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How One of My Family Members Used Shares of U.S. Bancorp to Build Substantial Wealth

February 5, 2010 By 2 Comments
U.S. Bancorp Stock

By simply putting $300 extra each month into shares of U.S. Bancorp, the firm that owns his mortgage, instead of paying off principal each month, this family member should end up with an extra $535,000 net in 30 years, plus own his house outright, and be collecting approximately $33,000 annually in cash dividends.

A member of my close family has been using a technique to build substantial wealth that doesn’t require a high income or any specialized knowledge, extra work, or effort.  I was so impressed by the way he implemented this program, I thought I would share it with my other family and friends (as well as anyone else who reads my blog) without giving away who it is.

Each month, he has a house payment of approximately $1,500, payable to U.S. Bank.  He decided that instead of making an extra $300 payment along with his regular mortgage bill to lower principal and pay the debt off early, he would instead establish a direct stock purchase plan and have that same amount automatically used to buy shares of U.S. Bancorp.  He was convinced the balance sheet of the bank was strong, and the fact that the CEO earns more in cash dividends from his outright ownership of U.S. Bancorp stock made him feel confident that management would act in the best long-term interest of shareholders compared to other banks, where huge bonuses and perks rewarded failure.

The commissions charged for this service are negligible, typically $2 per transaction.  This means that every year, he is investing roughly $3,600 in U.S. Bancorp common stock, with instructions that all of the dividends should be reinvested.  The mortgage on his home loan is roughly 5.5%.  How much will he make in extra profit from this transaction?

Let’s assume that shares of U.S. Bancorp will compound at 10% per annum, with the dividend reinvested, over the next 30 years.  Based on his special “savings” program, when he pays off his home, the deed will be mailed to him and he will be completely debt-free.  At the same time, this small direct stock purchase plan will have nearly $600,000 worth of shares of U.S. Bancorp common stock!  Based on its historical dividend yield, this will generate roughly $33,000 per year in pre-tax income, or $2,700 per month. He will have paid an extra $100,000 or so in tax-deductible mortgage interest, so a net $65,000.  Thus, this move gained him roughly $535,000 30 years from now simply because of how he invested his money.

[To recap, he'll own his home outright, have $600,000 in this account virtually no one knows about, and be earning $33,000 per year from checks getting mailed to him.  This is on top of his businesses, retirement accounts, savings, and "real" money.  You'd never know it.  He drives a 10+ year old Ford, eats at McDonald's, and lives on very little money each year.

This just goes to show you that most millionaires are regular people, statistically, that invest their money well.  They are teachers, dentists, bankers, coaches, and business owners.  Yet, when you tell people in the lower classes this, they refuse to believe it because of the image that Madison Avenue has sold them.  They don’t realize that they are likely living in the same neighborhood as a millionaire, who drives a pickup truck and has more money than many of the professional sports players on the local NFL team.

In the United States, there are three times more millionaires living in homes that have a market value of under $300,000 than there are living in homes valued at $1 million or more. – Dr. Thomas J. Stanley, Stop Acting Rich … And Start Living Like a Millionaire

Related posts:

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  2. How My Younger Brother Built a Substantial Portfolio, Bought a House, and Got a Free College Education
  3. Family Member Speculating on Citigroup Stock Options
  4. Misconceptions About Wealth
  5. The Importance of Frugality in Building Wealth
  6. How to Measure Your Wealth
  7. Miller Gorrie Built His Entire Fortune on a Small Block of IBM Shares
  8. To Earn More In Dividend Income Than 50% of the World Earns Working Each Year Requires Only 1,074 Shares of General Electric
  9. Walton Enterprises LLC – The Family Holding Company of Sam Walton and the Walton Family
  10. Paying for Your House with Dollar Cost Averaging

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  • Frat Man

    I read an article in either Fortune or Money Magazine that noted that a $10,000 investment in Johnson & Johnson in 1980 would be worth several hundred thousand dollars (I don’t remember the exact figure, but it was quite large) today. The point of the article was that (a) dividend reinvestment means a lot more than people think, and (b) J&J was an established, large-cap household name in 1980, and you could still make buckoo bucks off of it.

    But I was wondering–do you have any idea how many people such stories are true for? I’ve read horror stories about how mutual fund investors actually earned a paltry sum compared to the returns of mutual funds during one of the most extended bull markets in American history from from ’80s through ’07. I know on about.com you have that Hershey’s stock for Dairy Queen owner example, and here you discuss how your grandpa could have built his own Pepsi empire. But how many people actually do this? Growing up in a working-class background, I hardly knew anyone who owned stocks, and I was wondering if you had any idea how many people from working-class backgrounds actually have hold those Exxon shares since 1970 and are now reaping very nice returns from it.

    It seems so common-sensical that if you buy J&J today (this may be an unfair example since it’s trading it so low a price compared to its future earnings potential), you’re going to be well-off in 20 years. But it seems that only 1% of the population realizes this and tries to build towards it, and an even fewer percentage get to actually pull this off, which is quite sad.

    • http://www.joshuakennon.com Joshua Kennon

      I do know people for whom it is true, some in my own family. But I know a lot more people who sold during crashes in panic, even though I told them not to do it.

      My personal belief on the matter is that people don’t really understand what stock is. They see a little blip on a computer screen or in a newspaper and don’t know what it is. I see a piece of a company that has a share of profits, dividends, and voting rights. When I think that piece is undervalued, I buy more. When I think it is overvalued, I sell it (with few exceptions, such as the permanent dividend stocks held in my retirement trusts and accounts).

      Johnson & Johnson is actually a very good example. A few day ago, I bought another $8,500 of it for one of my retirement plans. I have the dividends set to automatic reinvestment and I probably won’t touch it until I am forced to withdraw it in old age by tax law. There are some weird things that happen with pharmaceutical stocks that cause the earnings to be understated in a lot of cases, meaning the p/e ratio is overstated and the earnings yield is understated. When the price is right, I am a net buyer of Johnson & Johnson. I don’t care if it loses 50% (it could, just like all stocks) as long as the core business is intact.

      In fact, if I were forced to sell everything I owned, put it all in a trust fund, and divide it into 4 individual stocks with dividends reinvested that could not be changed for 50 years, Johnson & Johnson would be one of those slots. It is really a collection of decentralized businesses, earning profit from almost every country on the planet in almost every currency, with good returns on capital and equity, nearly unassailable trademarks, and an industry that is virtually certain to grow as humans live longer.

      I don’t know if it will beat the market over the next 1, 3, or 5 years. But I do know that I would sleep well at night if my time horizon were an investing lifetime and I could reinvest the dividends tax-free.