Financial Lessons From the Third World

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The Abdul Latif Jameel Poverty Action Lab at MIT (yes, that MIT in Cambridge, Mass.) published a book “Poor Economics.”  A must read for anyone concerned about world poverty.  I found this book unique as it examined various poverty interventions in a scientific way:  researchers formulated ideas, tried the ideas in the real world with controls, measured results objectively and interviewed participants regarding their responses.

One interesting discovery was in Morocco where the urban poor owned television sets.  Researchers asked two questions. First, “Why do they own televisions?” and second “How did they pay for them?”  The first question was easy.  The poor are bored.  A typical uneducated day laborer will work three to four days a week.  In the city, there is no land to grow a garden or raise livestock.  So the unemployed laborer sits around most of the day.  And gets bored.  A television helps pass the time.

Paying for a television intrigued me.  Simply, if the poor wanted a television badly enough, they found a way to save money and keep the money safe until they had enough to make their purchase.  They would scrimp on cigarettes, food, softdrinks, anything.  It could take months.  They found a way.  The keys were wanting a television badly enough and keeping the savings safe until the television was bought.

I Think Americans Can Learn From This

Today’s American baby boomers are a sorry financial lot.  The statistics paint a dismal picture: Little if any money saved for retirement, declining savings rates, acquiring debt even as they enter retirement and acquiring more debt in retirement, overweight or obese with subsequent higher medical bills. If boomers think they can rely on Social Security to maintain their lifestyle in retirement, they’re in for a rude jolt.

First, Americans need to wise up regarding how limited their Social Security benefits will be.  Particularly for middle and upper class Americans, understanding their projected monthly benefit should provoke dismay and concern.  Hopefully this will cause them to want, really want, to save for their retirement, just like the Moroccan day laborer really wanted a television. Second, Americans need to find a way to save more.  Do we really need a smartphone?  How many cable channels do we really watch?  How often do we buy a new car?  How much do we eat?  That last one could be a source of significant savings not only in the immediate present but for the future (i.e. medical bills).  Just as important, the money saved needs to go into a protected account like a Roth IRA.  No sense saving money if it gets spent en masse on a whim.

Where to put the savings?

Traditionally, retirees or those close to retirement, put their funds into bank deposits or CDs.  At today’s interest rates, that’s about as worthless as a $3 bill.  There are good alternatives in stocks.

Plains All American (NYSE: PAA) for example, offers both income and capital gains.  The current yield is 4.8%, the dividend growth rate has been 4.3% for the past five years and the stock has grown from $32 per share to $46 over the past year.  The future bodes well.  Plains purchased natural gas and liquified natural gas operations from British Petroleum, a move that gives Plains access to Canadian shale gas.  Plains recently purchased pipelines and storage facilities from Chesapeake, supporting its expansion in the Eagle Ford oil field. I foresee continued earnings and dividend growth from these developments.  The company boasts a ROE of 16.4%, earnings that generally beat expectations and limited debt.

For income alone, Enterprise Products Partners (NYSE: EPD) might be a better bet.  It’s current yield is 5.2% and the dividend growth is 5.4%.  Read this article by Matt Di Lallo for more information about Enterprise.  In a nutshell, Enterprise is growing its business in intelligent ways in a growing American industry.

If you’re more inclined to blue chip stocks and you have time before retiring, McDonald’s (NYSE: MCD) or ExxonMobil (NYSE: XOM) offer lower yields, but superior dividend growth rates (15.3% on average for McDonald’s and 7.7% for Exxon).  McDonald’s has some uncertainty regarding the impact of the Affordable Care Act; Exxon doesn’t pay as much in dividends, but strikes me as being an all-around safer investment. I calculate that if the dividend growth rates continue (yes, a big “if”) and if you reinvest the dividends, in 15 years you will receive $1347 in dividend income for every $1000 originally invested in McDonald’s, $155 for Exxon.

Final Foolish Thoughts

America’s baby boomers have collectively shot themselves in the financial foot.  Too many spent money they didn’t have, ate too much, saved too little.  Consider the poor, uneducated Moroccan day laborer.  He wanted a television badly and found a way to save and protect money despite his meager income.  After perhaps months, he saved enough to make his purchase.   Let us learn from the poor before we join them.

dylan588 has a long position in McDonald's. The Motley Fool owns shares of McDonald's and ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on Chesapeake Energy. Motley Fool newsletter services recommend Enterprise Products Partners L.P. and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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