How Loyal Have You 3 Been?

Last year, I gave my three sons a different kind of Christmas present. I gave each of them seed money to open a Loyal3 account if they would commit to buying $30 in shares every month, for 30 years – about a dollar a day. They accepted the gift and started investing in January, each choosing one stock from the 50 or so offered at Loyal3.

This year, I turned the tables on them by asking for a different kind of Christmas present. I wanted them to e-mail me an update of their accounts and to do a little reflection on their first year as stock owners. I also wanted to nudge them into thinking about next year and their future as investors.

I made my intentions very clear. I wanted to use their Christmas presents as a source for another DivGro blog post, one in which I would share the perspectives of three young men just starting out their respective journeys in the world of investing. Of course, I promised not to reveal their identities but to use pseudonyms.

Learning by Doing

In 2002 when we arrived in the United States, I realized that I was essentially financially illiterate. I had secured a new job in a new country, exchanging our life savings at a horrendous exchange rate of 12-1 (South African Rand to U.S. Dollar). After buying a car, we had almost no money left over and I learned that depositing the little money we had into a U.S. bank account would actually cost us money, not earn any interest! 

My wife and I took a financial course and we heard about mutual funds, IRAs, and 401(k)'s. I knew about stocks, because my father occasionally traded stocks on the JSE, but I had to google "mutual fund" to learn what mutual funds were and how investing in them differed from investing in stocks. I started reading about investing and googled terms I didn't understand. In the beginning, I spent more time googling than reading. 

Over the next 12 years, I've learned a lot about investing. Never having the temperament to fake trade

using a "paper money" account, I jumped in with both feet and risked real money. I subscribed to a 

newsletter promising market-beating profits and soon thereafter I was inundated with subscription offers from other pundits – not only do investment newsletter publishers sell you their products, they also make money selling your address to their own competition!

Despite my disapproval of being promoted as someone with an interest in investment newsletters, I've learned a lot by reading and following the investment advice of that first monthly newsletter. I've subscribed to (and cancelled) many other investment newsletters, all the while learning by doing. And in 2013, I started this blog to share my experiences in managing a portfolio of dividend growth stocks, doing my own analyses and stock selections. 

I'm no longer financially illiterate. I could tell my sons a lot about investing and I could teach them sound investment principles. I could show them the power of compounding using a future value formula. I could tell them which stocks to buy and which ones to avoid. I could opine about what percentage of their earnings they should be investing. 

None of the above would be as effective as actually learning by doing. That's why I nudged my sons along with a little seed money, hoping that they would play along and choose to see through this crazy commitment of investing about a dollar a day for 30 years. Hopefully, in time, they'll learn something about investing and become financially literate earlier in life than I did!

Why Loyal3?

Loyal3 provides fee-free investing. They've developed a technology platform to allow people to buy stocks in popular companies through Facebook or the web, investing as little as $10 at a time. U.S. residents of legal adult age with a checking account can buy stock. 

Fee-free sounds too good to be true, right? Well, Loyal3 developed an interesting business model. They provide services to companies, such as raising capital, lowering costs of individual shareholders, and increasing brand engagement. Companies pay Loyal3 for their services, and indirectly for the fees associated with trading their shares. 

Loyal3's business model has some inherent limitations, but none of these are of concern to my sons (or other beginner investors): 

• Currently, Loyal3 offers only 64 stocks, including dividend payers such as Coca-Cola, Disney, Intel, and Target as well as non-dividend payers such as Amazon, Berkshire Hathaway and Google.
• All purchases are in dollar amounts and will include fractional shares. The maximum purchase allowed is $2,500 per stock per month. 
• Selling shares involves a combined order process, typically executed only once a day. This means that the price you receive will differ from the market price of the shares at the time you place your sell order. 

First Year Results

I like movies, so I'll choose pseudonyms for my sons based on characters in three of my favorite movies. The first is Howard Bannister, the absent-minded music professor played by Ryan O'Neal in What's Up, Doc? The second is Andy Dufresne, a banker sentenced to life imprisonment for murders he claims not to have committed, in The Shawshank Redemption. The third is the barrister Archie Leach, played by John Cleese, who is seduced by the con-artist Wanda in A Fish Called Wanda. 

Howard invested in Google (Class C) (NASDAQ:GOOG) and Google (NASDAQ:GOOGL):

Seed money	$100.00
Monthly contributions ($30×12)	$360.00
Total capital invested	$460.00
Account balance (2014-12-24)	$437.32
Performance	-$  22.68 (4.93% loss)

 

Says Howard:

I knew my Dad had been writing a blog about dividend growth stocks for some time and I had some idea what it was all about, but to be honest, I wasn’t exactly chomping at the bit to become as financially savvy as he is. But I did some reading about the various stocks on the list, and even though it doesn’t pay any dividends, I settled on Google for my first stock. I figured, admittedly ignorantly, that since I’d be investing for a long time to come, Google would be a good buy since they are known for their vision and innovation. 

I agree with Howard's intuition about Google, although I wouldn't buy shares at this time. My main focus is dividend growth stocks and, as Howard points out, Google doesn't pay any dividends.

Andy invested in Coca-Cola (NYSE:KO):

Seed money	$100.00
Monthly contributions (5×$30 and 7×$25)	$325.00
Total capital invested	$425.00
Account balance (2014-12-24)	$449.47 (incl. $8.76 dividends)
Performance	$  24.47 (5.76% gain)

 

Says Andy:

I chose Coca-Cola because they offer dividends and for the last 51 years they have grown their dividend. Over the course of the year I got $8.76 worth of dividends from Coca-Cola. When I started out I did not expect to have made a total gain of $24.47; I expected it to be a lot less. 

As a Dividend Champion, now with an impressive 52 year streak of dividend increases, I would be interested in buying shares of Coca-Cola for DivGro if I can do so at a discount to fair value of at least 5%.

Archie invested in Intel (NASDAQ:INTC):

Seed money	$100.00
Monthly contribution (1×$30 )	$  30.00
Total capital invested	$130.00
Account balance (2014-12-24)	$194.48 (incl. $4.56 dividends)
Performance	$  64.48 (49.6% gain)

Says Archie:

I bought shares of Intel with the seed money and with my January deposit. Due to my snowboard accident early this year, I missed six weeks of work, which caused me some financial stress. My recurring deposit and monthly purchase order was cancelled in February and I did not reinstate it because we moved into an apartment and I had rental payments to take care of. 

Intel is one of my DivGro holdings. I bought 120 shares in January 2013 and decided not to sell when Intel failed to raise their dividend this year. The stock did very well this year, so I'm happy that I kept my shares (and that Archie made some good money on his investment).

Lessons Learned an Looking Ahead

Howard says he is still learning the basics of investment and the hard truths of financial prudence. He likes Loyal3 because it allows him to be pretty much hands-off. Investments are automatic if you set up a recurring fund transfer from your checking account and a corresponding monthly buy order. 

Says Howard:

I would like to check in more often to monitor the share price and consider whether I'm investing in the right stocks. I'm not going to sell Google, but this year I'm going to switch to investing in a stock that pays dividends. I want to look for a stock that has a long track record of increasing dividends. 

My goal for 2015 is to invest 50% of my income. I will start by increasing my monthly buys at Loyal3 to $50. For the remaining money, I'll research other investment options.

I think this project we started in 2014 is a valuable learning exercise and a great way to get me started on securing my financial future.

Andy was surprised to see a gain of about $25 in his Loyal3 account. He likes that his invested money earned him dividends. He realizes that he still has a lot more to learn, but so far, he says, its been a great learning experience.

Says Andy:

I will definitely begin to invest more in 2015 and save more of the money I earn. My goal for 2015 is to triple my Loyal3 balance. I'll do that by doubling my monthly transfer and buy order. Whenever I'm able, I'll put in more than $50.

For now, I'm going to keep investing in Coca-Cola, but when I can, I would like to start putting money into other stocks. 

Loyal3 is a great way to invest money, especially for young people and beginners who have little understanding of how the stock market actually works. I've recommended Loyal3 to many of my classmates who were interested in investing but had no idea where to start. 

Archie is disappointed that he did not reinstate his contributions when his finances recovered sufficiently. He decided to do a catch-up contribution of $200 this month to buy more Intel shares.

Says Archie:

I'm glad for the gain, but it would have been better if I'd invested more consistently. In addition to my $200 catch-up contribution, I want to invest $45 each month from January to August to make up for missing most of my contributions this year. If the increased monthly amount seems doable, I'll just continue with it. My goal is to have a balance of $1,000 by December 2015.  

I like Loyal3 because it is easy to use and I like the stocks being offered. I definitely want to continue using it. 

Concluding Remarks

I'm (still) a happy dad! So far, this "project" (Howard's word) is a success. My sons are a little more investment savvy than last year. Two of them are showing gains and earned dividend income. The other made the full complement of 12 monthly contributions of $30 each, maximizing on dollar-cost averaging into Google stock ownership. And I'm happy to note that all three my sons are planning on raising their monthly investment amounts. 

This week, I pointed out to my youngest that his money worked for him. The small amount of dividend income he received is infinitely more than I had earned in dividend income at his age! Whereas I bought my first stock at the age of 40, two of my sons have bought their first shares long before they would turn 30, while the youngest in not yet 20...

Personally, I've learned a lot from this exercise, too. Circumstances made it hard for Archie to keep contributing and I only became aware of this because I asked my sons for this different kind of Christmas present. I'm sure it was hard for Archie to oblige. Yesterday, I apologized for driving him into a corner with my request. It was never my intent to create a stressful situation with this idea. 

Furthermore, I now see that last year's present, although lovingly intended and enthusiastically accepted, had some strings attached. While I still think it is an excellent thing for them to do, I want to make sure that they understand that continuing with this project is voluntary. Therefore, I'm releasing my sons from their commitment to buy $30 in shares every month, for 30 years. Also, they can choose to close out their Loyal3 accounts if they wish to do so. 

Of course, I dearly hope they would choose to continue with this crazy project and choose to see it through (now that the strings are detached). I'm convinced that if they do, they'll learn some interesting things along the way. And perhaps, they will choose to give me the same different kind of Christmas present next year.