Or, “how make money investing” if you’re an affiliate like me (wink).
See, if you’ve read my last article, you already have a way to make current cashflow, or income, which can become full-time and largely passive within a year.
Now we’re going to look at how to magnify and amplify that income – leverage it – to make you genuinely rich over time.
Lots of finance writers and others talk about “investing for retirement.” as if you’re preparing for your own funeral or something. You know, like you’re “sensibly” squirreling money away so you can be proud to hit 65 and say you’ve doubled or tripled your money.
I’m going to tell you right now, that way of thinking is bullshit.
Asset income, please
When I invest, I want income. And I don’t want it in 20 or 30 years. And I don’t want to have to sell principal to access it. I want it to be paying me good money, within 5 years, or 10 at the very most – and all the while it’s still growing.
I don’t want to hoard cash in some investment scheme for a pittance, while those institutions use that same money to make themselves rich over the years.
Nope, I want to get rich myself instead. And I’ll do it by doing much as they do, but better.
Introducing el Digger
So I’m going to introduce you to the single most successful investment strategy in existence. The only one you need, in fact. The one used by John D Rockefeller, the richest man in all of modern history. It’s so simple, and so powerful, you’re going to wonder why everyone isn’t doing it.
I call it “el digger”. That’s from the acronym I give it – LDGR. Leveraged Dividend Growth Reinvestment.
This strategy forms a closed loop, which over times spins faster and faster, feeding itself, and grows and grows at a supra-exponential rate (I’ll explain that later). Until it’s spinning so much money that you’ve got a full-time income from it alone, without you even needing to add any more of your own money from outside.
See, with most investment schemes pushed by media and IFA’s, you’re “saving” money (dirty word right there) to get some form of interest or yield. And they say, hey, all that interest is going to compound, and compounding is the eighth wonder of the universe.
No, it isn’t. You’ll be dead before interest compounding is ever going to help you.
But you know what does work? Leveraged dividend reinvestment compounding. LDRC.
The mathematics of LDRC is arcane. It doesn’t really compute with the everyday mind, because it’s not linear, or even simple exponentiality.
It’s vortex mathematics. It’s like a flower bud that keeps on opening from within, like animated fractal imagery. Implosive growth.
There’s two principles here: you make your money when you buy (bit like they say with real estate). And you never sell, you just use it as leverage, over and over.
The el Digger process
So the process is this. You head over to David Fish’s website and download the latest list of US dividend champions in pdf or excel format.
It lists only those companies which have raised their dividend payouts each and every year for a number of consecutive years. To be a champion, they must have done so for 25 years or more.
There’s 3 tabs that interest us: the champions, challengers, and contenders.
You want to look through the list and pick out the company stocks with good yields (column I in the spreadsheet) and good DGR’s – dividend growth rates. That’s column AO for the 10-year rate.
Then you want to open an account with an online broker. Go for one with low transaction fees, and margin facilities.
Then you want to buy shares, and hold them forever. Simple.
Warren Buffet’s wrong about many things, but he’s right about buying with the intent to hold forever.
You buy 10 or 100 or 1,000 bucks’ worth of shares every month with your own money as well. Whatever you can afford. If you don’t have much to set aside, it’s not that important, we’ll see why in a minute. What matters is persistence.
And as you get dividend payments and capital appreciation (the price of your shares going up) you’ll have more money to invest, which will be multiplied because you’ve got margin. So the broker is lending you money to buy more shares. That’s the “leverage” bit of LDGR.
And because you’re buying safe investments, you get lots of margin. More than 200% in fact. Just think about that for a minute.
And so you buy more shares. Rinse and repeat. That’s it. And you keep doing it until compounding catches, and suddenly you’re getting more cash than you know what to do with.
Now it’s only when you really spend a while looking at this and thinking about it that the power of it becomes clear. Meditate on it, marinade in it.
Dividends – would you start up a company which didn’t pay you?
I’ve never understood buying shares that don’t pay a dividend. That’s a sucker’s play. Buying so you can sell higher later, what’s the point of that? Killing the golden goose? Which, if it doesn’t pay a dividend, ain’t so golden anyway.
You’ll find that a lot – that shares that don’t pay a dividend often appreciate at a very high rate. I mean, look at the price of Berkshire Hathaway. It’s currently over 250 thousand dollars per share. Coca Cola is 45 dollars per share.
Do you see something a bit screwy here?
And tech companies like Google and Apple. If they’re not paying a dividend, then they’re accumulating more assets instead, which is reflected in the share price.
But I don’t really understand Buffet’s thinking here. He readily admits that he only really goes for dividend plays. So why not pay one himself? He famously likes Coca Cola and Wells Fargo, companies which have raised their dividends for consecutive decades. Yet he advises investors in his own company to (I’m paraphrasing) “put the certificate under their pillow, or in their safe, and take it out and look at it and stroke it occasionally.”
Well, screw that. Pardon my French.
Gimme Benjamins. Show me the money. Cold hard cash, etc.
Rockefeller is quoted as saying that the only thing that gives him pleasure – the only thing, mind you – is to look at his dividends coming in. Say what you like about his priorities, the man knew money.
No dividend = price inflation
As something of an aside here, I think the same principle is at work in the housing market. The reason house prices in much of the world rise so much and so fast, is for the same reasons that Berkshire Hathaway does the same. They’re assets that don’t pay a dividend. To put it another way, they’re fake assets or suckers’ assets. Liabilities.
Dividend growth is just as important as dividend yield
Anyway, in the el Digger process, dividend growth is just as important as dividend yield. Over time, the power of a rising dividend, combined with leverage, is truly mighty. So mighty, that it’s actually tricky to mathematically capture and demonstrate.
So for now, let’s just say it’s mighty.
And let’s also make the common sense observation that a share with a consistent 10% annual dividend growth is likely going to have something like 10% price rises. Because the yield will be rising, which will attract more buyers. Simple enough.
Past dividend growth is an indicator of future dividend growth. Not a perfect indicator, but the best we have. And with a good present yield, we have both the present and future sorted out.
Keep it simple
So they’re the only metrics you need – dividend yield and DGR. I honestly wouldn’t bother looking at any other metrics at all. Not one. P/E ratios, debt ratios – who cares? What a waste of time. That’s for all the talking heads in the media.
If the company’s paid a rising dividend for 30 years, then I know enough about them.
Power of frequent compounding
I would recommend getting lots of different shares rather than lots of one or two shares, at least in the beginning. That’s because you’ll be getting more frequent dividend payouts, which you can then reinvest immediately.
If you model the difference between compounding, say, annually, and compounding daily, you’ll see the power of this.
Ideally you want to be receiving dividends daily. Once you build up your portfolio this won’t be a problem.
You’re also “diversifying risk”, if that matters to you.
Supra Exponential Growth
This way of investing utilises a floating principal price and floating dividend, and it’s open-ended. It floats and rides high on inflation in the economy.
If you take another way of investing – say in a bond – that would be fixed and terminal. All you’re getting is the fixed bond yield. That’s it. It sinks via inflation in the economy. Then it matures, or expires at a certain date, so then it’s dead and you have to “roll over” to another maturity, which really means buying another one.
With el Digger you’re not just reinvesting the yield. You’re also reinvesting the rising dividends, and the capital appreciation (without having to sell, via margin). And you’re reinvesting these 3 elements with a 200% or so multiple. And then you’re reinvesting the returns on the leverage itself. So the leverage becomes a 4th element.
That’s what I mean by supra exponential growth. And when it really kicks in, usually around year 7 or 8, you’ll know about it.
You can do this on a low income
It only takes 100 bucks to open an account, and once it’s open you can add whatever amounts you like. You can get rich with el Digger on any old income.
In fact, it’s rather democratic. What’s important is not the size of the principal, or even your monthly additions. What’s important is time. That is, that you’ve started. Because it’s the dividend compounding that really makes the thing explode, not the size of the principal. So whether you start with 100 or 1 million to invest, you’ll end up in the same place – ie a steeply rising rate of return. I mean, steep like Everest. And at that point an extra zero or two just doesn’t matter much – you’re minted either way, and headed to the moon.
As they say, the best time to begin is yesterday. The second best time to begin is today.
With el Digger, time truly is your friend.
This ain’t no 30-year nest egg
With el Digger you’re going to see income that you can use within 10 years. Maybe 5 or 6.
It’s a money tree that you can pick fruit from once it matures, though it will continue to grow. And when it really matures, well you’ve got all the fruit you and your community could ever need, and shelter and wildlife too.
And you’re not going to cut down a money tree, are you?
At some point I’ll show you some of my charts and tables to demonstrate this. Leveraged dividend reinvestment does need time to work its magic. But not that much.
Take that to the Bank!
I’ll be writing more on this topic in the coming days. I might add to this article, too.
In the meantime, happy investing!
And I’d love to hear any comments you may have. This is an interactive forum, folks. There are some truths about money which have to come out. It’s overdue, this is the time, the world needs more sensible rich people.