Put $100,000 into undervalued, dividend-paying stocks today. Through a combination of capital gains and reinvested yields, the market could turn that single lump sum into a $1 million fortune over the next 15 to 20 years.
That's the best advice I can give to a new investor looking to buy into -- but also mitigate -- this volatile market. That said, it's hard advice to follow. First, $100,000 is not the kind of money folks just have lying around. I know I don't. Second, which stocks would you put it in if you did? There are nearly 3,000 dividend payers trading on the U.S. markets alone, and there's no way to tell at a glance which are good buys.
The good news is that we can work around these limitations.
Invest more
There are fewer barriers to investing today than ever before. Opinions on stocks are a dime a dozen online, and discount brokerages make it possible to buy and sell shares for as little as a few dollars from the comfort of our own homes.
Those are wonderful developments for individuals who seek to build a secure financial future. You don't need $100,000 to start investing. You can start with as little as $350 -- the amount needed to keep commissions at 2% on a $7 trade. What kind of returns can you expect from such a small investment?
Good ones.
Constant consistency
Wharton finance professor Jeremy Siegel has demonstrated that it's reasonable to expect a real return of approximately 6.5%. That's what's known as Siegel's constant -- and as he told the Fool last year, he's pretty proud to have a constant named after him.
Add inflation to that 6.5%, and you're looking at a nominal return of approximately 9%. Using the nominal rate, the stock market could deliver you a tidy $400,000 nest egg after 25 years of investing $350 each month. Not bad for only $105,000 of principal.
High yields and low prices
The key to earning that return -- as Siegel points out in his research -- is reinvesting dividends. And the power of those dividends can be profound.
According to Siegel, the best-performing stock of the original S&P 500, which began in 1957, is Altria and its incredible 19.8% annualized return. Why has it done so well? Reinvested dividends.
Investor distaste for tobacco and fear of lawsuits has kept Altria's price depressed while the company continued to pay out huge amounts of cash -- the yield today is 7.4%. That meant investors could reinvest their dividends at lower prices, thereby supercharging returns.
And the rest of Siegel's S&P best is a Who's Who of dividend growers:
| Company | Annual Return, | Current |
|---|---|---|
| Altria | 19.8% | 7.4% |
| Abbott Labs (NYSE: ABT) | 16.5% | 3.6% |
| Bristol-Myers (NYSE: BMY) | 16.4% | 6.1% |
| Tootsie Roll (NYSE: TR) | 16.1% | 1.3% |
| Pfizer (NYSE: PFE) | 16% | 4.0% |
| Coca-Cola (NYSE: KO) | 16% | 3.3% |
| Merck (NYSE: MRK) | 16% | 5.2% |
*Source: The Future for Investors, by Jeremy Siegel.
Today, all of these companies continue to boast solid yields, yet they're not without uncertainty. Merck, for example, has a heightened risk profile, given the threats of litigation. Of course, for long-term investors, that could be great news. If the price drops again, it means they can buy more shares with their reinvested dividends at a great price and, according to Siegel, supercharge returns.
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