My primary goal as a dividend growth investor is to build a sustainable and rising stream of dividend income over time. I plan to reach this goal by taking advantage of the power of long-term compounding, driven by a combination of dividend growth, dividend reinvestment, and regular investment of new capital. In some of my Seeking Alpha articles
I have investigated how various factors affect the long-term compounding of dividend income. In this post I will report an updated projection of my dividend income based on the 2012 year-end status of my portfolio.
Here is some relevant information from 2012, which was my first full year of dividend growth investing:
- Dividends received: $1,649.63
- Final portfolio value (including cash): $65,137.07
- Portfolio yield on cost: 3.5% (unweighted mean across all stocks)
- Dividend increases: mean of 10.4%, median of 8.5%
- Savings: mean of $1,427 per month
To generate a projection for subsequent years, I made the following assumptions:
- Portfolio value at start of Year 2: $65,000
- Dividend yield of portfolio and subsequent purchases: 3.5%
- Capital appreciation rate: 7.2% (stocks double in value every 10 years)
- Dividend growth rate: 7.2% (dividends double every 10 years)
- Dividend tax rate: 15% (after-tax dividends are reinvested)
- New capital invested: $1,200 per month
I tried to make the projection somewhat conservative by assuming a lower dividend growth rate and a lower savings rate (reflected in new capital invested) than what I achieved in 2012. I also assume all dividends are taxed, which may not be the case in later years. Here is the projection over a 10-year period:
According to the projection, it is possible for me to reach over $10,000 in annual dividend income after 10 years of dividend growth investing. (If I maintain my current savings rate, I can reach $10,000 in Year 9.) By measuring my actual dividend income against the projection, I will have a way of tracking my long-term progress. For example, to be on track with the projection I will need to receive $2,275 in dividends in 2013. In case you are wondering about later years, projected dividend income reaches $20,000 in Year 15, $50,000 in Year 23, and $100,000 in Year 30.
Of course, long-term projections are rife with uncertainty and a lot can change over the years. However, it is fun to crunch the numbers and see what can potentially be achieved through dividend growth investing.
DGM. Great job on forecasting those dividends over the years. Helps keep you motivated over the long haul and allows you to compare what acutally happens to what you thought would happen given the assumptions you described. I think the value in this exercise lies in the ability to make adjustments to your investments from a strong point of reason versus randomly changing things.ReplyDelete
That 23rd year looks rather sweet!!
Stoic: Thanks, I appreciate the feedback!Delete
That's great DGM. i just did a similar exercise to get to my $50k/yr 2018 goal.ReplyDelete
I am assuming blended portfolio increase of about 7.5% (largely because I have a good portion of my dividend income from mid cap and small cap stocks). For my large caps, I have assumed 5% growth. You likely can drive more growth with dividend income from mid caps, but it may just mean an initially smaller yield. Over the long term, the growth will more the compensate.
Curious if you've broken out the dividend income contribution by organic growth, dividends from reinvestment and new investment, In my case reinvestment and new investment will make up almost 40% of my 2018 goal! I was surprised by how high that was. Would be interesting to see how you compare
Integrator: Thanks for your comment. I haven't broken down the contributions from various sources, but I am fairly certain that dividend reinvestment and new capital investment are major contributors. That's one of the reasons why I want to try to maintain a relatively high savings rate: The more money I invest now, the more it will pay off in the future.Delete
Great work! Its looking great! Thanks for a very interesting blog. Greetings from av dividendinvestor from Sweden. I wrote a similar post today. I make 8000 USD today in dividends.ReplyDelete
ägamintid: Thanks for the feedback. It's good to hear that your investing is also going well.Delete
I really like the graph! I was thinking of posting something similar in my yearly review. I would be curious to know what the differences would be if you used your 2012 average dividend growth of 10.4%. I think you have made some conservative estimates. It always helps to have a visual and is great motivation.ReplyDelete
All About Interest: Thanks for your comment. I agree that a visual depiction of long-term compounding can be motivational. Here is the resulting annual dividend income after 10 years for higher dividend growth rates:Delete
Small increases in the dividend growth rate can produce large increases in dividend income, which is one reason why I try to find stocks with double-digit rates that appear to be sustainable.
This is exactly the reason why I love America. If you make a reasonable goal and plan to get there, and strive to get there, you can reach it. There are countries out there where people aren't that blessed and even when they try hard, mostly it goes in vain.ReplyDelete
Your article is very inspirational to me.
Martin: Thanks, I'm glad the post inspired you! I agree that America is a great place for working toward financial goals.Delete
Amen Martin! We often forget just how lucky we are. I've been to third world countries and it really does humble you. By and large Americans are ridiculous and don't even realize it.Delete
DGM, I like your graph. It really brings home the point you are making. I have full confidence you'll get there! You've definitely put yourself in a position to achieve 7.2% DGR.
Compounding Income: Thanks, I'm glad you like the graph!Delete
Interesting exercise that I will have to try for myself. I like the fact that it gives you specific goals to shoot for going forward. I've just been investing with no real specific income points to shoot for other than just making sure income is always increasing. I like the idea of having specific targets though for future years.ReplyDelete
Dan: Thanks for your comment. Having specific income targets for the future is a nice benefit of this exercise. The projection might change over time if I decide that slightly different assumptions are more appropriate, but the current projection serves as a useful baseline for measuring my short-term progress.Delete
Awesome chart there. I really like that. I'm shooting to have similar success to that. I hope that we can continue to have the same kind of success in the future as we have over the last couple of years.
It's a great exercise to try and formulate future projections like that. I find it gives me a sense of hope and inspiration.
Dividend Mantra: Thanks, I'm glad you like it! I think we're both making good progress on building our dividend income streams. Hopefully our results meet or exceed our projections!Delete
This is wonderful chart for dividend investors. I like to ask you what strategy grape UK investors.ReplyDelete
ftse: Thanks, I appreciate the feedback!Delete
Nice projection there.ReplyDelete
Could you publish the spreadsheet, so that others can plug in their numbers and run their personal projections (with their numbers/assumptions)? That would be awesome.
Anonymous: Thanks for your comment. I am looking into putting some Google Docs spreadsheets on my blog. As part of that effort, I will see whether I can create an online version of my projection spreadsheet.Delete
That sounds great. Any chance that we get our hands on the offline version in the meanwhile? Some folks may want to adjust and tweak the spreadsheet and are more familiar wit XLS than Google Spreadsheets.Delete
Anonymous: I will look into it.Delete
Hi, I am so happy to find your blog today. I am 31 years old and also have been a big fan of dividend-growth investing for my retirement life in 30 years. My markets are Korea and Hong Kong. I would like to visit here more often and share the ideas. Very delighted and thank you for posting excellent stuff!ReplyDelete
Sophie: Welcome! It is always nice to hear from another dividend growth investor. Best wishes on your investing and I hope you continue to enjoy my blog!Delete
What would the projections look like for 30k of new capital invested each year (2,500 a month) with all other numbers of yours being the same except initial portfolio at 2,000. I am a 22 year old who just graduated college and eager to build dividend incomeReplyDelete
Tom: Here are the annual dividend income results for your scenario, rounded to the nearest hundred:Delete
Year 5: $5,000
Year 10: $14,500
Year 15: $30,000
Year 20: $55,200
Year 25: $96,000
Year 30: $162,300
Note that these numbers are not adjusted for any inflation. Assuming an inflation rate near 3%, the $96,000 in Year 25 would have purchasing power in today's dollars of about $48,000.
Hi, I also invested in the UK dividends and I always remember basic facts that I need to follow during investment and choosing portfolio. Apart from these I have an online portal where I can find all information related to UK dividends and Best UK dividends.ReplyDelete
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