I don’t need to tell you that this dip is a massive long-term buying opportunity. You’ve likely heard the same thing a million times over the last week.
Instead, let me show you just how much money you can make over the long term, even if you only have a pretty small nest egg to invest. The results will surprise you.
A million-dollar decision
Say you have $25,000 to invest today and a timeline of 40 years until you’re looking to retire. We’ll assume that under normal conditions, the stock market will deliver a 9% annual return.
But if you buy the dip — and then add to your positions during any subsequent periods of market weakness — then you can add just enough to your long-term results to boost your return potential ever so much. Instead of a 9% annual return, I think it’s fair to say investors who are buying during this turmoil can expect to earn 10% annually going forward.
If we put $25,000 to work at a 10% return over 40 years, the results are striking. Without any additional saving — and assuming you were able to defer taxes the whole time — you’d be sitting on a nest egg of just over $1.1 million.
That’s right. Putting just $25,000 to work today could be a million-dollar decision a few decades from now. And remember, it’s likely the extra return achieved from buying the dip will be enough to propel the portfolio to these lofty heights.
One stock to buy today
The logic is simple. Investors should look for stocks that have the potential to return at least 10% annually and that have fallen a good 15-20% from their peaks. This sets one up for maximum capital appreciation, plus it increases your immediate dividend yield.
One stock I was personally buying last week is First National Financial (TSX:FN), Canada’s largest non-bank mortgage lender. The stock was as high as $42 per share in December, falling all the way down to $34 per share last week. I took advantage of the dip and added to my position.
First National has a little different business plan than a bank. It works closely with institutional investors who are looking to invest in the mortgage market. It makes money by servicing these loans for these investors, as well as getting a placement fee. It hardly has any mortgages at all on its own balance sheet.
It’s a steadily growing business that shows no signs of stopping, especially now that it has re-entered the subprime part of the market. Loans under administration surpassed $100 billion a couple of years ago, and should be flirting with $120 billion by the end of 2021. Earnings continue to be strong with the bottom line coming in at $2.90 per share in 2019, despite general weakness in the Canadian mortgage market. Analysts expect earnings to grow to $3.28 per share in 2020.
Long-term results have been wonderful, even after the recent price dip. Over the last decade, including reinvested dividends, First National shares have a compound annual growth rate of 14.48%. That’s enough to turn a $10,000 original investment into something worth $38,720. And it demonstrates the stock has the ability to easily hit our 10%-per-year hurdle rate.
And finally, let’s not forget about the company’s dividend, a payout that has quietly grown to be one of the best in Canada. The current yield is 5.5%, and the payout has been increased several years in a row. But that’s not all; First National has also paid special dividends over the last few years, including a $0.50 per share special dividend in 2019 and a $1 per share special dividend in 2018.
The bottom line
If you’re looking to secure your retirement and make a million, then the best time to act is today. Put as much cash as you can into great stocks like First National Financial and watch your money grow over time. Your future self will thank you.
Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Nelson Smith owns shares of First National Financial.