Coca-Cola Direct Stock Purchase Plan and Coca-Cola Dividend Reinvestment Plan or Coke DRIP Literature

How We Used Shares of Coca-Cola to Teach My Youngest Sister About Investing (and Why the Cycle of Consumption and Financial Stress Starts as a Teenager for Most Americans)

Investing in The Coca-Cola Company stockWhen I was a senior in high school, I bought my youngest sister, who was first grader at the time, a single share of Coca-Cola common stock for her 6th birthday.  I had it framed with an engraving of the first part of Deuteronomy 8:18 placed under it, “You shall remember the Lord your God, for it is he who gives you power to get wealth”.

I registered the ownership as a uniform gift to minors, naming our father as the trustee.  He and my mom decided to have $50 each month taken out of their personal checking account to purchase additional shares of stock for my sister through the Coca-Cola direct stock purchase plan / dividend reinvestment plan (DRIP).  This tiny amount resulted in $600 per year getting transferred to the Coca-Cola DRIP.  Instructions were given to the plan sponsor to reinvest all dividends to buy additional shares of Coke stock.  (Why Coca-Cola, especially when I told you how our grandpa could have made millions by investing in Pepsi due to his cola habit?  When she was six, my sister preferred Coke to Pepsi and we let her choose between the two businesses.)

In the decade that has passed, we have experienced the dot-com collapse, the September 11th terrorist attacks, subsequent recession and further stock market collapse, the rise and fall of the housing bubble, two wars waged halfway around the world, expanding federal deficits, staggering trade imbalances and near double-digit unemployment.

Today, the Account Has Beat Inflation By 3.5% Compounded … Even Though Shares of Coca-Cola Stock Are Still The Same Price (Really)

Despite all of these problems, and the fact that Coke still trades at roughly the same price it did when the first share was purchased, the account has grown at roughly 6% compounded.  How is that possible?  Through the power of reinvested dividends and the influence of dollar cost averaging where falling stock markets allow your regular contributions to buy more absolute shares, lowering your cost basis over time.

The Kennon Retirement Insurance Plan

One of the Things That Helped Me …

From time to time, you may come across reference to my “stupidity” insurance or my “reserve” fund.  I’ve had a bunch of readers write me over the years and ask about various comments I’ve made so I thought it might be useful to explain it.  My parents, siblings, and Aunt Donna have always known about my investing but virtually no one else did when I was a child (by the time I got into high school, though, it was all I talked about so hiding it was no longer an option).

For those of you who are older than 14, this isn’t going to do any good unless you have children or grandchildren that may benefit from some personalized version of it (which is why I’ve never written about it).  By the time I was older, we had put almost all of my siblings on a modified system that helped to guarantee they would enjoy the same outcome in their own retirements.  This plan has some resemblance to the dividend trust program I described in an article on student loan debt.

Misconceptions About Wealth

How The Marketing Industry Continues to Convince Average Americans They Know What a Millionaire Looks Like

A few days ago, I quoted something from one of Dr. Thomas J. Stanley’s books: “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.” For the past few days, I’ve been studying more about average household income in the United States and, specifically, the purchasing habits of the wealthiest Americans.  It is exactly what I’ve experienced in my own life, and fits precisely with those I know.  Yet, so many of my friends and family continue, almost obstinately, to attempt to emulate a certain “lifestyle” by building a bigger house or buying a nicer car, without first getting their financial foundation set.

Most Millionaires Never Made More than $80,000 in Annual Income

A perfect example: I see friends in New York order Grey Goose vodka, which Stanley discusses in his book.  Chemically, it is virtually identical to every other vodka brand because almost all vodka companies use a “base” from one of three suppliers (with Archer-Daniels-Midland being the largest), with the base shipped in giant tanker trucks across the highways, or in railroad cars.  So, for all intents and purposes, “the Goose” is identical to Smirnoff.  Put plainly, that $60 bottle you  use to signal that you are wealthy when, in fact, you are broke and have credit card debt?  It wasn’t that long ago it was sitting in the back of a chain-smoking truck drivers’ cab at a dirty rest stop in the middle of Nebraska.

Buying the luxury items does not make you a success.  The success comes from having lots of cash coming in, little debt, and the ability to be financially free so you can take control of your own life and spend time how you want with your family and friends. You are not a success because you wear Chanel glasses.  They actually get you further away from your goal.  You are a success if you have the cash to pay for the Chanel glasses using dividends, interest income, and profits from your investment holdings.  The difference is like a war hero.  It’s against the law to wear medals you didn’t earn in combat (seriously).  In the economic world, however, you can fake it by purchasing the “badges” even if you do it on credit at 30% interest and haven’t earned them.  Prada, Gucci, Montblanc, Grey Goose, Burberry … it doesn’t matter.  If you are financially independent, these are legitimate, wonderful ways to award yourself.  I actually own $200 Burberry ties and $1,200 Montblanc pens.  The point is, those things came long after I had built my first business and was on to my second and third, my retirement accounts were funded, my taxes were paid, and I had money saved for an emergency.

How Investors Who Practiced Dollar Cost Averaging Were Richer Within Only 2 Years of the Credit Crisis Meltdown

Citing data provided by Vanguard, one of the premier mutual fund and 401(k) providers in the world, The New York Times recently reported that 60 percent of 401(k) accounts now have more money in them than they did before the stock market crash and worst recession since the Great Depression began two years ago.

That may not seem possible given that the Dow Jones Industrial Average collapsed from 14,000+ to 6,000 and has only made its way back up to 10,000.  For those who know how dollar cost averaging, dividend reinvestment, and compounding work, this isn’t surprising.  You’d never know that, though, due to the incomplete information provided by the financial news networks, magazines, and newspapers.

Dollar Cost Averaging and 401(k) Balances

The average 401(k) investor doesn’t realize that substantial research has shown 99% of real, inflation-adjusted returns come from reinvested dividends.  That means that changes in the value of your mutual funds are almost meaningless.  Over time, the compounded value of your account as a result of plowing dividends back into additional shares of the fund, is where the real money and wealth originates.  When coupled with dollar cost averaging, and the leverage you get from an employer’s 401(k) match, the wealth that flows onto your balance sheet over the years be astounding.

Dollar Cost Averaging Your Retirement AccountHere’s how it would work.  Imagine you are employed by a regional hospital that offers 100% matching on the first 5% of salary you contribute to your 401(k) account.  You earn $50,000 per year and contribute 10% of your paycheck to your retirement fund.  That means that each year, your contribution consists of $10,000 deposited by you, plus $2,500 in matching funds from your employer ($50,000 x 5% = $2,500 x 100% matching = $2,500).  This equals a grand total of $12,500 deposited into your 401(k).

This is important: By saving the $10,000, you not only got a tax deduction of as much as $2,500, you received a $2,500 matching contribution from your employer.  Combined, this represents an instant 25% return on your money in extra cash deposited into your 401(k) and an additional 25% return in the form of lower taxes, meaning you will have more in your paycheck as a percentage of gross pay than you would have without the 401(k) contribution for a total combined 50% return on money.  You could literally park the cash in Treasury bonds and make more by retirement than you could from virtually any other source due to these dual factors.  People who criticize the 401(k) plan often foolishly ignore this source of “instant” income.  If the stock market collapsed 50%, your account would fall to $6,250, representing a loss of only 37.5% of your money.  Likewise, if the market went up 50%, your account would have a value of $18,750 ($12,500 + 50% gain = $18,750), representing a return of 87.5% on your money, that is, the actual $10,000 you deposited.

When you combine the inherent leverage you get on your money through the employer match and the tax deduction with the benefits of dollar cost averaging, the results are breathtaking.  As the stock market crashes, your regular contributions, combined with reinvested dividends and employer matching, buy far more shares of stock.  During the Great Recession and total market collapse in March 2009, when investors watched the Dow Jones Industrial Average fall by roughly 43%, their regular investments were buying more absolute shares of stock in the Dow components, such as General Electric, Johnson & Johnson, McDonald’s, Microsoft, and Coca-Cola.  As a result, it didn’t take long for the cost basis of the 401(k) account to fall rapidly, lowering the break even point.