Tuesday, March 19, 2019

The Compounding Power of Dividends

Since I began my dividend growth investing journey at the age of 20 in September 2017, it has really set in how blessed I am to have discovered DGI in my early teens. I always knew how powerful dividend growth can be with the hypothetical scenarios of "x dollars invested in x company 30 years ago would now be producing y in dividends." Well, now that I've began investing in dividend paying stocks and that I am at $495 in annual forward dividends as of January 18, 2019, I thought it would be interesting to examine the compounding effects of these dividends in the coming decades. Interestingly, this whole discussion randomly came about in conversation with my mother one day and she thought that my situation was pretty impressive for someone my age (credit to my mother for this post).

                                              Image Source: Pexels

For illustrative purposes, I'll be factoring in what I believe to be realistic assumptions for our model. I will use the following variables:

  • 4% dividend yield
  • 6% long-term annual dividend growth rate (DGR)
  • Reinvestment of dividends
  • No fresh capital contributions
  • Average of 5% annual stock price appreciation (almost in line with my long-term DGR)
  • 4% average annual inflation rate
  • Assuming starting annual dividends of $500 (roughly where I am at the time of writing)
The 4% dividend yield is considerably below my current dividend yield of 4.64%, including my retirement account mutual fund holding. Over time, I'll lower my average dividend yield to around 4% to attain more dividend growth (allowing me to better combat inflation and maintain purchasing power).

As shown below, my current 5 year annual dividend growth rate stands at 6.1%. This is right in line with our projections. We do have to take into account that the past 5 years of economic conditions have been favorable for companies, but with that said, I do believe that as I prioritize dividend growth in the future, the portfolio should be able to at least maintain the current dividend growth rate for the long term.

We'll be factoring in an average annual inflation rate of 4% as it's a bit above the historical average. We'll also assume that I continue to reinvest dividends selectively along the way into companies with attractive starting yields and growth profiles, with no additional capital contributions. This allows us to best illustrate the power of compounding. 

Image Source: Simply Safe Dividends screenshot


Having laid out the assumptions of 4% dividend yield and a 6% annual dividend growth rate above, we'll now examine the impact of dividend reinvestment in terms of nominal dollars and inflation adjusted dollars over the following time frames:


  • 5 years: $738.30 nominal annual dividends ($606.83 in 2019 dollars)
  • 10 years: $1,212.01 nominal annual dividends ($818.79 in 2019 dollars)
  • 20 years: $3,365.94 nominal annual dividends ($1,536.17 in 2019 dollars)
  • 30 years: $9,761.96 nominal annual dividends ($3,009.80 in 2019 dollars)
  • 40 years: $29,692.56 nominal annual dividends ($6,184.64 in 2019 dollars)
As a side note, I referred to the fantastic dividend investment calculator over at Investopedia to arrive at these calculations. If you haven't checked it out, I highly encourage you do so. I've found it to be a great illustrative tool when you're curious what your dividends could become. You can even incorporate regular capital contributions into the assumptions as well.

Conclusion:

The results above really speak for themselves. We can see that even a bit of planning in your teens or twenties can pay massive dividends (pun intended). If one would simply max an IRA or Roth IRA upon college graduation for 2 years, they could put themselves in my same position. By the time they would reach the traditional retirement age of their early to mid 60s, they would be collecting over $6,000 a year in dividends in today's dollars if they never contributed another dime. In other words, if they completely failed in life and were never able to contribute another dime to their investment account, they would still receive over $6,000 a year in dividends from their retirement account (that also likely wouldn't be able to be touched by creditors due to the protection of retirement accounts in general). 


One can only imagine the impact of fresh capital contributions on top of this capital base for several years or even decades. When one amasses even $500 a year in dividends in their early 20s, they at a minimum set themselves up for $6,000+ a year in inflation adjusted dividends. When combined with regular capital contributions and a high savings rate, it becomes very possible for dividends to unlock financial independence at an early age in life. If you don't believe me, just take Jason Fieber's word for it. He's living his dream life in Thailand entirely because of years of diligent saving and dividend growth investing.

Discussion:

Have you ever used the dividend investment calculator at Investopedia? Have you ever projected dividends 5 years, 10 years, or even 20+ years into the future? What are you thoughts on the compounding magic of dividends? As always, thanks for reading and I look forward to reading and responding to your comments.











Tuesday, March 12, 2019

February 2019 Dividend Income

Another month has passed and we are already approaching the Ides of March. March Madness will soon be upon us, the NBA Playoffs will begin in just a few weeks, and the MLB will soon begin its regular season. Spring will soon actually be in the air. But until that point in time, it's probably best for me to get some writing in while the weather is still awful. With that said, it's time to delve into how much dividend income our holdings provided for us in February.



Overall, I received $43.09 between my Robinhood and M1 Finance portfolios. Of that $43.09, $42.80 originated from 12 companies in my Robinhood portfolio. The remaining $0.29 came from 15 companies in my M1 Finance portfolio.

This is a 4% quarter over quarter increase compared to the $41.42 collected in November 2018 and a 31.7% YOY increase compared to the $32.71 collected in February 2018!

Breaking it down, the $0.29 that came from M1 Finance is the same as the results from last November, but there were some notable changes that led to the $1.67 increase compared to the previous quarter, including the following:

Being paid dividends for the additional share that I picked up shortly after AbbVie (ABBV) went ex-dividend on the prior dividend, in addition to the 11.5% raise announced by AbbVie since the November dividend was paid. This resulted in a $1.40 increase in income.

I also collected an additional $0.02 from Realty Income (O) as a result of its 2% dividend increase compared to November 2018.

I collected an additional $0.06 from EQM Midstream Partners (EQM) compared to November 2018 as a result of its 1.3% increase announced shortly after the previous dividend was paid.

Moreover, I collected an additional $0.03 from Enterprise Products Partners (EPD) as a result of its  0.6% dividend increase announced shortly after the previous dividend was paid.

Finally, I collected an additional $0.16 in dividends from AT&T (T) as a result of its 2% dividend increase.

Conclusion:
Although I didn't add any shares to any of these companies in over 4 months or initiate any new positions for the middle months of quarters, my income increased a bit and that's all I can ask as I finish paying my way through my last few months of undergrad and save to buy a car in cash. Fresh capital will continue to remain relatively limited, so dividend increases and reinvestment will be the driving force for growth in dividends for the last 10 months of this year.

Discussion:

How was your February? Did you add any new names to your portfolio? As always, thanks for reading and I look forward to reading and replying to your comments.




Tuesday, March 5, 2019

Expected Dividend Increases for March 2019

The Milwaukee Bucks are still in 1st place in the Eastern Conference and the month of February is now behind us, although it doesn't seem as thought the snow is done hitting Central Wisconsin. With that said, it's time to examine the dividend increases from February and look ahead to the dividend increases predicted for the month of March.



February Dividend Increases:

Increase #1: Genuine Parts Company (GPC)

Genuine Parts Company announced a 5.9% increase in its dividend, hiking the quarterly dividend from $0.72/share to $0.7625/share. GPC increased its dividend a bit more than the $0.76 that I was projecting, so I'm quite pleased with this raise. Overall, it increased my annual forward dividends by $0.51 across my 3 shares.

Increase #2: The Home Depot (HD)

The Home Depot announced a 32% increase in its dividend, skyrocketing the quarterly dividend from $1.03/share to $1.36/share! This raise was considerably higher than I think anyone in the community expected. This massive raise from HD increased my annual forward dividends by $1.32 across my single share.

Increase #3: PPL Corp (PPL)

PPL Corp announced a 0.6% increase in its dividend, raising it from $0.41/share to $0.4125/share. This dividend increase was quite anemic and well below the increase that I was expecting. Overall, it did manage to increase my annual forward dividends by $0.08 across my 8 shares.


Expected Dividend Increase #1: Williams Sonoma (WSM)

I'm expecting a 9.3% dividend increase from WSM, raising the quarterly dividend from $0.43 to $0.47. This would increase annual forward dividends by $0.96 across my 6 shares.


Expected Dividend Increase #2: Realty Income (O)

I'm expecting a 0.2% dividend increase from O, raising the monthly dividend from $0.2255 to $0.2260. This would equate to an increase in my annual forward dividends of ~$0.024 across my 4 shares.

Expected Dividend Increase #3: WP Carey (WPC)

I'm expecting a routine 0.5% dividend increase from WPC, raising the quarterly dividend from $1.03 to $1.035. This would result in an increase to annual forward dividends of $0.06 across my 3 shares.

Summary: 

February was a month with a little bit of everything. There was the GPC raise that was as expected, the HD raise that exceeded expectations tremendously, and the PPL raise that was rather disappointing. The point is that despite all that news, my dividend income continues to increase without much input from me. These great businesses continue to churn out profits to support their dividend increases while I let them do their thing. I received $1.91 in dividend increases in February. Assuming a 4% dividend yield, this would require an investment of $47.75 to duplicate! Furthermore, $1.044 of increases are expected in March for my annual forward dividends. This would require an investment of $26.10 in fresh capital, assuming a 4% dividend yield.


Discussion:

How many dividend increases are you expecting in March? Are you expecting dividend increases from any names not mentioned in this post?

Tuesday, February 26, 2019

The Phases of Dividend Growth Investing

Since I began dividend growth investing in September 2017, I've gradually noticed that there is a common evolution of dividend growth investing from an idea, into what eventually becomes a mindset, and even a lifestyle.

In my own life, I've noticed that since I discovered the concept of dividend growth investing and how I could leverage this concept to unlock financial independence at an early age, I have wholeheartedly adopted this idea as a mindset. I'm as passionate about dividend growth investing as some are about CrossFit and veganism.

With that said, let's take a look at how I believe dividend growth investing evolves from merely an idea, into a mindset, and even a lifestyle.



Phases of Dividend Income:

Phase 0: Theoretical phase

Every eventual fanatic dividend growth investor starts at what I like to call the "theoretical phase." This is the phase in which one experiences an epiphany. They one day randomly stumble upon the concept of passive income, and upon learning of this information, they are intrigued from the start. They will do more research and come to find that one of the absolute most passive forms of income to support a lifestyle are dividend growth stocks.

They then eagerly learn as much about dividend growth investing as they can, from the selection process of stocks, evaluation of stocks, and so on. Once a potential dividend growth investor reaches the end level of this phase, they then move into the next phase of this marvelous concept.

Phase 1: Practicality phase

When a potential dividend growth investor learns of the benefits of dividend growth investing, they begin to move from the theoretical phase into what I refer to as the "practicality phase." This is when someone simply becomes so eager to move from the theoretical phase of dividend growth investing, into the phase of actually implementing dividend growth investing in their own life.

They move on from the novelty of the hypotheticals of what an investment in X company 20 years ago would be throwing off in dividends now with dividends reinvested, to the point of actually desiring to make that hypothetical a reality. The practicality phase can't happen unless an individual embraces the idea of dividend growth investing. Although it's a very practical and near sure fire way to create meaningful passive income over time, dividend growth investing is often a slow process of accumulating fresh capital contributions, reinvesting dividends, and benefiting from dividend increases, often referred to as the trinity of dividend growth investing.

The amount that a would be dividend growth investor actually eventually invests in dividend growth stocks can range from investments of less than $100 (enabled with the recent rise of brokers such as Robinhood) to tens or even hundreds of thousands of dollars. Everyone discovers the concept of dividend growth investing at different phases of their life. Some may discover it at an early age in life, such as in middle school (like myself) or they may be in their 30s or 40s with a family even. This means that everyone starts at different investment amounts and becomes a DGIer to varying degrees.

In my case, I didn't start investing until I was 20. Being as young as I was when I began investing, I started with an investment of just over $2,000 in 6 different companies. It was this investment that would radically transform my mindset from one of hypotheticals into one of practicalities. This set the stage for the next phase of DGI.

Phase 2: Collecting Your First Dividend And Embracing DGI


Once I began investing in September 2017, shortly thereafter I received my first dividend from Genuine Parts Company (GPC). It wasn't much. I owned 2 shares at the time and collected $1.35 in dividends, but it was the beginning of that radical shift in my mindset. With every dividend I received thereafter, I became more and more convinced that dividend growth investing was my path from an employee to an owner; I viewed "harnessing the power of dividend growth investing to unlock financial freedom" as a mindset and a lifestyle. It's what ultimately led to the inspiration and motto of this blog. I began to think in terms of an owner rather than a employee/consumer. Rather than seeing $100 as a mechanism of acquiring goods/services, I began to see that $100 as a way of acquiring a share of Pepsi, two shares of Altria, or three shares of AT&T. In other words, the $100 could generate an immediate income of $3-6 in relatively safe, growing dividends for me in the years/decades to come.

With dividend growth investing, I realized that average, ordinary people were becoming financially independent over the course of years or multiple decades, depending upon how aggressively they invested in terms of the percentage of their salary they invested.

At a minimum, I believe DGI to be the practical solution to the retirement epidemic that America is facing. Rather than Millennials such as myself simply assuming that Social Security will be there for us when we reach retirement age (if it isn't drastically altered by then), the wisest course of action would be for us to start investing as soon as possible. If given 30-40 years, investments can compound considerably, transforming small contributions into massive piles of capital throwing off considerable dividends.

The best-case scenario for someone that aggressively saves 50%+ of their income and invests in quality, dividend growth stocks trading at fair or better prices for over a decade, is that they will be in a very enviable position in life, allowing them to focus on their passions rather than a paycheck. They will be financially independent or close enough that they won't be chained to a job they aren't engaged in, as is the case with over two-thirds of Americans.

It's the above information that enables me to feel the way I do about DGI. It is more than an investment strategy; it is a mindset that can free you from the obligation of a job that you don't feel engaged in, a boss that you dislike, or whatever it may be. You can truly be the architect of your own life when you are financially free

It's at the end of this phase that DGIers fully commit to the concept and lifestyle that accompanies DGI. I'm personally at this stage and will be for the next several years. They will continue to accumulate positions in dividend growth stocks for years before reaching the next phase.

Phase 3: Semi-Financial Independence/Continued Conviction In DGI Strategy

This is also a phase one can be in for several years or possibly even decades, depending upon how we describe semi-financial independence. This is the point at which one is actively collecting dividends that are becoming more and more meaningful with the passage of every month. It may be $100 here or $500 there, but the key takeaway from this phase is that an individual is starting to collect enough in dividends to enable either:

A) regularly reinvest dividends along with other fresh capital contributions to accelerate the path to complete financial independence.

B) use the dividends to pay for expenses or enjoy life.

C) some combination of the two previous situations.

Within this phase, the only thing that changes non-financially speaking is that the conviction in the DGI strategy continues to be reinforced as one collects dividends for simply owning shares in a company and continuing to survive. The bar for collecting dividends is really set that low; select quality companies at reasonable valuations and wake up in the morning, so to speak.

At this point, the strategy is really on auto-pilot and there is no need to radically change it. There may be some tweaks here and there to the selection and evaluation process of investing in dividend stocks, but the philosophy of DGI stays largely the same.

With the passage of several more years and the continued trinity of dividends, the investor will eventually transition into the holy grail of dividend growth investing.

Phase 4: Financial Independence

After a long, grueling road of investing and reinvesting tens of thousands or hundreds of thousands of dollars diligently, along with years of dividend increases from the quality companies in their portfolios, the investor has finally achieved the end-goal of financial independence. This phase is characterized by the freedom of the investor in question to pursue passions, hobbies, and interests at their own leisure.

If they work at a job they enjoy, they may continue to work, allowing them to continue to contribute fresh capital, reinvest dividends, and benefit from dividend increases on a magnitude that most can't even fathom.

This would allow them to reach potentially the uber wealthy phase of financial independence, in which abundance is a part of their lives. They could use this capital to fund philanthropic endeavors, political campaigns, or just continue to reinvest it.

If one works at a job they don't enjoy or find fulfillment in, they will probably have an idea of what they would like to do with free time by the time they reach this stage as it takes a minimum of several years and potentially decades to attain.

Whatever one decides to do upon reaching financial independence, the choice is absolutely theirs. They have earned their freedom after years of dedication to the very concept that made this life possible for them to begin with.

Discussion:

What phase of dividend growth investing are you at? How close or far away are you from Phase 4? Did I miss any phases, in your opinion? As always, I look forward to reading your thoughts and thanks for reading mine.