Tuesday, March 13, 2012

Future Dollar Thinking

Ever walk into a store, see the price tag for an item you want and then figure out how many dividend paying shares you would need to acquire to pay for that item each month?

I do.
If you did this every time you purchased something, it would make retirement seem like an impossibility. But just imagine, for a moment, that weekly coffee drink or burrito that you, and I, enjoy. Use something that is a special treat, not the regular day-to-day things for this thought experiment. Special treats have higher value to us should continue to be purchased so long as it's personal value continues to be high. If you had to choose between giving up the weekly treat and giving up the weekly morning latte, ditch the latte. If the weekly latte is your weekly treat then this experiment will be much more painful/eye-opening to go through.

Lets use a burrito as the weekly treat: it roughly costs around $6 at most of the major burrito places.
Lets say you got this burrito once a week. Rough cost of $312 per year for your weekly treat.

The ideal situation would be to have you dividends pay for you treat so that it does not impact your lifestyle in retirement. If dividends were paid weekly there wouldn't be an issue but the best you can do in the current market is monthly. With some simple budgeting it shouldn't be a problem to pay for the burritos.

How much does this treat habbit cost? $312 per year which is equal to $25.98 per month, round to $26.

Lets take a look at some of the top-yielding monthly-dividend paying companies/stocks.
Alpine Global Dynamic Dividend  AGD  Yield=11.78%  share price of $6.20    Mo. Div.  $0.06
PIMCO High Income                   PHK  Yield=11.29%  share price of $12.96  Mo. Div.  $0.12

I've only put the top payers here for simplicity of this thought experiment, no advise is given to buy or sell. Some would argue that anything about 5% is unsustainable but back to burritos!

With the monthly AGD stock dividend of $0.06, it would take a minimum of 433 shares to provide $26 of monthly dividend income, which would require an initial investment of $2684. This is not including the bite that taxes take so it would be better to have more shares, 25% more or ~550 at the cost of $3410.

Investor/trader note* Always round up to whole groups of shares like 10 or 50 or 100. They trade much
 faster then 433 or 541.

What would that commuting expense of $60 per week in fuel be?  You will need to be investing $34100 in 5500 shares

So, how much are your treats costing you?

The simple thought experiment above is applicable to everyone but you may suddenly want to become a van dweller and trying to live off of 11k per year after seeing your future dollar costs.

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