, not all of them are–there are companies of all sizes that have a long-standing dividend payment policy.
–stm
Fantastic explanation, STM — thanks! I’m sure many readers know this intuitively, but we also need to remind ourselves often of what really matters when trying to build wealth over time. Sometimes the simple lessons are those most easily forgotten.
#DGI 🙂 Major important to begin investing as young and a.s.a.p.
Thank you savethemanatee and Travis Johnson, Stock Gumshoe 🙂
http://www.stockgumshoe.com/2014/11/first-steps-and-favorite-tools-for-new-investors/ 🙂
LiveLong&Prosper – Benjamin
the reit’sand the mid mlp’s pay great Ihave money with gabelli fund that continues to pay 288$ per quarter on every 7500 invested. That’s 12,000 per yr. on less than 100,000 invested. Plus it grows from there.
Yeah, I wasn’t sure how much background to include. Most of this is fairly rudimentary, but at the same time many investors–especially young investors–are dismissive of dividend-paying stocks as “for old people,” and I thought it could be helpful to explain why they should be an important part of any portfolio. I can think of nothing more enticing than being able to retire early and having 100% of my salary replaced by annual dividends (at a lower tax rate) . . . and to get a 10% “raise” every year thereafter. If you start early enough, and do it right, you could retire at age 55 or 60, move to the Bahamas and travel the world without any worries. And that’s without risking your money on the get-rich-quick schemes you reveal here.
Now for the specific equities $EQUITY that you have researched for the young & old? 😉
Remember that you may will those equities to your beneficiaries in event of you becoming Spirit. 🙂 Long #SaveTheManatee, #StockGumshoe, #Gummune, #Spirit -Benjamin
Most of the DGI companies appear to me to be overpriced by quite a bit right now, so it’s hard to recommend any specific purchases, but we can go through different industries and see what we can identify. I have my eye on a bunch of companies. Although when it comes to buying dividend stocks with a long-term horizon, it’s definitely true that the initial share price has much less of an effect than dividend growth, I still have a hard time pulling the trigger unless I feel as though the stock is in bargain territory. Recently I bought $ABT, $IBM, and $TGT on the January dip, as well as a mid-cap paper producer called Domtar ($UFS) when its yield temporarily hit 5% on a pullback. Since it began paying a dividend just five years ago, its annual payments have gone from 12.5 cents a share to 40 cents a share and it has capability to raise it another 15% this year, we’ll see.
<<
Hi Travis I found this old post randomly…
I just wondered what do you think about Dividend investing particularly, and why I couldn’t find the DIVIDEND KINGS among the huge list of newsletter reviews… Strange, is there a reason for this? I thought it was basically a complete enciclopedie of a kind about newsletters.. thanks
$SEE – marku says: http://www.stockgumshoe.com/2015/11/microblog-water-our-most-precious-resource/comment-page-2/#comment-4763756
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5 High Yielding Stocks With 50 Consecutive Years Of Dividend Growth – See more at: http://long-term-investments.blogspot.com/2016/04/5-high-yielding-stocks-with-50.html?
Gold & silver DIVIDEND PAYMENT RATES…MAJORS AND ROYALTY COMPANIES cp[ied from: http://www.stockgumshoe.com/2015/06/microblog-a-major-turning-point-on-the-horizon/comment-page-2/#comment-4766969
Hi everyone, in another post I suggested that the small dividends paid by gold and silver miners and royalty companies were deserving of more attention in a ZERO INTEREST RATE ENVIRONMENT, and that the old argument of “gold does not pay interest” is true about physical but is not necessarily the case in miners and royalty companies.
Previously my main consideration in thinking about gold and silver was stock price appreciation potential on account of the underlying commodity prices; and this is still the major consideration. But with what is happening with interest rates, cash dividend payments are of increasing importance as a consideration in this sector.
Also if the price of silver and gold rises dramatically, we can expect further juice in increased dividends and larger market caps as asset reserves get marked up. So the whole sector seems primed for rocket leverage when prices in the underlying commodities really start to move.
I share these current figures as an FYI. Obviously these are easy figures to check for yourself when considering and investment, and should not be the only consideration.
Current dividend yield percentages selected gold/silver companies:
Mining majors AEM .79, NEM .34, ABX .51
Royalties: SLW 1.17, RGLD 1.69, FNV 1.24, SAND 0.0
Silver producers: PAAS .39, SSRI 0,
ABX has very high debt and inferior current account fundamentals. SAND has stated that initiation of a dividend is under consideraqtion in the not-to-distant future.
arch1arch1 says: April 18, 2016 at 1:56 am
Just a cautionary statement. Occasionally a failing company will pay an unsustainable dividend in order to attract investors. I see no evidence of such in those listed but it is well to be aware. You find that more often in the financial fields. Principals in such have been known to unload debts on stockholders so that they keep their yachts and stockholders own a sack of ,,,smoke,, in lieu of what I would like to say.
Thx HN and arch1 🙂
Many of the dividend growing stocks are the mega-caps that everyone has heard of: Microsoft, Wal-Mart, Pfizer, P&G, Pepsi, etc. These are easy. I prefer to try to identify smaller, less-well-known companies that have many of the same attributes but may be poised for quicker growth–both earnings growth AND dividend growth, that may belong in the dividend portion of a portfolio alongside the behemoths.
One company I’ve been looking at recently is financial services company Lazard Ltd. ($LAZ). Lazard was founded in 1848 and is headquartered in Bermuda. A financial advisory firm, Lazard is best known as a company offering services pertaining to mergers and acquisitions and similar large-scale strategic matters such as restructurings, capital structure, and capital raising. According to Dealogic (as cited by a seeking alpha article), $LAZ is “consistently ranked among the top twenty global M&A advisors, including #5 in the United States as of year end 2015 with a 17.9% overall market share,” despite being orders of magnitude smaller that Goldman Sachs and JPM and the like. They are commonly listed as an advisor for many of the large global M&A activity.
This is why Lazard ended up on my screen (stats taken from David Fish’s DGI spreadsheet, which can be found here: http://www.dripinvesting.org/Tools/Tools.asp. Stats are as of April 1:
No. years of dividend growth: 8
Yield: 3.61%
Earnings per share payout %: 18.89%
Trailing year earnings growth: 131.3%
Projected next year growth: 11.6%
past five year annual earnings growth: 40.3%
Estimated next five years annual earnings growth: 2.4%
market cap: 5.035B
debt/equity: 0.77
five-year dividend growth rate: 22%
ten year dividend growth rate: 25.3.
From F.A.S.T.Graphs, a wonderful subscription service, I know that the market typically has valued $LAZ at roughly an 18-19 P/E ratio, depending on the length of time you want to look at–over the past 13 years, when Lazard was first offered on the NYSE, the best fit is an 18.8 P/E; over the past 8 years, the best fit is 19.6; over the past five it is 17.9. The current P/E of $LAZ is just 10.8, suggesting it is quite undervalued historically,
Risks: A temporary slowdown in worldwide M&A activity. My guess this is why the stock is currently undervalued somewhat, and why its estimated future growth is so low.
From this, it appears as though $LAZ (a) has recently adopted a stance of rapid dividend increases; (b) at just a 20% dividend payout, it has room to increase payments further; (c) the stock price itself appears to be undervalued. It’s a well-respected firm with a long history without overwhelming debt. These are all qualities that I look for in dividend growth firms–especially it’s ability to continue to pay and grow its dividend in the future.
It is up around 30% from its 52-week low in mid-February.
I am researching $LAZ further, but so far it looks like a candidate to add to my portfolio. I may wait until after the current earning season to add it to see if there is another dip down into the $35 area (it is now sitting at around $39).
–stm
(no position in $LAZ and no plans to purchase in the next 72 hours)
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This is a bit off topic as it involves a strategy to time trading equities that offer dividends: Glenn henderson says: February 28, 2016 at 12:40 pm http://www.stockgumshoe.com/2013/02/microblog-dividend-trifecta-or-daily-paycheck-strategy/comment-page-1/#comment-4715834
Use dividend calendar .com. They list by the day all dividend stocks paying. I take the ones 8% and higher. Buy them 5-10 days before they go ex dividend. Many will go up higher than the dividend they pay. Sell those pocket the growth. The others hold until exdividend. If they are green sell them at the open. If there red hold them until the market bounces them back. Look at bgc and wsr. I am up almost 2k since i bought them. Selling at the bell. The gain is higher than the dividend. You have to work at this its a job not easy. Allot of stratedgy on when to buy and sell. Its allot of fun also. With a bank of 120k i believe you can earn 120k in growth and dividends a year.
Which is fine, BUT DividendCalendar dot com does not exist. 🙁
So as a way around I picked http://www.nasdaq.com/dividend-stocks/dividend-calendar.aspx Does anyone have a better, more comprehensive link to share?
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Dividend Kings List 08/2016
Posted: 02 Aug 2016 11:12 PM PDT
Dividend growth investing may not be for everyone, but I am a fan. I like the idea of receiving tax efficient payments from long established companies with an established track record of annually increasing their payments to shareholders. The longest dividend growth history have dividend kings. Those stocks raised dividends by more than 50 consecutive years without a break. Today I like…
This is only a content summary. Please visit our blog to read the full content – http://long-term-investments.blogspot.com Best2U- Ben
Good morning Ben—
As described earlier, I love dividend-paying stocks, esp. those that regularly increase payments. Most today seem to be funding their dividends through debt, which is very very scary. Still think the market is at risk for taking a bath over the next three months, at that point may be a good time to get into some of these. Emerson is a DGI favorite. The others this author highlights are growing very slowly and have monumental amounts of debt–even KO which didn’t used to just a few years ago.
I love Starbucks as a company that is just getting started paying and growing divvies, and that is still on its growth curve. Really hoping for a price pullback on that one.
No position in any of these stocks.
$EMR, $DGI Thank you for your perspective #SaveTheManatee 🙂
Long with certificates $AB, AEE, $AEP, CNP, $SO, $WR and #Gummunity 🙂
#Best2You- Ben
Barron’s article $KSS makes top 5 🙂 http://www.barrons.com/articles/todays-top-5-stock-picks-dividends-value-and-oil-1470396475 Long #ZKSS http://www.stockgumshoe.com/author/dr-kss-md-phd/ and Gummunity @stockgumshoe.com – BenJammin’
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Comment Link: http://www.stockgumshoe.com/2016/08/august-idea-of-the-month-2/comment-page-1/#comment-4897944
Comment:
Hello, try Harry Domash stie: http://www.dividenddetective.com Lots of reading, lots of due diligence but that’s is the way it is these days!