Apple (Nasdaq: AAPL)
has a monster of a problem.
The maker of iPhones and iPads has roughly $137 billion of cash
on its balance sheet. On paper, that looks like $137,000,000,000 --
or more than the gross domestic product of Ecuador.
That doesn't even count the money the company is raking in this
quarter. It's just the cash it has sitting in the bank right
This might seem like a nice problem to have... After all, an
ample cash reserve is important for independence and security.
But having too much cash, especially at current record-low
interest rates, may be crippling Apple's ability to
For the better part of the last decade, Apple was a model of
innovation and financial performance. The company enjoyed a track
record of introducing sleek, game-changing products and services,
including the iPod and iTunes. But it wasn't always a smooth ride
In 1997, Apple was in deep financial trouble. The company
brought back its visionary founder Steve Jobs. But Jobs alone
couldn't save Apple... he needed money. The only way Apple could
save itself was to grovel before its arch rival
and borrow $150 million.
Apple never wanted to be put in that position again, so it
adopted a corporate culture of hoarding cash. Apple continued to
fight its old demon long after the company had plenty of money. And
now Apple has created a monster drag on its potential
But what does Apple's problem have to do with you?
The chances are good that you created the same monster. And now
it is dragging down your retirement plan's growth.
Investors were rightly horrified by the market's collapse in
late 2008 and early 2009.
Most realized all too late the importance of maintaining an
adequate cash balance. But just like Apple in the aftermath of its
financial crisis, investors appear to be overcompensating. In the
three years that followed the market crash, the growth in U.S.
savings deposits puts Apple's cash war chest to shame.
The desire for security is understandable.
But keeping too much cash on the sidelines earning an
average 0.6% interest rate in the short term can jeopardize
retirement security in the long term.
Even when investors realize this, they are still unwilling to
take on the market's volatility and/or believe the market may
But there is a strategy that could help investors ease back
into the market and achieve better growth with less
Most investors believe that to achieve growth, they must own
aggressive securities or be in on what my colleague Andy
Obermueller calls "The Next Big Thing." But there is a
tried-and-true investment strategy that provides a gentler path to
growth. By reinvesting the dividends from safer -- even boring --
securities, investors can create a less volatile portfolio without
For instance, if you invested $10,000 in a stock with a yield of
5% and automatically reinvested the dividends, then in 10 years'
time, your investment would be worth $16,289. That 62.9% return
assumes the stock never appreciates a single penny.
Of course, that's how it works in theory. How does it work in
the real world? So far, even better...
Concerned by the growing number of investors sitting in cash, I
launched a real-world, dividend reinvestment experiment called
The Daily Paycheck
In December 2009, I started with $200,000 in cash and slowly
invested it in carefully selected dividend-paying securities. I set
up my brokerage account to automatically reinvest the dividends.
Since its inception, my portfolio has gained 38.9%, slightly
outpacing the S&P 500 Index
with 42% less volatility
Everyone knows the market is risky. But what few people -- and
even some companies like Apple -- fail to realize, is the long-term
risk of sitting on too much low-yielding cash. Even at the current
rate of inflation in the United States, money sitting in a
low-interest checking or savings account will be worth less next
year than it is worth this year.
And imagine if the rate of inflation shot up?
To put it plainly, you've got to let your money grow in order to
Action to Take -->
If you've been sitting out on the sidelines, then dividend
reinvestment is a good way to ease yourself back in the game.
Consider running your own real-world dividend reinvestment
experiment. Start slowly. Pick one or two stable dividend-paying
securities and watch the growth that even a few months of dividend
reinvestment can deliver. And if you want to know more about my
dividend reinvestment strategy, then
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