Dividend growth investing has been very kind to me.
By living well below my means and intelligently investing my capital in high-quality dividend growth stocks, I’ve essentially bought my freedom.
I’ve been able to buy my time.
But what good is owning your time at a young age if you’re at risk of losing it? Is it better to have been free and lost freedom than to have never been free at all?
Fortunately, I don’t have such concerns.
And that’s because dividend growth investing largely insulates me from that, as the passive income that has bought me my freedom is highly likely to continue growing at a rate faster than inflation over time, thus only buying me even more freedom.
I don’t have to worry about selling off stock in order to generate income. I’m not buying a group of funds that have such low yields that I have to make up the difference by slowly getting rid of the equity I worked so hard over the years to attain. Being as young as I am, this is important to me.
Why worry about losing your freedom when you could instead worry about what to do with too much freedom?
See, my Full-Time Fund is set to generate ~$10,800 in dividend income over the next 12 months.
Now, that’s based on how much, in aggregate, every company in the portfolio is set to pay out in dividends over the next year.
But because these are dividend growth stocks, we know that just about every company in the portfolio should announce a dividend increase over the course of the year.
Most of the companies I invest in are growing their dividends at somewhere between 6% and 7% a year.
Think Johnson & Johnson (JNJ), PepsiCo, Inc. (PEP), and Union Pacific Corporation (UNP).
Indeed, you can pull up David Fish’s Dividend Champions, Contenders, and Challengers list – a fantastic resource containing information on more than 700 US-listed stocks with at least five consecutive years of dividend increases – and see exactly what kind of dividend growth to expect, as the dividend growth is actually averaged out across the list.
Dividend Champions are stocks with 25+ years of consecutive dividend increases. Dividend Contenders are stocks with between 10 and 24 consecutive years of dividend increases. Dividend Challengers are stocks with 5-9 consecutive years of dividend increases.
Companies that have registered more than 25 consecutive years of dividend increases averaged dividend growth of ~6% last year. Companies that have paid their shareholders increasing dividends for between 10 and 24 consecutive years averaged dividend growth of ~7.5% last year. The number is closer to 10% for companies with shorter streaks.
All 768 stocks that are currently on the list averaged dividend growth of ~8.5% last year.
A dividend growth snowball is a portfolio chock-full of dividend growth stocks.
It could be thought of as a snowball because it starts to roll all by itself, and it rolls faster and faster the bigger it gets.
The more dividend income one is expected to receive, the more the dividend increases start to impact the growth of the portfolio. And dividend reinvestment speeds this process along that much further.
Well, I’m going to show you what that looks like in real-time.
Let’s just assume, conservatively, the stocks in my portfolio average 6% dividend growth this year. That would accordingly grow my dividend income by 6%.
We’re talking an increase of approximately $650 in annual dividend income as a result.
That means my dividend income would grow from ~$10,800 to ~$11,450.
If that doesn’t strike you as pretty amazing, let’s break that down real quick.
If I wanted to increase my dividend income by $650 with fresh capital out of my own pocket, do you know how much I’d have to invest?
I’ll give you a hint: a lot.
My portfolio has a yield of approximately 3.4% right now.
So if I wanted to replicate that yield with new capital, I’d have to invest ~$19,100 in new money to achieve the same increase in my dividend income that the dividend raises this year likely will.
Just think about that for a second.
When I was just starting out back in early 2010, I had to invest over $19,000 of my hard-earned cash in order to build an asset base of high-quality dividend growth stocks that could generate $650 in passive dividend income for me.
Now I don’t have to lift a finger.
It’s completely organic. It happens without my input.
It’s old money becoming new money. It’s money cloning itself.
I always say money can work harder than I ever could. It works 24/7. Never gets sick or tired.
Well, that’s never more apparent than when I look at the power of dividend growth investing.
It would take me a hell of a lot of work in order to be able to invest more than $19,000 this year, especially considering that I’ve slowed down a lot in order to enjoy some of my newfound freedom.
If I wouldn’t have quit my job at 32 years old, maybe I’d still be able to work harder than my money. But all of the saving and investing is a means to an end – and that end most certainly isn’t just more money.
Moreover, I always try to maintain perspective.
$19,000 is a pretty solid annual income for someone working a full-time job. And then you’d have to factor in taxes, the cost of getting to and from work, lunches, etc. A job can actually cost a lot of money. Plus, we’re not even talking about living expenses here. In reality, it would require a good-paying job and a lot of frugality in order to be able to invest that much capital in a year.
When I landed my first service advisor job back in 2006, I was only grossing around $28,000 per year. So when I say my money can work harder than me, I’m not exaggerating. Moreover, this effect will only magnify itself over time as the totals grow and as the dividend increases continue to pile up.
I also try to remain mindful of the millions of people out there in the world living in poverty. These people don’t even have the opportunity to work, save, and invest.
As such, this is an amazing spot to be in. Receiving a “pay raise” for doing absolutely nothing that would otherwise require me to work extremely hard and invest tens of thousands of dollars is a dividend growth snowball in action.
In addition, dividend reinvestment only adds to the snowball’s speed.
If I were to reinvest my ~$10,800 (a tally that grows by the month) in dividend income over the course of the year, that would further increase my expected dividend income by another ~$360 (assuming the same 3.4% yield noted earlier).
All in all, we’re talking ~$1,000 in dividend income growth. That would move my expected dividend income from ~$10,800 to ~$11,800. That’s just one year of dividend growth.
When I first started investing back in early 2010, I knew this was all possible.
But seeing it happen in real-time is incredible. I can’t even begin to explain how it feels to see my freedom, time, and opportunities to grow right in front of my eyes… all while doing very little to make it so.
I had to aggressively save and invest for more than a year before I was able to say that I could expect $1,000 in ongoing dividend income from my portfolio.
I had to put away almost $30,000 of my own money in order to accomplish that same feat!
That required many 50-hour workweeks. Many days of going to work in the dark and coming home in the dark. I was getting screamed at on the phone by upset customers. I had to work with technicians that hated their jobs. Every night ended with a sigh. And every morning started with an alarm blaring at me.
My life is now blessedly alarm free. And I’m able to do what I want, when I want, with whom I want.
On top of that, the snowball is rolling without my assistance. The blood, sweat, and tears I put into building that snowball and rolling it as hard and as fast as I could for more than six years of my life is now paying dividends… literally.
Said another way, the numbers you see above are assuming no fresh capital investment. This is all organic income growth.
Just know that you can get here too, if you work at it. You have to want it. You have to be willing to put in the work up front. You have to remain patient and persistent. You have to keep climbing, keep moving.
But the hard work does pay off.
They say if you build it, they will come. Well, if you build and roll the dividend growth snowball, freedom will come. And then more freedom will come. And then more.
It’s waiting for you.
How’s your dividend growth snowball working out? Excited to see it roll without your assistance? Interested in building your own dividend growth snowball? Check out my coaching service.
Full disclosure: I’m long all aforementioned stocks.
Thanks for reading.
Image courtesy of: Sira Anamwong at FreeDigitalPhotos.net.