Dividend growth investing really resonated with me. But I wasn't always a dividend growth investor. Luckily I never went through the early phase of just being an "investor" - buying a hot stock tip from a friend sort of experiment phase.
While still studying at University I bought my first shares as a cash-strapped 4th year. The lucky pick was $100 worth of KO - Coca-Cola. Truly an excellent pick if you follow along with dividend growth investing or you're just starting. Coca-Cola wasn't a calculated purchase, though - I wasn't born a stock investing star - my first pick was a lucky pick. Maybe it was a foreshadow of the kind of investor I would become.
After a great investing start, the next two purchases were a bit rough to say the least. Especially my second purchase of NLY. I bought $100 of Annaly Mortgage Management at $17.88 / share. It has proceeded to tank - down about 40%. However, I still keep the stock because the commission to sell it would be about 10% what it's worth now - $70 - and it pays 11% dividends a year which I definitely invest in other stocks like Coca-Cola.
After that I bought LGCY - Legacy Reserves. It pays about 9-10% dividend. This next purchase certainly wasn't terrible. However, LGCY is a dividend stock with some of the growth. The stock price itself has not grown - I'm actually down 2% - but the dividend has been growing steadily. There was a period in the recession where dividends didn't grow, but they also did not shrink or get cut. In a perfect world the stock price and the dividend would both grow. This is the sweet spot for investors like myself.
With rising dividends and stock prices a dividend growth investor can eventually live off their investment without selling the underlying assets. Like myself, investors start in an accumulation phase where they invest both new capital as well as the dividend income they receive into dividend growth stocks. Once this accumulation phase is over, the investor can then live off the dividend stream alone without selling off the main principal. For example, if you invest $300,000 into these dividend stocks and they pay, on average, 4% you would receive $1,000 per month! If you keep costs low you can retire! Easy peasy. In a traditional retirement scheme you would accumulate a huge lump sum of money and then sell off 4% of it every year until you croak. The traditional simile is that a "normal" retirement would be like growing a very large tree and then cutting off branches every year and watching it shrink. On the other hand, dividend growth investing helps you to grow a moderate sized tree and you live off the fruit of the tree instead of cutting off its branches. If you invest well, the tree will grow too. Sweet.
At the rate I'm going I will need approximately $1,300 per month for food, housing and other expenses. That's $15,600 per year or $390,000 invested. If you want to retire even sooner you can semi-retire and get a side job. For example, if I make $5,000 per year from side jobs, gifts, part-time work, etc. then my required money becomes ($15,600 - $5,000) $10,600 and m big fat retirement sum needed is only $265,000. A not insignificant difference of $125,000. If you throw in taxes it is not much of a wrench as the federal tax rate for the "up to $36,250" bracket is 15%. But wait, there's more! Qualified dividends are taxed at 0% if you're in the 15% federal bracket. At worst, dividends are taxed at 20% and that's if you're in the top of the 39.6% federal bracket. As a dividend growth investor, follow along as I plan to retire by age 40!
-Wallet Engineer #1