Remember the Rule of 72

by BRK
(St. Louis, MO)

A great way to effectively plan for your financial future is to harness the power of dividend paying stocks, especially when purchased through a tax-advantaged account such as a Company 401(k) or Roth IRA account.

The following quick calculation provides an estimate you can use to measure the effective power of dividends to your portfolio - the rule of 72. To determine how long it will take your investment in a dividend paying stock to double, divide 72 by the dividend yield. This number tells you the time before your initial investment will double in size, excluding any capital appreciation on the underlying stock alone.

Combining dividend paying stocks with a dividend reinvestment plan (DRIP) available through your broker or brokerage firm allows you to reap the benefits of both the Rule of 72 and the capital appreciation associated with your chosen investments.

Several equity classes have historically paid strong dividends relative to their peers. Specifically, utilities (including specifically master-limited partnerships) and various consumer product companies (Proctor and Gamble, General Mills) have demonstrated a continuing commitment to paying dividends.

The long term value of investing in dividend paying stocks may help diversify your income stream and provide additional returns to your retirement accounts in the future and should be at least strongly considered by those with the appropriate risk tolerance and knowledge to effectively invest in equity.