Albert Einstein called it "the most powerful force in the universe." He ought to know.
The modern world's most celebrated intellect was referring to the concept of compounding -- the practice of earning money on what you have already earned.
Fortunately, you don't need to be an Einstein to understand why compounding has also been called an investor's best friend -- or to see how you can profit from it.
Demetrios kept all of his acquaintance's money as commission, save for a single 19-cent drachma, which he invested in an Athenian bond paying 3% annually. After 2,000 years of reinvesting the returns from the 3% payout, according to the math, that drachma would have grown in value to be worth more than all the assets on earth.
Happily, you don't need to wait centuries for compounding to pay off -- you can begin to see the difference in a matter of months.
That's the central tenet to The Daily Paycheck, a premium advisory from StreetAuthority, under the guidance of Amy Calistri.
Amy provides investment ideas that offer above-average dividend yields and frequent, dependable distributions each month in The Daily Paycheck. The goal is to build a portfolio that over time will deliver a steady stream of dividend payments, or "paychecks," on top of better-than-average capital gains.
So far, so good: The average yield of a Daily Paycheck holding is 6.3%, almost triple the average yield of the stocks in the S&P 500. And since The Daily Paycheck's debut in December 2009, Amy's collected 1,574 dividend checks for a total of $65,000.
Amy's secret weapon? Nothing less than "the most powerful force in the universe" -- on steroids.
In The Daily Paycheck, Amy won't even look at a stock or a fund unless it pays a steady dividend. Then, each time she receives a dividend, Amy uses the payout to buy additional shares -- thereby compounding her original investment.
Now, a typical income portfolio will hold a few dividend payers, and maybe a fund or two. And, yes, you'll receive dividend checks every three months, or so -- a "quarterly paycheck," if you will, that when reinvested will likely deliver outsized returns over time.
However, The Daily Paycheck is anything but typical. For one thing, the advisory tracks more than 50 holdings spread out among three distinct portfolios. Moreover, over 30% of those holdings pay dividends on a monthly basis.
The increased frequency of payments means two things: 1) Amy's income is spread out over 12 months of the year instead of four and, 2) thanks again to the power of compounding, the income potential is magnified.
Bob: We've seen how compounding could have worked for the Ancient Greeks. How can it work for the rest of us?
Amy: If you invest $10,000 in a security with a 7% yield, you will make $700 a year in income. If you take those dividends and reinvest them, your holdings will generate $982 a year after five years. After 20 years, your investment will generate $2,709 in dividends -- 287% more than if you hadn't reinvested your dividends. And here's the great thing: Even if the security never gains a penny, after 20 years, your $10,000 investment will grow to $39,697.
Bob: In the past you've cited both conservative investments, and aggressive ones. Who makes up your Daily Paycheck audience?
Amy: The beauty of The Daily Paycheck strategy is the range of investors it works for. Obviously, I have a lot of Baby Boomers who are starting to transition their growth portfolios to portfolios that can generate income for their pending retirements. By starting now, they can build a portfolio that generates more and more income in a relatively short amount of time. For instance, my portfolio generated 18.1% more income in December 2011 than it did in December 2010.
I have a number of retirees that are more interested in current income. They tend to do less dividend reinvestment. But with a portfolio full of securities that have an average yield above 7%, they find a lot of ideas to suit their needs.
And I'm a little surprised -- and jealous -- at the number of younger people who subscribe to The Daily Paycheck. I wish I had started with this strategy when I was their age. With decades of compounding ahead of them, they are capable of amazing growth -- without suffering though the volatility associated with aggressive equity portfolios.
Bob: You mentioned volatility or, more specifically, a relative lack thereof. I take it you consider that to be another key advantage of The Daily Paycheck?
Amy: Absolutely. Obviously, every investment is risky. But income-generating securities tend to be less volatile than the overall market. As a result, my portfolio is 26% less volatile than the S&P 500 Index. And since I specifically select investments that I believe are best suited for dividend reinvesting over the long term -- strong, stable income providers -- my subscribers worry less about getting in and out of positions when market conditions change. It really is a low-maintenance strategy.
When the market is turbulent, I feel bad for investors with aggressive equity portfolios. I know they lose sleep the night after the market plummets. I, on the other hand, actually look forward to checking up on my portfolio on bad market days. I love to see that I'm reinvesting my dividends at incrementally lower prices and locking in incrementally higher yields.
I have a lot of friends who stress over their aggressive portfolios during the summer when markets can be more volatile. I like knowing my subscribers can spend less time worrying about their investments and enjoy more time doing the things they like to do.
Note: To date, Amy has collected a total of $65,000 in dividend checks since she started using her "Daily Paycheck" strategy in late 2009. Meanwhile, her real-money portfolio has grown from $200,000 in December 2009 to $310,000 today.
Amy's strategy has been so successful, StreetAuthority has encouraged her to get the message out to more people. That's why, for first time, she went in front of a live audience at St. Edwards University to present exactly how her Daily Paycheck strategy works. We encourage you to watch her exclusive presentation if you haven't already. You won't be disappointed.