Sunday, December 30, 2012

Long-term Dividend Goals

If you happened to notice on my Goals page I've updated it some to reflect my long-term dividend goals.  In this post I'll detail where and how I calculated the numbers for my dividends.  The Dividend Goal is the amount of forward 12-month dividends that I want to have by the end of each corresponding year.  The following dividend goals are only for my FI portfolio and does not include dividends received in my Roth IRA or from converting my 401k into DG stocks when I do get reach FI.  My 401k especially will add a big chunk of capital free to then invest.

I started with my total minimum expenses for 2012 which will come in right around $18k.  I then added an extra $500 to give around a 3% cushion in minimum expenses covered.  I then increased my minimum expenses by an assumed 3.50% inflation rate.  After another year I'll have a better idea of what my expenses might look like due to inflation and potential decreases in my spending which I'm hoping to cut some more of in 2013.  You'll find out my 2013 goals early next year.

To calculate my Dividend Goals, I used $1,770.65 since that is my forward 12-month dividends as of now and assumed a 5% average dividend growth rate plus a 0.5% increase due to automatic reinvestment of the dividends.  I then assumed that I could add $50k in fresh capital each year carrying an average yield on cost of 3.00%.  See the table below for the final results.

Annual Dividend Goals
Year Age Dividend Goal Actual Expenses
2012 28 $1,770.65 $1,770.65 $18,500
2013 29 $3,368.04 -- $19,148
201430 $5,053.28 -- $19,818
2015 31 $6,831.21 -- $20,511
2016 32 $8,706.92 -- $21,229
2017 33 $10,685.81 -- $21,972
2018 34 $12,773.52 -- $22,741
2019 35 $14,976.07 -- $23,537
2020 36 $17,299.75 -- $24,361
2021 37 $19,751.24 -- $25,213
2022 38 $22,337.56 -- $26,096
2023 39 $25,066.12 -- $27,009
2022 40 $27,944.76 -- $27,954

I think I"ll be able to reach FI earlier than my 12 year target but there's a lot that can change when you're projecting out 2 years let alone 12.  I believe that all of my assumptions are erring on the side of caution to leave me with a much larger margin of safety.  For example, my average dividend growth rate is higher than the 5% that I used in my calculations and the $50k in fresh capital doesn't include the fact that I'll be selling off some of my ESPP shares every 6 months starting in June, which should net me an extra $5-7k every six months that isn't accounted for.  By selling off my ESPP shares, I'll be trading in a 1% non-DG stock for 2.5-4% DG stocks.  That's a good tradeoff that will help out a lot towards my FI goals.

I'll update these goals as the year(s) go along in case I'm able to make more or less progress than I originally anticipated in these calculations.  It's very good to see that using these conservative numbers I'll be able to reach FI before I turn 41.

8 comments:

  1. Nice chart. What amount of capital (including appreciation over time) are you expecting will be needed to generate the dividends in the final year?

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    1. Thanks! Well I think I won't need nearly as much capital invested as the calculations show. If you take the $27,944 and divide by a 3.00% yield you get $931,466. If you just add up the invested capital over the years that would be the $63k that I have invested already in portfolio value plus $600k in further additions, so $663k. Of course converting my 401k when I reach FI is going to provide a nice boost in dividends because before any appreciation that'll be another $170k that I can convert to DG stocks. I think I'll be able to reach FI much earlier than 40, but just running through the numbers this way gives me goals to shoot for.

      Thanks for stopping by!

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  2. Nice goal and great long term view. Are you planning on taking additional money making strategies such as options (covered calls and cash secured puts) or is your income goal solely dividend income?
    Currently I am planning on using both, dividends and options to boost the income and thus lower the amount needed to produce it.
    Thanks for sharing.

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    1. Martin,

      I currently use options once I don't see much value in the market but for now there's plenty of stocks that I see that are on sale so I've been picking up the shares through direct purchase rather than through options. Once the markets get toppy or my dividends are much higher then I'll probably start using options again. I've used them some, I really like selling puts, but it's hard for me to lock that money up for a few months or longer so I've been shying away from them. I know AllAboutInterest uses options a lot more by having a margin account, I need to see how exactly margin works I know the basics but not enough to try and go for it now. Best wishes for 2013!

      Thanks for stopping by!

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  3. Great goals very methodical and achievable. I look forward to following you in 2013!

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    1. Marvin,

      Thanks! I definitely think it's achievable and hopefully on an earlier timeline. Best wishes for 2013! It's great to see the DG/FI community growing. Keep at it yourself!

      Thanks for stopping by!

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  4. Nice plan and chart you have setup there. That's awesome that early FI by 40 looks possible, even when you take a conservative approach to calculating the numbers. Over the years, you'll very likely receive bonuses, pay raises, promotions, etc. Plus special dividends every now and then. It's impossible to predict, of course, but I guess those windfalls will just be pleasant surprises that help you pull in the years needed to FI.

    Best wishes!

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    1. FI,

      I figured for now I'll be really conservative with my calculations and later I'll really grind it down. I haven't had a year where I've converted any of my ESPP shares so it's kind of hard to see how that's going to go plus I think my expenses aren't going to increase by 3.50% per year, they actually decreased by over 10% from 2011. Plus my dividend growth rate should be higher than the 5.00% that I used to calculate which is another margin of safety. Considering how conservative my calculations are it's very inspiring to see that I'll still reach FI during age 40. I should easily be able to knock off at least a few years from that although I wouldn't be surprised if I can cut it in half if I keep up the rate that I've been going.

      Thanks for stopping by!

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