Buy Stocks, not Bikes

If you had invested money in Apple Inc. 10 years ago, your money would have grown 2704% (ignoring inflation)
If you had invested money in a bike 10 years ago, your return on investment is -99% + an 80000% gain in awesomeness

I’ll let you decide whether you would rather be rich or awesome…

So this post has nothing to do with bikes (the title is just a teaser to get my cycling friends to read this far into a post about stocks). I want to share something called dividends with people who may not be so familiar with investing.

Risk-averse people often stow their money in CDs or high-yield savings accounts, like those 5% accounts at ING. Many do not realize that companies pay stockholders a fixed amount, called a dividend. A dividend is a fixed payment, per share of stock, that a company will pay you, just for holding the stock. The dividend rate is often called the “yield” of a stock. Citi Bank currently pays a 4.61% yield, Verizon 3.76%, Bristol Myers Squibb 3.95%, Pfizer 4.91%, Bank of America 5.38%, and there are many more (many small companies will even pay upwards of 30% yields, but these are more risky than the larger, more established companies).

By putting your money in a high-dividend stock, you are getting a comparable interest rate to a bank account, but have the added upside of the stock’s normal appreciation. There is the risk that the stock goes down, but these large, well-established companies almost always appreciate over a long time frame.

In some sense, it’s like playing a slot machine that spits out a nickel each time you pull the lever, and–almost always–pays an average return of 10-20% if you play it for a year. With companies like Zecco offering free stock trades, you also don’t have to spend any cash on commissions/fees etc.

As for that 2704% return I mentioned earlier? Well, that can buy a guy a lot of Pinarellos.

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~ by wcuk on August 2, 2007.

2 Responses to “Buy Stocks, not Bikes”

  1. However, unlike CDs, dividends are not risk free. For example, GM cut their dividend 50% about a year ago. For the completely risk-averse investor, a CD or a Treasury note is what is called for.

    Plus, large, well-established companies do not almost always appreciate over a long time frame. Also, dividends are a company’s way of saying, “here, we can’t make good enough use of these profits (a.k.a. reinvest them with high returns) so we’re giving them to you.”

    Finally, your slot machine analogy is not quite right. While the long-term inflation-unadjusted return of the S&P 500 may be around 11%, yearly returns are almost never 11%. So it’s more like if you play the slot machine for 10 years, you’ll almost always get paid an average return of 11%.

    And one last comment vis-a-vis investment in bicycles: amassing wealth is a means to an end. When I lay on my deathbed and think back on that fateful summer of 2004 when I bought my first (real) road bike, I won’t rue the day that I decided to forgo $1650 compounded 11% annually for the rest of my life. I will instead be content with the realization that I decided to forgo %1650 in return for a more fulfilling and purposed life than merely amassing wealth could have provided. And as for your Apple, Inc. example. I’d gladly have 10 years of bike riding and racing than have $42,000 at the end of that ten years without the bike in the meantime.

  2. I thought the 80000% gain of awesomeness was enough to hint I would take the bike too.

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