The Intersection of Dividend Growth Investing and Financial Independence

Tired of working under fluorescent lights day in and day out?  Well besides winning the lottery the only way to get away from working 9-5 til 65 is to spend less than you earn and invest the difference.   Most of the blogs that I follow are focused on dividend growth investing and they usually have a tilt, heavy or light, towards financial independence.  Financial independence is the point where your savings and investments can provide enough monthly income to cover your expenses.  Now some people say it's just your base expenses (food, housing, utilities...) and others say enough to support your lifestyle.  It doesn't really matter what it is because the end goal is the same, cover your expenses through passive income.  The intersection of your expenses and passive income is the crossover point.  Once you reach that point serious congratulations are owed to you because you no longer require work and its income in order to support your lifestyle.  That doesn't mean you can't work but you now have the option not to.

But how long will it take you to reach that crossover point?  Let's set a few assumptions to see how things look.  Single person making $50k per year with annual expenses of $25k.  Inflation of 3.00%, annual salary increases of 3.00%, dividend yield with all investments is 3.00%, and annual dividend growth coming in at 7.00%.  Nothing way out of the ordinary.  This hypothetical person should have approximately $37,500 in take home pay the first year leaving him/her with $12,500 to invest for a gross income savings rate of 25%.  It would take approximately 27 years for this person to reach the crossover point or 28 years if they require a safety margin of around 15%.

What if this person can find a way to cut $5,000 from their expenses each year?  That move alone would bring in the crossover point by 6 years.  Find a way to boost your income by $5,000 at the same time and you can knock another 2 years off your working years.

If you're shooting for financial independence, obviously your goal is to get there as quick as possible.  I imagine that most of you are like me and like to plan, otherwise you wouldn't have savings to even invest.  I created a spreadsheet, Crossover Point spreadsheet, for all of you to use if you'd like to get a rough estimate of when you could possibly hit the magical crossover point.  I can't account for all situations because there's just too many variables in play, but it should give a rough estimate of how long it will take.  For my own situation I've got approximately 10 more years to go to hit the crossover point plus a 15% margin of safety.  Time to get my expenses in check!

  What's really interesting is seeing how much the dividends continue to grow beyond expenses over time.  That's the real key with dividend growth investing.  If you select high quality companies that continue to increase earnings and dividend payments above the rate of inflation then you're standard of living can increase without having to rely on social security payments and their minuscule COLA adjustments.  One other thing that I really like about the spreadsheet is that it allows you to vary a lot of different things to see how they change your years to crossover.  For example, lowering expenses is much better than increasing your income on a dollar for dollar basis.

Here's the link to the Crossover Point Spreadsheet.  Feel free to use it for your own projections.

Have you projected out your crossover point?  Is anyone sub 5 years yet?