Blue Chip Base

When building a stock portfolio I highly recommend building what I call a Blue Chip base. These are stable stocks which pay a dividend of at least 2 percent and have strong brand names. Usually these stocks do no make wild swings but are steady growing companies which over the long term should return 8 to 12 percent returns with the dividends. Below I have listed 4 stocks that I own as a Blue Chip base.
General Electric (GE) 2.8 percent dividend 21.44 P/E
Johnson & Johnson (JNJ) 2.3 percent dividend 17.36 P/E
Coca Cola (KO) 2.6 percent dividend 21.91 P/E
Altria Group (MO) 4.1 percent dividend 15.71 P/E

I will use Coca-Cola as an example of how a blue chip should work over the long term. I bought 100 shares of KO in Nov. 2004 for $39.66 per share. Today KO closed at $48.91 per share and I own 104.91 shares because I reinvested the dividends. Todays value is $5130.97 and my cost basis was $3986 including broker fees. This equals a profit of $1144.97 if I were to sell today, which I won't because it is a long term holding. This is a return of 28.7 percent over a two year period which equals 14.3 percent return per year. Not a bad return for a relativly safe company. The key to this strategy is to compound your dividends by reinvesting them. If you notice the extra 4.91 shares I reinvested are now worth $239.65.
To show this strategy over a long period of time read this example.
If an investor purchased $40 of Coke stock in 1919 and spent all the dividends, the total value of his investment at year end 1999 would be worth $298,218. If the same investor instead chose to reinvest his dividends in Coke his investment would be worth $5,866,413.00. Yes 5.8 Million dollars on a $40 dollar investment. Seems impossible but it's not with the power of compond interest.
The Rule Of 72 should be taught in every school. Every young person should understand compound interest and the simple secret to financial success, before they begin earning, investing and spending.

Step 1 of 2: How long does it take my money to double?
This step teaches you how to determine the number of years it will take for your investment or debt to double in value.
Divide the number 72 by the percentage rate you are paying on your debt, or earning on your investment. Here are two examples...
You borrowed $1,000 from your friend, who is charging you 6% interest. 72 divided by 6 is 12. That makes 12 the number of years it would take for your debt to your friend to double to $2,000 if you did not make any payments.
You have a savings account with $500 deposited in it. It earns 4% interest from the bank. 72 divided by 4 is 18. It will take 18 years for your $500 to double to $1,000 if you don't make any deposits.
Remember: 72 divided by the Interest Percentage is the number of years it takes to double.

Step 2 of 2: How many times will my money double?
This step teaches you how important it is for your money to double as many times as possible, and for your debts to double as few times as possible.
Determine how many years you will keep your investment before cashing it in. Divide that by the number of years it will take to double each time, the number you figured out in step one.
Now look at what happens to your money each time it doubles...
$1 ... $2 ... $4 ... $8 ... $16 ... $32 ... $64 ... $128 ...
You can see that it makes a big difference how many times your money doubles. If you can make it double only a few more times by making just slightly better investments, you can end up with many times more money at retirement, or whenever you cash in your investment.
Think about how fast your debts can double with high interest rates, such as those charged on most credit card accounts.