Monday, February 20, 2006

Financial Leverage: $3.04 - value of stocks & cash flow

So our 50 year old couple are anticipated to have a positive cash-flow after a few years, reaching over $91,000 annually, by age 80. In addition to this rather nice supplement to their living income, the value of the stocks they purchased should also be increasing.

Over the past 10 years or so, the average total annual return on the 12 stocks we picked for them increased by about 10% annually. However, about half of that was being received in annual dividends, meaning that the value (or cost) of the stocks was inflating by about 5% per year.

While this might seem small, remember that we wanted them to have an adequate cash-flow for living expenses, and some nice extras in their retirement years, rather than having to scrimp and worry.

Using the 5% projected annual increase in value then, the expected value of this initial $200,000 stock portfolio is:
  1. In 10 years: $325,000
  2. In 20 years: $530,000
  3. In 30 years: $864,000
and our positive annual cash-flow is projected as:
  1. In 10 years: $5,957
  2. In 20 years: $28,728
  3. In 30 years: $91,376 (loan payment has expired)
So not only do the dividends pay well, but the increasing base value of the portfolio means that they are offered some protection against inflation for their income component, plus they may have the opportunity to pass this on through their estate to loved ones, or favorite causes.

And again, this was all because they took a fairly modest risk at this time, using some leverage to buy a high yielding stock portfolio. We'll later examine this portfolio to see if it meets some basic criteria for diversification.


The Confused Capitalist

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