When Benjamin Franklin was asked to name his “greatest fear” for the future of America, he stated that America was such a resource-rich country in the midst of creating unprecedented prosperity that life could potentially become too easy, and the “ethic” and “virtue” of America would be wiped away by unearned riches. When Alexis de Tocqueville visited America, he echoed similar thoughts by prophesizing that Americans may one day lose sight of the toils and struggles it took to put together the kind of economic engine that the world had never seen before.
As a history major back in the day, those reflections came to mind when I read this recent article from Dan Ritter at Wall Street Cheat Sheet chronicling the fact that most Americans have not been able to participate in the broad market rally that has been dominating the headlines in the United States for the past year or two:
But new data from Pew Research suggests that more than half (53 percent) of Americans have absolutely no money in the stock market, including retirement accounts. This reality is often overlooked when people make judgements about the relative health of the economy and what that means for Main Street. The recent stock market highs have not been affecting everybody.
Oftentimes, this information is used for political purposes to try cast some kind of judgment between “the haves” and the “haves not.” But the truth is that it is not about that at all. Paul Allen, one of the co-founders of Microsoft along with Bill Gates, once remarked that “in order to become wealthy, you have to own a business in some form. There are no savings account millionaires.” That statement is especially true in today’s interest rate environment, where you could probably come up with more money going through your seat cushions than you could make over the course of a year from $100,000 sitting in a savings account somewhere.
That is because, when you start acquiring business interests (and publicly traded stocks are just one method of accomplishing this), you are transitioning from a life of only getting money through work to a life of generating money just for being alive. If I worked at McDonald’s and put in a forty-hour work week that netted $8 per hour after-tax, I’d have $320. If I spent that money on rent, food, clothes, a movie, and whatever, all of that money would be gone. That’s it. Game over. If I want another $320, I’d have to go out and put in another forty-hour work week.
Now when you start saving up money to buy stocks, things get interesting. Let’s say that, over the course of two years, you set aside $6,100. At present market prices, you’d be able to buy 89 shares of Royal Dutch Shell (side tip: if you are an American investor, it almost always makes sense to purchase the B shares due to the more favorable tax treaty, but as always, do your own research or consult your financial planner if you are seriously considering such a purchase). Right off the bat, you would be able to generate $320 in annual income. Because you have your own little personal oil well, you would be able to take an extra week off and still make as much money as your fellow McDonalds co-workers.
Every $68 that enters your pocket comes with a choice: you could spend it on goods and services (nothing wrong with that), or you could buy a share of Royal Dutch Shell that would pay you $3.60 in free money this year. And given that Royal Dutch Shell has a long-term record of giving shareholders 6-7% annual raises, and today’s $3.60 annual payout may be next year’s $3.85 payout. The acquisition of these assets over time can make your life a lot more fun because you are engaging in actions that will make your future self look at that free dividend money rolling in to his checking account and think, “Hell yeah.”
When I come across articles like the one I linked to above, I get a little bit sad because it has never been easier for Americans to acquire ownership of excellent businesses. Visit the website www.computershare.com and filter the stocks available for purchase by “No purchase fees.” You will see that you can buy $50 of Exxon stock (or more) each month for absolutely no fees. The money will just be drawn out of your checking account. Exxon has over a hundred billion dollars’ worth of proven reserves, and generates $35 billion in profits across 48 countries. You can tap into that just by having $50 taken out of your checking account every month. Each $50 withdrawal would give you $1.40 in annual business income that should grow by 8-11% annually as long as the world keeps guzzling oil at a price above $80 per barrel or so.
When I see statistics about how most Americans do not own any form of stock, it makes me sad because it means that most Americans are neglecting to make the kind of decisions that will allow them to get off the treadmill of trading their labor for wealth. There is another way. If you can find a way to live on $50, $100, $200 less than you bring in each month, you can get the ball rolling. There’s all these fantastic companies around us that will let us acquire ownership stakes for free or hardly any cost at all. Maybe Franklin and De Tocqueville’s fears were right. Maybe it is too easy. On paper, all you have to do is save $100-$200 per month and put it in a stock that charges no purchase fee like Exxon, Becton Dickinson, or Dr. Pepper. It’s right there in front of us. It only takes a couple minutes online to set up. The obstacles to high-quality business ownership have never been lower, and I hope you take advantage of the opportunity to create your own “little money machines” by taking a minute or two to arrange your affairs so you are always acquiring business interests each month that churn out income. The easiest way to start a virtuous cycle is to harness these three forces: regular cash contributions, regular dividend distributions, and dividend growth. Wash. Rinse. Repeat. Do that for a decade or two, and you will wake up one day wondering just how you got so loaded.