Two Different Ways To Spend $4,000-$6,000

          I was talking with one of my soldiers (an E-4) today about his life plans for when his enlistment ends after we get back to Hawaii (he is planning on leaving the service and using his GI Bill benefits to go to school while working part-time).  I was pleasantly surprised to find out that he had actually saved a respectable amount of cash during his five years in the Army and had stored it in CDs, savings bonds, and savings accounts.  While not the best way to grow his money it actually puts him way ahead of the vast majority of his peers in terms of money management.  I have repeatedly advised my soldiers to not take their un-taxed deployment money (which for a single soldier, regardless of rank, is a pretty respectable pile of cash) and spend it on the sports car of their dreams when they get back to Hawaii.  Now delayed gratification is a tough behavior to adopt on a regular basis and is especially difficult for a young 20-something who just spent a year in a combat zone to care much for when he returns home with a lot of money in his pocket, nevertheless I point out to them that I am also a 20-something who is on the same combat tour as them and that there are more productive investments available to them.  To make my point I compared the cost of various expensive products to the payoff from purchasing an equal amount of stock in a solid dividend paying company. I actually managed to get some to admit they were impressed with the results!

               My approach was simple: from September 1^st through October 1^st I will have invested between $4,000 and $6,000 in dividend stocks (the last couple of thousand dollars are still uncommitted).  I went on Amazon.com and searched through various product categories with that corresponding price range.  I found some admittedly pretty cool products, along with others that I couldn’t comprehend ever owning.  The point I wanted to make to my soldiers was that while on a cash basis I could afford to buy one of these products (without using credit!) that I would actually be better off investing the money in dividend stocks.  The caveat is that I have already set up an emergency fund that can cover six months of expenses (based on living in Hawaii) and my Roth IRA has been maxed out for the year.  All of my long term savings goals have monthly contributions allotted to them and the remainder of the cash, aside from a pittance that I keep in checking for discretionary purchases, goes to my investment account.  That said, here are a couple of examples of what I found:

          This is the Mitsubishi WD-92840 92-Inch 1080p Projection TV…yes, seven feet eight inches of high definition entertainment. I’ll admit that the existence of such a thing got more attention from me than it should have. Of course my next thought was how hard it would be to find an apartment in Hawaii with enough wall space to accommodate it (answer: very hard!). To be fair it is being sold for 3% off, lowering the price to a mere $5,799.99. Now if someone actually bought this I would hope they never bought another television set, projection or otherwise, ever again, in order to maybe have a shot at letting the entertainment value that it provides to balance out the cost paid over time. Personally I think a more productive use of that much cash would be to purchase stock in dividend powerhouse like Johnson & Johnson (JNJ). At the time of this writing JNJ is trading at $63.20 with a yield of 3.61%, meaning an investment of $5,799.99 would get you 91 shares (I’ll exclude fractional shares) providing an annual income of $207.62. Furthermore JNJ has a five-year dividend growth rate average of 8.73% with enough protection for the dividend to ensure continually increased payments for years. That projection TV is pretty cool but it won’t pay you more than $200 a year to own it!

          These are free-standing floor speakers that provide excellent sound, enhance your entertainment experience, and apparently fit elegantly into any room. They also cost a cool $5,999.95! I’m not much of an audiophile but I’m pretty sure I can get a decent pair of speakers for just a few hundred dollars and to be completely honest I’ve always been content with the sound from my television. Thus in the spirit of lower cost merchandise I suggested retail giant Wal-Mart (WMT) as a better destination for such a significant amount of cash. At the time of this writing WMT is trading at $51.52 with a yield of 2.83%. If you bought stock instead of the speakers your portfolio would be the proud new home of 116 shares of an American icon. The owner of these shares would also benefit from an annual income of $169.13 as well as Wal-Mart’s blistering annual dividend growth rate which boasts a five-year average of 16.86%. Projecting those numbers out into the future paints a much more interesting financial picture than owning a pair of speakers that will only depreciate over time and will never pay you anything to provide some downside protection.

          Every dollar has value. A dollar under the mattress will lose value over time. We can protect the value of our dollars and even increase their value through the use of various investment vehicles. Dividend growth stocks provide the three-pronged benefit of the potential for capital appreciation, annual income, and an increase to that income every year that supercharges the earnings produced by compounding interest. While it is important to remember that money is not everything and that value can be had through employing your cash for the sake of experiences and the possession of material objects I would suggest that a balance must be struck: investments should be utilized to guarantee financial independence which in turn can provide the discretionary cash that provides access to experiences and possessions that cannot be had for free.

Full Disclosure: Long Johnson & Johnson and Wal-Mart

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