Several years ago, my company had a special policy for rewarding is employees who decided to continue their education and go back to school. If you completed a degree program while working at the company (bachelors, masters, etc.) you received exactly 100 shares of company stock, straight up. This was in addition to the free tuition assistance that the company provided. Even better, those 100 shares were given to you directly. You didn’t have to hold it in the company retirement plan. The company stock award has since been discontinued, so I personally cannot take advantage of it. There are two of my co-workers, however, who succeeded in getting that stock bonus as they finished their master’s degrees. What they each did with it was different and had an impact on their future wealth.
For the sake of privacy, we’ll call my co-worker friends Isaac and Antoine. Both graduated from the same engineering program with their master’s degrees around 2008. Isaac took his 100 shares and sold them all within a short period of time. He spent the cash over time on lifestyle purchases. Antoine, on the other hand, made the decision to retain his ownership. Over the past five years or so, he just decided to sit on the shares. Now, my company pays dividends to shareholders. I’m not sure whether or not he re-invested them as they were paid out or if he just took the quarterly cash payments, but we’ll look at both cases. What would his return be on his investment? Does sitting on shares of a big company that churns out cash provide more total value than selling your stake and pocketing the profits? I’m sure you know the answer qualitatively, but as far as the numbers go – how much of a difference does it make?
The stock price around the time my co-worker friends received their award was about $81.15. With 100 shares, that adds up to a $8,115 bonus, not a bad reward for finishing a degree. As I stated, Isaac took with money and ran. But what about Antoine – what would things look like now? Below is are two graphs showing the different scenarios – one without and one with dividends reinvested.
The capital gains and dividends received in the first case aren’t too shabby, around $6,357.00 as of the end of December 2013. Look at the next graph though. If Antoine delayed gratification and reinvested dividends over just a five-year period, he racked up $8,524.97 in total gains – a full $2,167.97 in additional wealth. The difference in return on investment is 11.09% versus 13.95% over that time period.
This is just another example of growing wealth one dollar at a time. By relinquishing his stake as a partial owner in the company, Isaac decided that the utility of having those $8115.00 in 2008 was greater than leaving his money to sit and grow. There’s nothing wrong with that – that made him happy and that’s just fine. However, if you’re interested in building long-term wealth, that is no way to do it.
Investing, as I have learned from reading about it a lot and starting to do it myself, is a long term game. Everyone’s looking for the next Apple or the next Amazon. That’s fine, there are definitely people who get rich that way. I however, prefer the more consistent steady growth that investing in a company like the one shown here provides (there are reasons why I don’t invest in shares of my company outside of my retirement plan because of factors like the cyclical nature of the business and inconsistent dividend growth, but that’s a topic for another post). Just remember, in a capitalistic society just as the United States, money tends to flow to those who are owners in profitable enterprises. Selecting conservative, consistently profitable stocks and holding them for a long time is a good way to do that. When you give up your ownership stake like Isaac, you must remember you are also giving up your right to all future shares of profit the business generates.