Turning $100 into $500,000 is possible and achievable by anyone as long as they are willing to give it time. This doesn’t involve buying Lotto tickets, cryptocurrencies, trading stocks or anything like that. Instead, I’m going to teach you a really simple way of turning $100 into $500,000 by buying dividend stocks!
What are dividend stocks?
Dividends are corporate earnings that the company decides to pass on to the shareholders. Mature and well established companies are usually the kind of companies that reward their shareholders with a portion of their earnings. When a company pays dividends, it is a sign of strength and confidence about the future of the company, which will encourage investors to buy more shares and drive the share price up.
In other words, a company that pays dividends is a strong company. Their share price will most likely be very stable and their dividend payout will probably increase over time. The reason why so many investors create a dividend stocks portfolio is because they tend to be very reliable and safe. An example of some strong companies that pay dividends are:
- Coca-Cola (KO) – 3.22% Yield
- Johnson & Johnson (JNJ) – 2.41% Yield
- McDonald’s (MCD) – 2.40% Yield
- AT&T (T) – 5.67% Yield
- Walmart (WMT) – 2.11% Yield
The Yield % shown above is how much the company pays in dividends compared to the share price. For example, the Coca-Cola share price is $45.94 (November 2017) and the Yield is 3.22%. This means that in a year you will receive $1.479 (dividend) for each share you own. Keep in mind that dividends can be paid monthly, quarterly or yearly, but the Yield is always going to be calculated yearly. In other words, if KO pays every year, you will get one payment of $1.479 per share. If it is paid quarterly, you will get 4 payments of $0.3697 per share in a year totaling $1.479.
You might think that a yield of 2% or 3% is really low, but if you take into account that the share price will also go up (Coca-Cola has gone up 27% since 2013), your dividends payment and portfolio will both continue to increase!
If you want to find strong reliable dividend stocks that will continue to pay dividends and grow their dividend payouts, you should start looking at Dividend Aristocrats. Dividend Aristocrats is an elite list of big, strong and well established companies that have continued to pay and increase their dividends over the last 25 years. They are part of the S&P 500.
The stocks shown above are part of the Dividend Aristocrats and if you want, you can find the full list of companies that belong to the Dividend Aristocrats by clicking here.
Time in the Market and the power of Compounding
When investing in dividend stocks, one of the most important things is to start as soon as possible. The second most important is to reinvest the dividends in order to buy more shares. It is very important to resist the temptation of using the dividends to buy other things. If you really want to be financially free, reinvest those dividends by buying more shares of your dividend stocks.
The power of compounding or as I prefer to call it, the snowball effect, is when you use the dividends that were paid by your stocks to buy more shares in order to generate even bigger dividends payouts.
What if the stock market crashes?
Investing in dividend stocks means that you are going to buy those stocks through thick and thin. Should the stock market crash (which is VERY normal), one of the things to watch for is if the core business of the companies held in our portfolio have changed. If this is not the case then you should continue buying more shares of those companies. If you do this instead of following the herd and selling your shares at a loss, you will continue to generate dividends and grow your accounts.
Remember the Dividend Aristocrats and the 25 years paying dividends thingy? In the last 25 years there have been 5 major stock market crashes/corrections and these aristocrats never stopped paying dividends. Not only that, they kept INCREASING their dividends payouts to the shareholders! How is that for a reliable investment?
How to turn $100 into $500,000
In order to achieve this goal, you need to do 3 things:
- Start investing NOW!
- Build your Dividend Portfolio.
- Contribute monthly to your Portfolio.
I’m going to show you exactly how to do this. Please keep in mind that when buying stocks you will have to pay fees, and these fees can make a HUGE dent in your returns if you buy stocks every month. Instead, I would suggest buying stocks once or twice a year in order to save money on the fees.
Lets start in the year 1986 (TODAY!), it is January 1st and on a cold day, a very wise kid (YOU) decides to open up an investing account with $100. He doesn’t know much about the stock market so he reads about the Dividend Aristocrats and decides to buy 5 stocks. He makes that decision because he has heard of, or is familiar with, the companies on that list. The stocks that he chooses are:
- Coca-Cola (KO)
- Johnson & Johnson (JNJ)
- McDonald’s (MCD)
- AT&T (T)
- Walmart (WMT)
Since this kid doesn’t know which one is better, he decides to put $20 dollars in each stock. He is very excited, goes home and talks to his family and friends about it. He is so excited that he makes a promise, that no matter what he will contribute $100 monthly to the investment account to buy more stocks, and will use the dividends to buy more shares.
How is this kid going to raise $100 a month?, I don’t know! IT’S A KID! lol! But seriously, as working adults we can make an effort to save $100 a month and put it into our investment portfolio. And trust me, I get it, some days it will be hard, but as long as you keep contributing to this account as much as you can, you will be paving your way to financial freedom.
Continuing the story, this kid kept his promise and contributed $100 a month the portfolio to buy more shares. The year is now 2017 (your retirement maybe? your kid’s college fund?) and 31 years has passed. This kid saw at least 7 major crashes/corrections but he continued to buy more shares while everyone else was panic selling. And the results? This kid now has more than $500,000 in his account!!! How was this made?
- A Dividend Portfolio was created with only 5 stocks.
- There was a plan to keep buying more shares
- Dividends where used to buy even more shares
- A total of $37,200 where invested; an initial deposit of $100 and $100 contributed every month.
Let’s take a closer look at the portfolio performance during those 31 years. These are real numbers:
Yes, that number is correct, the final balance is $538,712. It may not be as sexy or exciting as they depict on The Wolf of Wall Street, but nor is it as terrifying as they depict on the News where they warn that you are going to lose it all in the stock market.
In order to make money in the stock market, you need to have patience and have a plan. Stick to your plan, don’t follow the herd and most importantly, keep it simple!
This is a simple portfolio with only 5 stocks that were held for over 30 years! This kid didn’t need a Financial Advisor who charges 2% of the portfolio in order to manage it. I don’t want to over simplify investing, but I want to show you that this can be achieved by anyone, and it doesn’t require a fancy degree or Einstein IQ. Although of course, the more you learn about investing the better. More knowledge will help you make better investment decisions and will help you grow your portfolio over time.
30 years is long time.
I know that we all want to be instant millionaires. But since the gratification of investing will be in the long run, sometimes we don’t have the patience to wait. Instead we prefer the instant gratification of buying clothes (just because they’re on sale!), steak dinners or concert tickets in order to feel good right now. Instead, what if we put that $100 or $50 a month towards our financial future so we can rest assured that we will have a better retirement with at least $500,000 in the bank instead of $0! Hey, I prefer that option, and I’m pretty sure you do too!
If you want to learn more about the stock market I encourage you to read my Stock Market 101 Guide where you will learn the basics in order to get started investing!
If you want to dig deeper into how to invest, how to find great stocks and my own investment strategy, I have developed a step-by-step course called Money Making Bootcamp where I share all my knowledge and experience investing in stocks.
I love reading your comments, so if you learned something today, have a question/comment or just want to say “Hi Derek!” feel free to leave a comment below!