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Tue. Jul. 22, 2008

Your Greatest Wealth Building Asset *

You may think your greatest wealth building asset is the Chevron (CVX) stock you purchased 3 years ago. Even though your brilliant purchase has appreciated over 50% in the last 3 years in the face of a bear market, it is not your greatest wealth building asset.

Traditionalist would say your home is your greatest wealth building asset. This is getting closer, but it is not your greatest wealth building asset.

Others would say your income is your greatest wealth building asset. Thought there is a lot of truth to the statement, it is still not your greatest wealth building asset.

So, what is your greatest wealth building asset? Everyone is born with it. Few realize its importance until they lose most of it. The asset is so valuable it can’t be bought. Your most valuable wealth building asset is time.

As a value/dividend investor, I have learned that time can cure many mistakes and provide enormous investment leverage. Consider these stocks:

Johnson & Johnson (JNJ): Let’s say on August 25, 1987 you purchased 1,529 shares of JNJ at $6.539/share or about $10,000 worth. This was JNJ’s closing high for 1987. By December 31, 1987, your investment was only worth $7,156 – a 28% drop. It wouldn’t be until June 9, 1989 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don’t recommend), it would have been worth $103,238 at the July 21, 2008 mid-day price of $67.52. This is about a 12% compound annual return, excluding dividends.

General Electric (GE): Same scenario, on August 20, 1987 you purchased 1,821 shares of GE at $5.49/share or about $10,000 worth. This was GE’s closing high for 1987. By December 31, 1987, your investment was only worth $6,696 – a 33% drop. It wouldn’t be until January 2, 1990 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don’t recommend), it would have been worth $50,638 at the July 21, 2008 mid-day price of $27.80. This is about an 8% compound annual return, excluding dividends.

Bank of America (BAC): You know the drill. On August 25, 1987 you purchased 1,397 shares of BAC at $7.156/share or about $10,000 worth. This was BAC’s closing high for 1987. By December 31, 1987, your investment was only worth $6,025 – a 40% drop. It wouldn’t be until August 5, 1988 before you closed above your original purchase price. However, if you held this stock and spent the dividends (which I don’t recommend), it would have been worth $40,960 at the July 21, 2008 mid-day price of $29.32. This is about an 7% compound annual return, excluding dividends, for a stock that is currently battered and beaten.

In all three examples above, the stock was purchased at its high before the 1987 crash/panic. Some recovered more quickly than others, but all recovered. The key is to buy good-solid companies, and be prepared to hold them through the good and the bad. All three of the companies above are S&P Dividend Aristocrats, or companies that have increased their dividends in each of the last 25 years. How long should you plan on holding a stock? That’s easy, To Infinity and Beyond!

At the time of this writing, I owned JNJ, GE and BAC.

(Photo: peter mueller)

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5 Responses to “Your Greatest Wealth Building Asset *”

  1. Dividend Growth Investor says:

    Some nice stock picks D4L.
    I always thought however that my greatest wealth building asset is my ability to generate income. It’s you that selects these wonderful dividend investment opportunities. If someone else was managing my portfolio, I would have been 100% invested in stocks like BSC, CFC and let’s not forget AHM..

  2. Father Sez says:

    I have to put in my vote with DGI. It’s “us” who are our greatest asset. “Time” may be our best tool or at least one of the best.

    But your logic and example is stellar, D4L.

    Regards

  3. Dividend Tree says:

    For me the biggest asset is individual itself. The individual characteristics and thought process are assets that can be appreciating and/or depreciating. The vision and goals he/she sets out for (timeline), how he executes it (over a period of time), ability to see both sides of the coin (recognizing it’s not always good – again time!), and ability to adapt (function of time) are the tools.

    Thought process of individuals like you are appreciating assets. You have a vision, a methodological approach, and an execution plan that you follow through ups and downs. And you adapt accordingly (e.g. change in NPV MMA difference threshold). I believe ‘time’ is a tool and not an asset. Everybody uses it in a different way.

  4. Dividends4Life says:

    All: We all may be saying the same thing, but it is just a matter of semantics. Granted, income is very important, but I did not select it as my greatest wealth building asset because if I got a million dollar raise today and died tomorrow, it would do me no good. If I were indigent and ignorant today, but would live another 70 years there is time to improve my situation.

    I considered, but rejected, desire and will to succeed (similar to “us”), for the same reason. If I were the most driven person in the world, but died tomorrow, again it would do no good.

    Time is the foundation. It is not a given. None of us are guaranteed tomorrow. Tools are bought and sold at our discretion. Time is a finite gift that is quickly depleting.

    The message of the article is similar to the story of the tortoise and hare. You may be the best and the brightest, but if you aren’t focused and use your time wisely, there is a point where your superior talents, skills and intellect will not pull you through.

    Best Wishes,
    D4L

  5. Bryan says:

    But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again.”

    JM Keynes