Spreading the word about wealth from dividends
After 30 years as a financial planner, Stephen Parr has gone into print to spread the gospel of growing rich through dividends.
Tauranga-based Parr has launched the first in a series of guides on how ordinary people can take control of their money, with any profits from the books going to charity.
Having achieved financial independence himself, and having seen his daughter well on the way to her independence using his techniques, Parr wants to share his message more widely.
The first, The No. 1 DIY Financial Freedom Plan, focuses on cutting spending to free up capital to invest using the ‘‘Dividend Income Accelerator’’ (DIA) strategy.
Parr, who started working in investment in 1987 just months before the sharemarket crashed, said DIA is ‘‘without doubt the best strategy I have come across in my career to achieve a longterm passive income that continues to grow’’.
But it will be an eye-opener for the masses of New Zealanders who remain enamoured of saving their money into incomegenerating term deposits, or corporate bonds.
DIA wealth accumulation involves people saving excess income into blue chip sharemarket-listed companies which seek to reward investors with dividends, and which, like Coca-Cola, aim to increase their dividend each year.
An initial investment of $10,000 in a stable, blue chip with a dividend yield of 6 per cent will yield a return of $600.
If that company increases the dividend by 5 per cent a year, which Parr said was a realistic expectation for a growing company, after 10 years the dividend will have grown to $930. And after 20 years the dividend will be $1515.
The example assumes that dividend income was spent, not reinvested, which would result in a compounding effect increasing the speed of wealth accumulation, he said.
The dividend yield on that original $10,000 invested has risen in Parr’s example to more than 15 per cent, though as a company increases its dividends, the capital value of the shares can be expected to rise, too.
That is what Parr means by dividend income accelerator.
He said it was the reason ‘‘why some retired people who have held shares for 20 years or so have a lot more income to spend every year than their neighbours who may have started with the same amount of capital 20 years ago but kept it in term deposits.’’
By contrast, a term deposit, assuming again that interest is not reinvested, would see no increase in income outside of that delivered by rises in interest rates, and capital will not grow.
After 10 years, the capital is still the same (though inflation will have eroded its value), and the yield on the original money invested won’t have moved either.
‘‘I find the great majority of people that I talk to believe that term deposits are the thing to have. I want to show people that although term deposits are a very useful thing, it is better to become the owner of a bank than to be a lender to it,’’ Parr said.
Relying on term deposits will mean many people end up disap- pointed by their standard of living in retirement.
Investing in shares does bring risk of sudden movements in the value of an investor’s capital, and at times it can require a little intestinal fortitude, but over time good dividend-paying shares tend to rise in value.
Parr calls DIA a ‘‘get rich slowly’’ strategy, but said it was virtually unrecognised by the DIY investors. It is based on the philosophy of American investor Marc Lichtenfeld, author of Get Rich with Dividends.
Picking a portfolio of rising dividend blue chips can be done by DIY investors willing to put in the research for themselves, Parr says, but equally, it is a strategy that can be adopted by using the services of an investment adviser.
The New Zealand and Australian sharemarkets are both noted for having many higher dividend paying companies.
Ordinary people on fairly ordinary incomes could amass wealth that way.