Can Investing be as Safe as Saving?
Jon is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Back when my wife and I were newlyweds, we did what many poor college kids do: we went to Alaska in order to make a little summer fortune. The experience was fantastic for us. We caught a lot of fish; we saw a lot of moose and bear. And at the end of the summer we had enough money to pay some school bills and put the rest away in savings. We continued putting our money away for the next couple of years into a savings account with ING. At the time we earned a fairly substantial 4%.
That was before the recession, and savings accounts that offer those kinds of returns are no more. Nowadays, if you have money in a savings account, you're actually losing money when considering inflation. The allure of savings accounts is that they are safe. It feels good reading that whole "FDIC" thing. But does investing have to be unsafe? Or perhaps I should ask: can investing be as safe as savings?"
In this article, I want to talk about investing in a savings-ish kind of way. There is the kind of investing where you are investing in the "next big thing" and looking for your small investment to balloon into a major pile of cash. There's nothing wrong with that, but those kind of investments tend to be on the risky side of the pendulum. But there is another kind of investing where the investor isn't really looking for big time share price increase (although he surely isn't against it). This investor is perfectly content with plopping down a wad of cash so he can sit back and collect the dividends that come with the investment.
One of the turn-offs to dividend investing is that it's really boring. This isn't investing in Sirius XM, when they were trading at $0.10/share and seeing it skyrocket to nearly $3 in a couple of years. That's exhilarating. No, dividend investing isn't like that. Dividend investing utilizes the power of percentages and time to the shareholder's advantage.
For our discussion on safe investments, let's just focus in on five companies that are good dividend plays.
Each of these five companies is very big and has been around for a long time. These big companies are not likely to crumble and fall anytime soon. They are tremendous empires that can withstand quite a lot. Consolidated Edison is the smallest of these five companies in terms of market cap, but they more than make up for this deficiency with age. They have existed in one form or another since Thomas Edison himself. Given that amazing track record, it is reasonable to assume that they will also continue to survive as a company.
If we are looking for a safe investment, companies like these are a good place to start. We are looking for companies that will be around as long as your savings account will be. Of course, no business is immune to failing. Enron and Lehman Brothers shareholders will nod their heads in agreement. But when a big company like this fails, it is the exception, not the rule. That's why it's big time news. Smaller publicly traded companies fail all the time and you don't hear about it. That's because it's within the realm of normal. So when it comes to picking a safe investment, these big titans are a good place to start.
Now that we've found a relatively safe investment, let's turn to the matter of dividend yields.
As you can see from the chart, the dividend yield from these five companies is better than what you get from a savings account. I am not aware of any bank currently offering 3% interest on a savings account. Most offer around 1%. The dividends from these five particular companies come in from 3%-5%. Now, 3% isn't extremely exciting; in fact, it barely out-paces inflation. However, it is money in your pocket, and it is more than you would get in the bank.
Perhaps more interesting is that the above chart is dealing with the dividend yield, not actual dividend numbers. In reality, all of these companies are in the habit of increasing their dividend payout periodically. The yield normal hovers around the same percentage because the actual stock price appreciates. To the casual observer, it seems that these dividends just hover, but in reality it is the dividend yield that maintains. The dividends themselves frequently increase.
As you can see, these payouts look like a staircase. The actual payouts from Microsoft and McDonald's have gone up over 80% over the past 5 years; now that is a bit more exciting. When was the last time your savings account increased your interest rate? Probably never, and it's more likely your interest rate has gone down. Like I said, when I started with ING, I got 4%. Six years later, my interest rate is under 1%.
So as we have seen, investing in dividend players can be more lucrative than simply placing your money in a savings account. Not only is the percentage higher, but the payouts increase frequently with time. But there is one more factor that is just the icing on the cake.
All of these companies' stock prices are up over the last 10 years. Microsoft is up only a modest 9%, but an investment in Microsoft 10 years ago would have earned you more than a savings account, and in the end your initial investment would have increased 9% without reinvesting those dividends. On the other end of the spectrum you have McDonald's, closing in on 400% gains.
We could go into a lot more detail and talk about what would have happened if you had reinvested those dividends, but I think our objective has been accomplished. Can investing be as safe as saving? Yes, I believe it can. There are companies out there that aren't going anywhere, that are going to pay you dividends faithfully, and that are going to increase their payouts. By identifying these opportunities, we can increase how our money works for us.
thequast has no positions in the stocks mentioned above. The Motley Fool owns shares of McDonald's and Microsoft. Motley Fool newsletter services recommend McDonald's, Microsoft, and AT&T.; 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.If you have questions about this post or the Fool’s blog network, click here for information.