CLASSES TO GO

Compound Growth Rates and YieldJim Thomas

National Volunteer

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Disclaimer• The information in this presentation is for educational purposes only and is not intended to

be a recommendation to purchase or sell any of the stocks, mutual funds, or other securities that may be referenced. The securities of companies referenced or featured in the seminar materials are for illustrative purposes only and are not to be considered endorsed or recommended for purchase or sale by BetterInvesting™ National Association of Investors Corporation (“BI”) or the BetterInvesting Volunteer Advisory Board, its volunteer advisory board (“BIVA”). The views expressed are those of the instructors, commentators, guests and participants, as the case may be, and do not necessarily represent those of BetterInvesting™ or BIVA. Investors should conduct their own review and analysis of any company of interest before making an investment decision.

• Securities discussed may be held by the instructors in their own personal portfolios or in those of their clients. BI presenters and volunteers are held to a strict code of conduct that precludes benefiting financially from educational presentations or public activities via any BetterInvesting programs, events and/or educational sessions in which they participate. Any violation is strictly prohibited and should be reported to the President of BetterInvesting or the Manager of Volunteer Relations.

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NAIC Principles

• Invest Regularly

• Reinvest All Earnings

• Invest in Quality Growth Companies

• Diversify to Reduce Risk

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What are “Earnings”

• Proceeds from companies you sell

• Earnings produced by companies you own, which are either …– Paid to you as dividends, or …

– Retained by the company and reinvested your behalf

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Why Reinvest Earnings?

• Compound Growth!

• Money (earnings) not invested doesn’t grow

• Reinvesting means taking money produced by an investment and investing that money too (not necessarily in the same thing!)

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Example

• $100 investment with 6% price growth and 4% dividend yield

– Investment worth $106 after one year

– Plus $4 received as dividends

• Reinvesting the $4 allows $110 to grow (rather than just $106)

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Example Results Over Time

• $100 investment

• 6% price growth

• 4% dividend yield

• Dividends reinvested vs. putting them “in a mattress”

YearsD i v i d e n d s

Reinvested Mattress

5 $161 $156

10 $259 $232

15 $418 $333

20 $673 $468

25 $1,083 $649

30 $1,745 $891

40 $4,526 $1,648

50 $11,739 $3,003

What about the SSG?

How do Dividends, Reinvesting and Compound Growth relate to the SSG?

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Percent Payout

• Annual dividend …

• as a percentage of annual earnings

• $0.15 dividend (paid during a year)

• $1.00 earnings (during that year)

• 15% payout (i.e., 15% of earnings were paid as dividends)

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SSG Section 3G: % Payout

• Annual dividend (F) as a percentage of annual earnings (C), or F ÷ C.

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Dividend Yield

• Annual dividend …• as a percentage of dollars invested to

produce that dividend

• $3 dividend (paid over a year)• $200 invested• 1.5% annual dividend yield

(i.e., $3 ÷ $200 = 1.5%)

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SSG Section 3H: % High Yield

• Annual dividend (F) as a percentage of annual low price (B), or F ÷ B.

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SSG Section 5A: Present Yield

• Dividend expected to be paid next year …

• as a percentage of the current stock price.

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SSG Section 5B: Avg. % Payout

• This is a judgment item;you may want to change it.

• How does it compare with the average from section 3G?

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SSG Section 5C:Compound Annual Total Return

• Potential Avg. Annual Yield

• … combined with …

• Potential Annual Price Appreciation.

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SSG Section 5C:Compound Annual Total Return

• The computer calculates compound return.

• Your job is to provide the judgments that flow into this calculation.

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