All my talk about oil stocks here on the site bring in lots of oil stock investors from the search engines, who woulda thought?
In the past couple of days, I had been talking to a reader that decided to make BP and Royal Dutch Shell the starter positions in her stock portfolio by putting $400 per month into each Royal Dutch Shell and BP since 2011. I didn’t inquire into the specifics, but a very rough calculation that takes into account the capital appreciation of those companies could indicate that she is sitting on about $40,000 worth of stock in the two oil giants that is generating around $1,800 in current income, averaging out to $34 per week that makes its way to her in passive cash.
Although those are only my back-of-the-envelope estimates based on what she said, my point isn’t to get caught up in the specifics but rather to discuss a psychological element that came up in the discussion. She mentioned to me that savings became a lot easier once she started seeing results.
That made a lot of intuitive sense to me. It’s hard finding motivation when you have to put in a lot of effort and delayed gratification just to get that initial quarterly dividend check of $5, $10, or whatever. There’s a lot of reasons why people don’t make income investing part of their life story, but one of the reasons is that the rewards are small at first.
For 99% of the people in this country, coming up with that first $1,000 to invest is quite the hurdle, taking even months or even a year to set aside. And if you only get $30—what’s that, $0.08 per day, when you initially start, it can have a huge deterrent effect from doing anything at all. Dollar-cost-averaging with automatic reinvestment can mitigate this somewhat—you can see those new Exxon shares get purchased with your cash on hand each month, you can see the small sum generated by your Exxon payout that automatically buys another partial share, and then you can see the cash declaration on those shares go up each year.
I think that last point is the key to getting through the early days of investing—when you own a single share of Johnson & Johnson, you’re not just entitled to the $0.70 that the company pays out quarterly now. It’s not just about receiving $2.80 for each share. It’s about the fact that you will own all the dividend income that the share will ever produce as long as (1) you don’t sell it, and (2) you stay alive.
The reader I was talking to mentioned that it’s easy to keep investing once you’ve got something successful going, because it starts to become fun. Turning $1,000 in monthly dividends into $1,100 in monthly dividends is a fun game, because you’ve already accomplished something good in your own right, and it’s easier to pick up a clump of snow from the lawn and attach it to the middle of the snowman than it is take that clump and know that it’s the very beginning of the snowman.
Somewhat paradoxically, once you’ve been saving well for a long time, it’s entirely possible that something could trigger psychologically for you that gets you to start improving your savings rate because the game becomes fun. When you’re sitting on 2,200 shares of Coca-Cola, adding another 20 shares is just feeding the beast, and making a good thing even better.
There’s also the fact that just holding on to a stock for a while starts to build something impressive in its own right—even if you only set aside $1,000 in Chevron twenty years ago, you’d now be sitting on $11,000 worth of the stock and collecting $367 per year just by letting it sit there. Do that every year, and you’ll be pleased by what you see.