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

A member of my 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 compound at 10% per annum, with the dividend reinvested, over the next 30 years.  Of course, there is no guarantee that will happen and the company, like any business, could go bankrupt leading to massive and total loss, which is one of the reasons it is important to be reasonably diversified.  Still, for the sake of our illustration, based on his special “savings” program, when he pays off his home, the deed would be mailed to him and he would be completely debt-free.  At the same time, this small direct stock purchase plan would results in him owning nearly $600,000 worth of shares of U.S. Bancorp common stock!  Based on its historical dividend yield, this would 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, or 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 would own his home outright, have $600,000 in this account virtually no one knew about, and be earning $33,000 per year from checks that were 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 who behaved in optimal ways, including investing 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

Update: Several years ago, this post was placed in the private archives.  Due to requests from the community, I restored access to it on 05/20/2019 as part of a project meant to make articles, essays, and other content available if I felt they had some degree of educational, academic, or entertainment value.  At that time, I made minor edits to the post to refresh it, including updating the format to better fit with the new site design.  Reading the piece nearly a decade after it was originally written, I want to reiterate again that none of this was intended as investment advice and that the point was not to discuss a specific stock – as I say above, any business can go bankrupt, this particular family member at this time happened to select U.S. Bancorp because he thought it was undervalued (something that turned out to be the case as the rise in quoted market value and dividend payouts for bank stocks since the Great Recession has been extraordinary) – but, rather, to point out that the way in which you allocate capital can have a substantial effect on your net worth and income.  That is, the rules of corporate finance apply to your personal household.  The exact same initial stream of cash, put to work in ways that offer a compounding advantage, might seem insignificant on a year-to-year basis but are rather breathtaking after 10, 20, 30+ years.  No reasonable person would want their entire investment portfolio to consist of a single stock (as I’ve reminded you in the subsequent years, it is important to pay attention to your portfolio weightings!) but going through your life and career accumulating productive assets that produce what you hope will be ever-increasing amounts of cash per annum, and paying reasonable prices for those assets while maintaining a strong, liquid balance sheet that survive recessions and depressions, has been a winning economic formula for as long as civilization has existed and there is no reason to think that is going to change any time soon.  Different people approach this differently.  Some place a heavy emphasis on real estate, while others prefer common stocks.  Some operate their own private businesses while others are specialists in accumulating commodity royalty streams such as those involving oil, natural gas, and/or mineral rights.  The underlying philosophy is what matters.  Try to find intelligent things to do, then do them.  It can be amazing how much easier things get over time.