There are many perspectives from which people can view investing money. A lot of people view investing as buying stocks or real estate and hoping that the value of their shares or properties goes up over time. Many of my friends believe that the only way to get rich through investing is to purchase a security that multiplies in value by a factor of ten over a few years. The people who view investing like this couldn’t be more wrong.
When you invest in a company, you are actually purchasing a piece of ownership in that company. This means that if that company pays a dividend then you are entitled to a part of the profits that the company makes every year. Let’s take a look at JP Morgan Bank for example. JPM pays a dividend of $3.60 a share every year. Now let’s say that you bought 1,000 shares of JPM at $100.00. It would cost you $100,000 to make this purchase. You are now “invested” in JPM. However, to many people the word ‘invested’ is vague. What does that really mean? Well, it literally means that you are now a partial owner of JPM. Another novel way to look at the purchase of JPM shares you made is to look at it as if you have bought a stream of profits for yourself. The 1,000 shares of JPM are going to throw off $3,600 every year or $900 every quarter. As long as JPM remains profitable, this means that regardless of the share price, you will receive $3,600 a year just for being an owner of your 1,000 shares. You have purchased a stream of profits. You have purchased the right to receive $3,600 a year. This is actually your share of profits from JPM that are dispersed via dividend payments.
The share price of JPM may fluctuate from $50 to $150 and back down to $60 over the course of your lifetime. You would see your $100,000 go to $150,000 and then plummet to $60,000 in this scenario. Many people would view a drop like this as a “bad” investment. To the investor who was looking to buy a stream of profit though that will give him or her income over a lifetime, the share price fluctuation doesn’t matter. A stock quote is just that. It is a quote. If you are not looking to sell, then the share price really doesn’t matter. You are still receiving your stream of profits in the form of a $3,600 a year straight from JPM.
I once found a $20 bill in my pocket many years ago when I was a teenager, and I was very excited about it. I thought that $20 was equivalent to owning $555 in JPM shares. After all, if I owned $555 in JPM shares then I would receive a dividend payment of $20 a year roughly. Although this is a fun idea, it is not entirely correct. Finding $20 in a pocket is a one-time event. Buying shares of JPM that results in a dividend payment of $20 yearly is something that will occur for the rest of my life. I have bought my way into a lifetime stream of payments. It is a very important distinction.
This concept is why many wise investors buy up shares of Coca Cola, Wal Mart, General Mills, Pepsi, Kraft, Johnson and Johnson, Proctor and Gamble, and other “boring” companies whose share prices may go nowhere year after year. They are the most stable and safe stocks you can own, some people would argue. This is because they have been consistently profitable over a very long time. They always make dividend payments. If you can amass a portfolio that consists of stocks such as this, then you will have a great income portfolio. A $10 million portfolio with an average dividend yield of 3% would generate $300,000 a year. This money will show up every year. You can sleep in until 12pm every day. You can stay up late playing video games. You can read whatever books interest you. You can take your kids or loved ones out for ice cream. You can do whatever you please with your time.
Once you have bought your way into enough streams of profit, you have also bought your way into financial independence. For many people this means they are free to do what they want with their life. And all because of what? They collected enough assets that threw off more money than they knew what to do with. These assets can be in the form of stocks, bonds, apartment complexes, franchising a restaurant, owning a hotel, etc… The key is to accumulate assets that throw off money every year consistently. Buying into these streams of personal profits is a great way to accumulate wealth. Interestingly enough, I have found from personal experience that my friends view investing as a much cooler idea once they view it from this perspective. They are no longer fixated on the appreciation of their investment’s asset price because they know that regardless of the share price, they will be receiving a yearly payment that they have bought into for the rest of their life. I suppose this all goes back to the fact that many people do not pay attention to the total return on their investments when in reality it is a very important concept.