Finance: Rule of 72

Woodson

Woodson

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Hey fellas... turning 33 in a couple weeks and looking to increase my returns for compound interest/ retirement / etc...

Does this rule still hold true? TIA.

Rule of 72

One way of doubling your money is by using the rule of 72. The rule of 72 essentially says that when you divide the number 72 by the return rate of your investment (i.e. by the dividend that your stock pays), you will be able to determine how many years it will take for your investment to double. Let us take an example. One stock that I own is Annaly [COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif][COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif]Mortgage[/FONT][/COLOR][/FONT][/COLOR]

REIT whose symbol is NLY on the New York Stock Exchange. Currently, its dividend is paying 16%. Dividing 72 by 16, we come up with 4.5. That means that my investment will be twice its value in 4.5 years. In contrast, were I to leave all my money in the [COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif][COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif]bank[/FONT][/FONT][/COLOR][/COLOR] and earn only 2% on my money, applying the rule of 72, the money in my bank would take 36 years to double. The point is this: When investing for the long term, you should look for stocks--among other things--that have high [COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif][COLOR=#297ccf! important][FONT=Arial, Helvetica, sans-serif]dividends[/FONT][/FONT][/COLOR][/COLOR], say, 8% or more. Why? Because the higher your return, the faster your money doubles.
 
dawgball

dawgball

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by the return rate of your investment (i.e. by the dividend that your stock pays)
Click to expand...

The rule of 72 still applies, but the quote above is very strangely worded.

Your "return rate" is not necessarily equal to the dividend that your stock pays.

Your return rate would be percentage in price change PLUS the dividend paid.

This number could be higher or lower than the dividend based on price performance.

Simply put: rule of 72 states that if you average a 10% annually, then it will take approximately 7 years to double. If you average 4% annually, then it will take approximately 18 years to double.
 
T

TAZ

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Rate of return does not equal dividend rate. Rate of return is more closely related to the appreciation of stock.

For example if you invest $1000 in company X which is worth $10 a share you would get 100 shares. If they paid a 16% dividend, or $1.60 per share, you would get $160 in cash. All things being equal on the day that the dividend is paid to you the stock price will drop by 16%. So now you have 100 shares worth $8.40 each and $160 in cash, the same $1000.

If the stock were to appreciate by 16% after paying that dividend and this happened every year for 4.5 years, then you would double your money. However, you have not accounted for income tax and capital gain tax when you sell it to get your money in hand. If this is a retirement account, disregard the last part.
 
Woodson

Woodson

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Dawg/Taz,

Thank you for clarification. I just had an epiphany and it was quite eye opening. How I've put such little thought in the one area that is going to contribute most to my and my families well being later in life.

Can I ask a suggestion for a couple "easy" reads to better understand and educate myself. You both seem to have a very good understanding of finances and your input and suggestions are appreciated.
 
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