The Conoco, BP, and Royal Dutch Shell Retirement Plan

I recently got a call out of the blue from someone that I went to Washington & Lee with back in the day. We were good friends during our Freshman year, but we joined separate fraternities, and for whatever reason, we didn’t hang out a whole lot after that.

Anyway, his grandmother just passed away, and he found himself in the verge of clearing almost $32,000 in an inheritance once the estimates fees and whatnot are taken into account.

He decided he wanted to invest the money. That decision alone put him ahead of most 24 year-old men out there.

But, of course, it leads to another far more important question: Invest in what?

That’s what prompted his call to me to discuss possible opportunities. He has a job, but no specific retirement accounts. That prompted me to suggest the following: Create a five-year plan and scale that money into a Roth IRA over time (the current tax code allows for $5,500 annually provided you make at least that much). He could get $11,000 invested fairly quickly, by making a 2013 contribution anytime between now and April 15th, 2014, and he would be eligible to sock another $5,500 away coming this January 1st. That would get a third of his inheritance into productive assets quite within the next 45 days.

Ideally, each of those $5,500 investments would be split up into two pieces of $2,750 each, so that the inheritance could be split up into 11-12 productive businesses. My suggested plan would have him invested in blocks of Coca-Cola, Pepsi, Clorox, Chevron, Exxon, Nestle, Colgate-Palmolive, Disney, Visa, Procter & Gamble, Johnson & Johnson, and Kraft. You give those suckers three or so decades to grow, and you would have basically created your own little pension to take care of you.

Think of it like this: If you have $30,000 in a tax-free account with dividends reinvested, you can put yourself in the position to have 8.5% annual growth plus 1.5% returns coming from dividend reinvestment, so you could realistically compound your money at 10% annually over that time frame, due to the nature of high-quality cash generating businesses mixed with long periods of time and tax-favored holding structures. That $30,000 could realistically turn into $979,000 by the time he is 65 (assuming 10% annual returns for a thirty-five year stretch).

Although that was my suggestion, he decided he didn’t want to wait until he was 65 to enjoy the money (fair enough), and he didn’t want to practice such widespread diversification—he wanted “silver bullet” style investments that give money now.

Instead, based on his goals, he decided to put roughly $10,000 each into BP, Royal Dutch Shell, and Conoco Phillips, and take the dividends as cash to spend now. That’s not a stupid way to behave.

In terms of current income, he gets $495 in immediate income from BP (and that amount should go up I most years).

From Royal Dutch Shell, he should get a little over $500 in immediate income.

And in the case of Conoco, he should get $378 in immediate income.

Tax-rate wise, he’ll have to pay 15% annually. So, on that $1,373 in dividend income, he’ll get to keep $1,167. Once a month on average (namely, twelve times per year), he will see “Santa Claus” come and drop off $97 in his checking account. I don’t know what he drives, but that is roughly what I spend on gas per month. This inheritance basically got him free gas for the rest of his life, should he treat the money that way. Or, he could treat the dividend income as a rent subsidy that will effectively pay for 2-3 months of his rent each year. That’s not a bad place to be.

And the best part is that he is doing something that is not exhaustive. Normally, I write about income investing in a delayed gratification sense—you’re socking away money today for something in the future. But money is only useful if you take the money and do something useful with it. That sounds like a tautology, and maybe it is—but money is useless if you just pile it up and scrooge it away until you die. But an extra ~$1,200 or so in the pockets of a 24 year-old is great, and the cool thing is that those companies will likely grow their dividends at a rate greater than 4% over the long term, so he will actually be growing richer as he spends money.

Is this how I would do it? No. But that doesn’t mean it’s not a great decision. For the rest of his life, he stands a good chance of seeing money deposited into his account month. He gets to spend that. He gets to see the money grow each. He will get to spend that. And, the best thing is that, the price of the shares should continue to increase over the coming decades, so he could likely sell the Conoco, BP, and Shell stock for a good chunk of change a couple decades from now, if he should so decide. In fact, even though he is spending the money now—it could still theoretically act as a retirement, using his grandmother’s gift to give him spending money in his 20s, 30s, 40s, 50s, 60s, and beyond. That’s a gift that keeps on giving.

 

 

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9 thoughts on “The Conoco, BP, and Royal Dutch Shell Retirement Plan

  1. Considering the alternatives, not too bad of a decision from your college friend. I could think of some worse ways to be investing/spending that money. Of course it isn't what you or I would do, but the alternatives are much worse.

  2. BidAskDividends says:

    I wouldn't suggest buying Nestle for a Roth IRA (or any tax advantaged account). Dividends are withheld by Switzerland at 15%. If kept in a taxable brokerage, he can recoup these at tax time, however this is not possible for a Roth. The 15% will be lost.

  3. andrea says:

    I think he's made an excellent choice, for now.Once he is older he will come to see the value of re-investing, and by then I hope the "free" money has not spoiled him into not working for the rest of his life .LOL And i hope he;ll have a good income and not miss the dividends that were paid him, but now are funneled back into his "pension fund" LOL.

  4. Mitul says:

    Although he has put a good chunk of his inheritance in quality companies that are yielding very well, I still feel that he should have diversified his investment into multiple sectors. There are other well positioned companies with high yield such as Altria, HCP, AT&T. At the moment, I do believe that the first two are either fairly valued or are trading just below their intrinsic value. Either way, it was his money and I am nobody to judge how he should have done it. The fact of the matter is that he decided to take an important step of his life is what should matter. I am also 24 years old and recently begun to invest in the market. Of course, I'd like to say that I wish I knew better and started earlier, especially at huge discounts after the financial crisis, nonetheless, I've put some money into quality names that are fairly valued and hoping to find other opportunities.

    – Mitul

  5. Edward says:

    I think it is a GREAT START! And if it really is just the start, your friend will begin to research and invest in other great companies. And who knows, he could "retire" to just work his investments by 43 on a sailboat in the Keys:)

    One caution, the de-valuation of the currency is very real and will pack a wallop over a 30-40 year span. I can remember when I could buy a decent, by the times, economy car for under $2k. By most online calculations if someone in 1984 were shooting have a nest egg of $1mil by 2014, they would only have between $250k-$500k in purchasing power. A million just isn't what is used to be:(

  6. Douglas Hager says:

    Tim,

    First of all, this is a fantastic blog. I stumbled on your writings on SA and immediately recognized your posts as something I would always care about. I have no idea how you write as prolifically as you do while attending school. My hat is off to you. I'm much older than you (56), and although I started saving at an early age, I was unwilling for many years to accept the volatility in common stock prices. I was very heavily skewed towards cash and stable value funds. The comfort of knowing "the balance just goes up every day" caused me to miss the longer term picture, although it always felt good during large moves down in the market.

    Anyway, I now generally agree with and am invested in your overall investment thesis of buying household name great companies that pay dividends (even though Berkshire Hathaway is my largest holding and has been for years). The one issue I generally have however is your avoidance of discussing current prices. For example, Exxon is a common name mentioned here. I would argue that even given that it's a wonderful a company, it's still a much different investment today at 94.5 than it was just a few weeks ago at 86. Buffett, Howard Marks, etc. all point out repeatedly you can pay too much even for great companies. That's why I avoid dividend reinvestment plans. Just my opinion, but I want to put money to work at prices I think are reasonable.

    Also, I would be very careful postulating 35 year returns averaging 10% as you did in this article. I'm not saying it's impossible, just potentially very aggressive….especially given how far we've moved since March 2009 (or even since January 2012). As you well know, small differences in average return assumptions make HUGE differences in terminal values when compounded over long periods like 35 years.

    Keep up the great work. I believe you're going to law school (?), but no doubt have a bright future as an financial advisor.

  7. says:

    He could always take two thirds of the dividends and re-invest the other third.

    He gets an immediate benefit to his income, but also growth due to re-investment, I think this is the best of both worlds

  8. Sumflow says:

    Your friend did not get very much, he should double it a bunch of times so that it can take care of him.  Giving it to a landlord or a gas station, has to be a bad idea.  See video on stuff.

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