The 3 Things That Will Make You Rich

Posted On January 18, 2017 11:32 pm

It’s very easy for those in the financial industry to get lost in the weeds and fall into the trap of thinking that capital allocation, ie stock picking, is the most important factor in achieving one’s long-term financial dreams. That’s understandable, given that we live in a world where every market move is analyzed to death, and “hot” stock tips are the coin of the realm. Of course the truth is that, while stock picking, (actually overall portfolio management) is important, that represents just one of the three vital components of getting rich.

The other two more important factors are: savings rate, and time. This makes intuitive sense since the great wealth building power of the stock market comes from the ability to compound your money exponentially. That requires you to have discretionary, ie “long-term investable” savings, as well as the ability, patience, and discipline to let your companies do all the heavy lifting; thus allowing you to sit back and collect an exponentially growing stream of dividends.

What may surprise most people though, is that these two factors are, by far, the most important ones. For example, just take a look at how much a difference in savings and investment time horizon can make.

Assuming a spectacular 20% annual return (120% above market’s historical CAGR since 1871) assuming you invest $1000 starting at age 50, by the age of 65 your portfolio would be worth $1,037,305.52, and paying $25,932.64, assuming a 2.5% yield. Not bad overall, assuming you can manage to achieve and sustain that kind of Buffett like return.

But take a look at what a 15% annual return, (5% yield with 10% dividend growth, ie my portfolio), with $2,000 per month in savings starting at age 40 will do. By 65 you’d have $5,873,087.29 paying you $146,827.18 in annual dividends. Even if social security were to fail completely, (and it won’t), you could live like a king on that kind of income and never have to worry about running out of money, since the dividends are growing over time.

But what if you just don’t have the time, interest, or temperament to invest in individual stocks? Well then how about a low cost, high-yield dividend growth ETF such as the Vanguard High Dividend ETF (VYM)? Assuming a 10% annual return, with $3,000 per month in savings, starting at age 30, by 65 you’d have a true fortune: $10,732,565.14 that pays $311,244.39 in annual dividends. That’s $25,937.03 PER MONTH, the same as the 20% annual return scenario pays EACH YEAR.

Of course I realize that everyone’s situation is different. Debts, kids, family obligations, job losses,  the cost of living where you live, (I weep for those of you living in New York City;) all can make saving and investing consistently easier said than done. However, the point I want to get across is that rather than try to pick the next great hyper-growth mega-stock, ie the next Amazon, which is very hard to do, focus on what you can more easily control.

Even a mere $100/month in savings, invested into VYM, can make a big difference, turning $100 at age 25 into $1,151,006.70 by age 72. So don’t lose hope, or more importantly, focus on the fact that living as frugally as is comfortably possible, and investing for as long as possible, is far more important than what you are investing in.

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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