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This 5-Stock Portfolio Makes The Perfect Graduation Gift. . .

This 5-Stock Portfolio Makes The Perfect Graduation Gift. . .

 

Savvy investors understand that the miracle of compounding accelerates total return, the longer the time frame, the better. I don’t think there’s a better gift for a graduating grandchild or other loved one than a gift of a portfolio of dividend-paying stocks including enrollment in the company’s dividend reinvestment plan. Assuming that the graduate can fund the portfolio, even with small amounts to start, the portfolio will compound to produce real wealth over the long term. How much wealth? Millions of dollars, as I’ll demonstrate.

 

Instead of giving a gift of money that the young person is likely to spend frivolously, a gift of a five-stock portfolio held in dividend reinvestment plans, is likely to stay in place and grow over the years. Your total cost to set up such a portfolio, depending on the price of the stock that you select, is somewhere around $500. What’s more, there’s a two-fold advantage to this gift. Not only will it provide a long-term financial benefit to the graduate, it will give him or her a first-hand experience with a logical approach to investing.

 

By “saving” in the stock of the companies in a portfolio of DRIPs, your young investor has the opportunity to build wealth by participating in the growth of the economy in the most efficient manner possible, and, if you can afford to take this gift one step further, by making additional gifts to fund the portfolio over the four years that the graduate is attending college, the results will be astounding. By the time you are ready to present your college graduation gift (which is the additional investments into that portfolio), your high school gift portfolio will already be producing dividends that will be at work compounding wealth for your loved one.

 

Say you invest $5,000 a year spread evenly among a well-diversified five-stock portfolio made up of high-quality dividend-paying companies. You do that for four years starting when your graduate is 18 years of age. Let’s also say that no further investments are ever going to be made into those accounts. What would your $20,000 (invested over the four years) turn into? The answer is more than $1 million, assuming an 8% average annual return over the 47 years until your graduate reaches 65 years of age.

 

Is an 8% average annual rate of return realistic? Let’s look at what occurred during the past 47 years. Even though the Dow Jones Industrial Average made no net progress between 1966 and 1982, the DJIA has grown 18 times over since then to the present level of around 18,000. So what can you expect from a portfolio of dividend paying stock, especially carefully selected high-quality stocks that tend to increase their dividend payouts on a regular basis over a 47-year period?

 

Might you obtain a higher rate of return? Say, 10%. That’s the long-term rate of return of the market in general as calculated since 1926 based on Ibbotson research. Our portfolio may well provide above average returns compared with the market as a whole, but let’s accept a 10% average annual rate of return. In that case, your $20,000 investment would provide more than $2.5 million.

 

 

The reason for such a great benefit is that nothing is lost to investment fees and the likelihood of the investment staying-put over the long term is maximized. Once an investor is enrolled in a DRIP, subsequent investments can be made without going through a broker and without fees and dividends can be automatically used to purchase more shares (and fractions). That way, every penny is used to create a growing stake in the underlying company.

 

The following are the five companies we would include in a long-term portfolio. To qualify for inclusion, the company must have a long history of dividend increases. We kept total return in mind, looking for companies with excellent earning and dividend growth rates as well as sustainable business models. We limited our selections to companies that do not charge fees for investing through the plan and we sought to diversify the companies in terms of industry.

 

Finally, we decided to limit the selection to five companies that are household names—stocks your grad is familiar with and can relate to.

 

    • AFLAC (AFL) is a leading insurer that’s maintained after-tax operating margins of over 10% since 2007. An extremely investor-friendly company, AFLAC has paid increasing dividends for 34 consecutive years raising their dividend by 5.1% in 2015.

     

    • Johnson & Johnson (JNJ) has a market capitalization of about $280 billion and its business is split between drugs, medical devices and products on one hand and consumer goods like Band-Aids, Baby Shampoo, and topical medicines on the other. The dividend has been increased for 53 consecutive years.

     

    • International Paper (IP) is the dominant company in the area of paper and packaging, both in the U.S. and abroad, with almost $23 billion in annual sales and a market capitalization of about $16.5 billion. With a yield of about 4%, it has raised its dividend for 6 straight years (and its latest increase was 10%).

     

    • General Mills (GIS) is a major food processor with products like Big G and Chex cereals, Yoplait, and Pillsbury. The dividend has been increased for 12 straight years and has never been cut in the 114 years that the company has been paying them.

     

    • ExxonMobil (XOM) is the largest oil company that resulted in the breakup of the old Standard Oil conglomerate (at $333 billion market cap) and routinely logs the largest annual profits of any American company. Its dividend has been increased for 33 straight years.

     

When you’re considering an appropriate gift for your graduate, you may want to consider a gift of such a portfolio. In that way, you may provide a lasting legacy.