Rule of 72 for young adults: The rule of 72 and an overview of other basic financial information should be taught in every high school and university in the world. A short definition on how the rule of 72 works: it is 72 divided by the investment yield which equals the number of years required for the investment to double. With an investment yield of 6% your investment will double in 12 years (72 / 6 = 12). For example, if you invest $10,000 and the investment yield is 6% in 12 years you would have $20,000. Why is this vitally important for young adults to know? Here’s why: had I invested $10,000 at the age of 22 (I decided to buy a used car and not a new car) and the investment yield was 7% I would have $233,290 at the age of 67. If I postponed the decision to save or invest money until the age of 40 (leasing expensive cars, etc.), with the same investment of $10,000, by age 67 I will only have $66,182. If you understand how the rule of 72 (compounding) works you will be much more likely to start investing at a young age. Another hypothetical example, you are getting married at 22. Your parents give you up to $30,000 to spend on the wedding, or you could reduce the cost of the wedding and invest the difference. You decide to cut back the cost of the wedding and invest the difference. Let’s use the following example: the wedding cost $10,000 and you invested $20,000 with a yield of 7%. At the age of 67 you will have $466,580. The better you understand the rule of 72, the more likely you are to become an investor and not a consumer (and in debt). You will “get” why you should start investing at a young age and pay yourself first (this means you save a certain amount of money from every paycheck you receive). If all young people bought in to this way of thinking, it would go a long way toward helping the US become a nation of savers and not spenders (and increasingly in debt). Likewise it will also help the US become a net exporter (like China and Germany as examples) and not a net importer nation (forever increasing national debt).
Should Apple pay a dividend? Apple paid a dividend from June 15, 1987 to December 15, 1995. The lowest dividend payout was $.06 and the highest was $.12. If Apple were to have a 4% dividend yield (assuming the stock price was $300) it would require a $12 yearly dividend payout ($3.00 per quarter). Apple’s reported fourth quarter results (October 18, 2010) indicated profits of $4.31 billion and free cash flow of $5.7 billion. Apple has 914 million shares outstanding; to pay a $3 quarterly dividend it would require Apple to distribute $2.742 billion to shareholders each quarter. This is 48% of the quarter’s free cash flow number. The dividend payout ratio (dividends per share / earnings per share) would be ($3 / $4.64) 65%. Apple should have no problem paying a 4% dividend payout as they have approximately $50 billion dollars of cash or cash equivalent on-hand (Apple is in the top 5 non-financial companies in the world for amount of total cash or cash equivalent on-hand). A company can do the following with its cash or cash equivalent on-hand:
• Increase Research and Development (R&D), sales force, etc.
• Start or increase dividend payout
• Increase capital or infrastructure expenditures
• Buy companies
• Invest the cash
• Buy back shares to increase the price of the stock
(If you are interested, for a more detailed discussion, please see the following blog: http://paulsgang.blogspot.com/2010/09/investing-in-possible-buyout-companies.html)
In my opinion, Apple should again start paying a dividend. With a 4% dividend yield they can still accumulate cash (around $2.5 billion per quarter) and it may spur an increase in the number of people willing to buy the stock. What is your opinion? Please add a comment if you think Apple should or should not pay a dividend to their shareholders.
Netflix third quarter financial announcement: I had a record number of visits to Paul’s Gang from last week’s blog on Netflix and received plenty of positive feedback. Netflix announced their third quarter financial results October 20, 2010. What was good about the Netflix financial announcement was: over 2 million new subscribers for the quarter, 66% of subscribers using streaming video (subscribers will watch more content on streaming video than DVDs in the fourth quarter) and 31% revenue growth year over year. What was not so good was: there are over 1 million free (non-paying – trial customers) subscribers (the percentage of which has been increasing), gross margin decreased by 1.7% from the second quarter (number of free subscribers or increasing cost of content?) and overall free cash flow was only $7 million. Overall it was maybe an above average but not great financial announcement. Stock price did increase by over $19. What did you think of Netflix’ third quarter financial announcement? What do you think will be the high and low stock price in the fourth quarter?
Please chime in with comments about the rule of 72 for young adults, should Apple pay a dividend and Netflix’ third quarter financial announcement. What are your favorite financial and investment books, ideas for future blogs, etc.? Future blogs that I will be writing:
• Income generating bucket of money
• Investing in possible buyout companies
• Investing in Brazil
• Reviewing the classic financial book (written in the 1950’s): Common Stock and Uncommon Profit by Philip A. Fisher
• Using Philip A. Fisher’s stock picking methods to analyze stocks
© 2010 Paul Cusick
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Looking forward to your review of the Fisher book. Perhaps you'll follow it with a review of the Graham and Dodd book?
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