Monday, January 20, 2014

The Ultimate Goal of Dividend Investing

The whole reason I started my journey towards financial independence stems from when I was laid off in January 2009.  At the time it was unexpected and came out of nowhere, but I thoroughly enjoyed the time that I was out of work and set out to learn as much as I could about investing and strategies to not be reliant on "the man" to decide if I get to eat that week or make my house payment.  That led me to dividend growth investing and it's been a great ride so far.  With every dividend payment, dividend increase, and new purchase I can see how much closer I am to the ultimate goal of dividend investing which is to be able to cover all of your expenses through dividends.

There were times when I was first starting out that it didn't seem like the dividends would ever really amount to much.  In January 2012 I received a whopping $0.64 in dividends.  That's not even enough to buy most songs on iTunes.  But as I continued to make new purchases and the companies I owned increased their dividends, the snowball that is compound interest started to pick up steam.  By July of 2012 I received over $20.  By the end of that first full year of following the dividend growth investing strategy I was up to over $300 dollars in December and just under $800 for all of 2012.  Now I try my best to live very simply and keep my expenses low, but $800 per year won't exactly let me live a luxurious lifestyle.

Fast forward to the end of 2013 and in December alone I received over $500.  That's almost as much I received in my whole first year of dividend growth investing.  For all of 2013 I received $2,546.79 in dividends and if I make no new purchases and all the companies I own keep their dividends flat I can expect to receive over $3,600 in 2014.  Now we're getting somewhere.  That $3,637.82 works out to $303.15 per month or $9.97 per day in income that I don't have to work for.  Based on my average monthly expenses from 2013, that $303 per month would cover my water bill.  And my natural gas bill.  And my electricity bill.  And my cable/internet bill.  And my monthly gasoline bill.  And still leave me with enough money to buy about 4 songs off of iTunes (because we all need to have some fun every now and then).  That's not one month each year, that's every month from now on as long as those companies continue to do what they do best.

Dividend growth investing is by no means a get rich quick scheme or even the best route to amass the largest portfolio balance.  However, the best thing about investing in companies that continue to pay increasing dividends is that there comes a time where your dividends received surpass your expenses.  At that time you officially become financially independent.  I wouldn't recommend you call it quits right then, because a little margin of safety never hurt; but you've officially made it to the promised land.

If you're just starting down the path of dividend growth investing with the hopes of reaching financial independence, don't get discouraged by the small initial amounts.  If you stick to the plan and continue to invest in some of the greatest and most well run companies in the world the wealth and passive income generation will build month after month, quarter after quarter, year after year, until eventually you no longer have to work to provide for your lifestyle.

I can see the end game already and I'm still years away, but the goal is in sight and the drive to reach that crossover point gets stronger with every dividend I receive.

What monthly bills can you cover with your dividends?  

26 comments:

  1. Great post. posts like theses keep yourself and readers motivated to continue saving and investing.

    Right now my dividends can cover my cell phone bill for the rest of my life. :)

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    1. FF Dividend,

      That's awesome that your cell phone bill is covered from here on out. I know when you're first starting out it can be frustrating at times and not really seem worth it. Is $4 a month really going to do much? By itself no, but when you compound that $4 at 6-12% per year plus add new capital the dividends really start to build.

      Thanks for stopping by!

      Delete
  2. I like it JC. It's a cash flow thing, and it's great. Right now my wife and I can cover all of our overhead except food and our mortgage. I did get some good news though, my house insurance actually goes down this year. I've never had that before. My PITI will actually DROP! Keep motivating the newbies buddy! We were all there once
    -Bryan

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    1. Bryan,

      It's definitely about the cash flow, but I still don't use the cash flow only in my projections. That's awesome that your PITI is dropping. I can't imagine mine will since Texas is horrible for property taxes and insurance. That's what I was hoping for with this post. I've seen a lot of new DGI'ers and bloggers and I wanted to reinforce that the DG strategy takes time and to not get discouraged by what seems like small amounts in the beginning.

      Thanks for stopping by!

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  3. I've finally defined my goals with numbers instead of qualitatively. It used to be retire early, then retire by 40 and now I know how much capital I will need. I'm determined as ever! Maybe even retire to Panama or Thailand or Malta until 59.5 (I still invest in other retirement accounts.)

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    1. WE,

      Putting quantitative goals down is a big step. Yeah you want to be in a better financial position in a month or year from now. But what constitutes a better position. Is it a larger portfolio, less debt, higher income? Without some kind of goal you can actually measure your focus tends to wane. Retiring early to a lower cost of living area is a great way to go if you really want to hit FI even earlier. If I were single I'd probably do it for a few years, but I don't think my wife would get on board with that one. Plus family is a very important aspect of my life so it'd be very difficult to be away from them.

      Thanks for stopping by!

      Delete
  4. Nice post. At this point, I can cover my cable, internet, phone/cell phone, heat and hydro bills with my monthly dividend income. I hope to add all my insurance to the mix by the end of 2015. That would be $10k in dividends per year :)

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    1. MOA,

      That's some great bill coverage. And the best part is that's for life. Getting insurance covered too would be a huge step. I like to look at my bills/dividend income this way every now and then to remind me of where I'm at now and where I want to be.

      Thanks for stopping by!

      Delete
  5. Great advice PIP. I remember when I started a year and a half ago. Oh boy, $8 from General Mills!!!! But it starts to add up over time. My focus is on my taxable account now so I can shoot for early retirement. I think by the end of this year, if not sooner, I'll start to reach critical mass where things begin to really roll. If I had to start over, I probably would focus completely on my taxable account, like Dividend Mantra.

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    1. Dividend Warrior,

      Yeah, $8! You can buy 2 boxes of cereal, maybe 3. But eventually it starts to compound as time progresses and you reinvest, get increases and invest more capital. That $8 then turns into $10 and then $13 and then $17 and then eventually you can cover your cereal expense for the rest of your life. I think hitting the $1,200 mark is a big milestone as that works out to $100 per month, every month. At that point it's finally something you can actually see being able to cover some of your regular bills.

      I'm focusing mainly on my taxable account. I only contribute enough to get the match from my employer for my 401k. No sense in letting free money go by.

      Thanks for stopping by!

      Delete
  6. I started to focus on dividend investing and becoming financially independent shortly after I was laid off from my first job. It really left a sour taste in my mouth and I vowed to reach a point where being laid off again wouldn't devastate me financially.

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    1. First Million,

      My layoff did the exact same thing. And while it sucked at the time, I can't really complain. That time out of work helped me to realize how much more there is to do other than being completely at the whims of an employer. It gave me such a clearer focus for what I want in the future.

      Thanks for stopping by!

      Delete
  7. This post sums up what it is all about for me! Awesome progress so far PIP. Right now, I am able to just about cover my cell phone on an avg month basis. Closing in on that magical $1200 annual mark hopefully later this year :-)

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    1. Divi Me Up,

      That's great that your cell phone is covered. I can't wait for my contract to be up and I'll be switching to one of the $50 per month no contract full unlimited plans that are out there to see how that works out. As long as the coverage is good then that will lower my required dividend stream by $50 per month. Nice little raise there as that would require $15k invested at 4% yield to cover. Keep at it Divi!

      Thanks for stopping by!

      Delete
  8. Hi PIP,

    at the moment I have received 14,68 EUR in dividends.
    That is only ONE lunch at McDonalds ;-)

    But I think we have to go straight forward!
    Every month brings you closer to the big goal!

    I´m walking - and it make fun...

    regards
    D-S

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    1. D-S,

      Hey, I received just $0.64 one month. That won't even let me buy a pack of gum. If you keep saving/investing then those dividends will grow to $20, then $40, then $60, then $80 and eventually you'll hit FI. It's a slow march, but it's totally worth it.

      Thanks for stopping by!

      Delete
  9. Good post here. Yep investing for dividends indeed starts out slow. But it's also exciting in the beginning to make up for it. As time goes on the monthly payments grow and grow. Honestly though, the growth has more to do with savings/deposits than the strategy itself. Eventually the opposite will be true, can't wait!

    I think I can cover the following: cell phone, electricity, cable internet & tv, car insurance, food, and gas for my car.

    ReplyDelete
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    1. CI,

      If you're striving to hit FI/ER then it's really all about the savings you can make because compound interest takes time to work. That's all the reason to start earlier so you give compounding the time to work. I wish I had started earlier, like high school years, but I'm making up for lost time the best that I can.

      That's a good chunk of your expenses right there. Congrats!

      Thanks for stopping by!

      Delete
  10. Preach, brotha! Preach!

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  11. I really enjoyed the article and found it to be really reassuring. I used to mainly invest in mutual funds and was more interested in capital gains. In 2009, I started switching to individual securities, still looking mostly for capital gains but starting to get into dividend income. Throughout 2013, I started switching more and more to dividend income and am now a full dividend investor. It seemed to be "too good to be true" so I was quite worried. It seems like lots of the literature is negative towards dividend investing so that's why I like your article so much. I've found a few more like yours so am feeling better. It seems so obvious to me but the negative articles were a tad worrisome and started me thinking that I must be missing something.

    Anyway, my investments now generate dividend/distribution income that is over 160% of my expenses so I have lots of breathing room. I retired in June, 2013 so we'll see how it all works out.

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    1. Anon,

      Switching your focus to the cash flow can make a big difference in your tolerance for volatility in the markets. You're no longer relying solely on the markets always going up because while it may seem like they will for a while, eventually the tide will turn.

      Congrats on reaching FI and with a huge margin of safety. I can't wait to get there.

      Thanks for stopping by!

      Delete
  12. Quick question I didnt understand how can you invest in both Traditional IRA and 401K ?
    I am in the same boat I am contributing more on 401K account just for the sake of the fact that my limit with them increases per year to 17k from 5k. So i can invest somewhere in between 5 to 17 k ...that is the only reason I am going by 401k..my employer dont even match a penny still just because i am allowed to invest more to go towards the very same account for retirement (i know i ll have to pay tax later but still i m ok for now) and i invest 5.5k to limit for my roth ira. I am new to dividend investing barely make about 1.7k in dividends per year...any comments ?

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    1. Jigar,

      I don't contribute to a Traditional IRA although you can still do so if you have a 401k. The contributions just might not be tax deductible. But you get to account for that later when you withdraw the money. I'm above the MAGI threshold for Roth contributions so the only "traditional" retirement accounts I contribute to is my 401k and that's because of the pretty solid match that I get, 5.5% if I put in 6% plus a 4% profit sharing. That's not bad at all.

      That's a shame that your employer doesn't offer any kind of match. Did they ever offer a match and just suspend it or never did?

      $1.7k per year in dividends is a great starting point. I was at $0.when I started back in late 2011 but I'm up to almost $4k for this year assuming all the companies I own continue to pay their current dividends the whole year.

      If you have any other questions feel free to ask through comments or using the contact form on the sidebar near the top of the page. There's a lot of great free information out there and if there's anything in particular you need help finding/learning about let me know.

      Thanks for stopping by!

      Delete
  13. PIP,

    Thanks a lot for detailed response.
    No, I work for a small company and we barely got started offering 401k last year. They don't match it and they never did. I wish they would start doing a little bit at least.

    Yes sir, I feel happy about my small dividend income and I feel better when I see yours, dividend growth investor, dividend monk s posts about my stocks. I grabbed lot of nice stocks that you all talk about PM , MO, WMT, MCD, KO, PEP, KMI, KMP, BP, IBM, GE etc.

    At this point I am eyeing on CVX, TGT WMT AFL , PM. I have budget of only two stocks or possibly just one. M confused between these or any other better dividend opportunities. Any cooments ?

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    1. Jigar,

      That's a shame that there's no match but hopefully that can mean higher salary growth as the company expands.

      I feel the same way about some of the other bloggers that I follow that have a few years on me. I want what they have! Eventually I'll get there though, it just takes consistent saving/investing and time.

      That's a lot of great companies there. I own all except KMP just because I want to avoid MLPs at tax time but I own KMI since it's a C-Corp. I think CVX and PM are great prices here. I added some more PM yesterday because the decline was just too much and I finally got a chance to see what kind of capital I have available should I move forward on the rental property. Which I'm hoping to do. If you don't own WMT yet then I like the value here TGT too. TGT offers better value but WMT is just plain awesome. Well, for investors. TGT still is great though, especially as the economy improves and more people "trade up" from shopping at WMT to TGT.

      It's hard to say without seeing your overall portfolio plus it depends on how you feel about sector weighting. If you want to keep them relatively even or on par with say the SP500 then you'll have to check to see what's lacking and could use a boost. Personally I'm not too worried about sector weightings as this time because while my portfolio is at a good size there's still a lot of work to do to build it up. I think CVX, PM and TGT are the best values right now because they've all taken huge hits to their share price while operations haven't been materially changed. I think TGT will probably show continued weakness going forward so you could maybe wait on that one but it's up to you. If you haven't done so already I have a recent stock analysis on CVX and hopefully one on WMT being posted to Seeking Alpha. GIS, PEP, & KO are others that I like here.

      Thanks for stopping by and once again if you have any questions feel free to ask.

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