Disclaimer **The following is not a recommendation, you should consult a professional and take into consideration your own risk tolerance when investing.**
I’ve already written about dividends and their importance before. If you haven’t checked it out, I think it’s worth your time as a refresher. So now I figured I would dig a little deeper into showing my portfolio and how the income has grown over time from adding to positions, pure dividend increases, and dividend reinvestment. These are just the dividend paying companies. I have a few non dividend paying companies, but we’ll save that for another day.
So here is a master list of activity dating back to 2008: Dividend History In 2008, my brokerage company finally allowed for dividend reinvestment. When I have time, if the OCD kicks in, I’ll go back further and pull some account history going back as far as possible. So what this cluster fuck rainbow of a spreadsheet shows (it goes down to Row 317 by the way) is a year over year comparison of dividend income beginning in 2008 through year end 2015, and prepped for 2016. There are probably better ways to build it, so it would be pivot table friendly, but I just wanted to compare year over year the dividend income from a particular stock position, within a particular account. This serves 2 purposes, I wanted to monitor the growth in dividend income quarter over quarter from a stock to see the effect of the DRIP (looking vertically at the cells), but also year over year I could easily compare the quarterly dividend income and see the growth annually (looking horizontally at the cells). And old benefit as well, back in the day, you could select which shares were sold for cost basis purposes (you kids have it easy today, the brokerage house does that for you). I also have it autosum for each account, and way down closer to the bottom autosum for the 4 quarters of the year, and them monthly in the year. All of this autosum probably makes me look insane, but it’s for checks and balances, but also allows for fair comparison as some companies don’t always follow a regular payment schedule each quarter. For example, Coca Cola (KO) pays their dividend in April, July, October, and December typically. For those keeping count, Q4 has two dividend payments. You would normally expect a dividend payment cycle of January, April, July, October. Mind blown. Hence, autosum on a quarterly basis, for year over year comparisons when companies change a month they payout.
A little homework: Scroll down to Cell A288 and look down to Cell A291. I want you to notice 2 things going on here. In cell A288 we have initial dividend activity taking place. JNJ paid $20.73 on 3/12/2008. Look down to the next cell A289 and we see that JNJ paid $23.12 in cell E289. This is just quarter over quarter and in this time frame 2 things occurred: the annual dividend was increased and we had dividend reinvestment occurring. This led to a quarter over quarter increase in dividend income of 11.52%. When we compare the second quarter to Q3 2008 we are only taking into account drip activity. So comparing the activity in A290 to A289 we see a quarter over quarter increase of 0.90%. This occurred because we reinvested our dividends from the previous quarter, those fractional shares pay you a dividend the following quarter. Comparing A291 to A290 activity, we can arrive at a quarter over quarter increase of 0.51%. These little slight increases may be scoffed at by some, but that would be short sighted. Over time, those little increases will build up over time. Throw in increased dividends payments, especially a company like JNJ with their pedigree and the income will build itself.
So lets see that in action for a longer time perspective. Look at cell E288 (JNJ dividend income $20.73) and look at cell AU288 (JNJ dividend income of $43.81). This account had only one purchase of JNJ done way back at the turn of the century, so the only activity has been DRIPs. What I want you to notice with that info handy is not only the quarter over quarter increases in income occurring, but the year over year increases taking place. When we step back and start to look at the big picture we can see the income really growing on its own. Those little quarter over quarter drips add up, and on top of that JNJ itself increasing payouts really adds up. Combine the 2 and you have magic taking place. Sweet sexy magic. You’ve heard of compounding, well these 2 forces combined is basically double compounding.
Now a little math for you with the figures from earlier in the paragraph. If we started out receiving dividend income of $20.73 for that first quarter and 7 years later we are received quarterly dividend income of $43.81, what is our annualized rate of growth of our dividend income? To answer this you would want a financial calculator, I prefer the HP12C, or just download an app to your phone. The inputs would be:
N= 7 (years)
Solve for I.
Basically our income has grown at an annualized rate of 11.28%. For sitting and waiting. Not having to lift a finger. I could only dream of my paychecks growing at that rate of return each year. Not happening. So in 7 years, the dividend income has increased by a little more than double. Not bad. We also have not even mentioned capital appreciation, but being that I’m buy and hold and don’t have any intention of selling out of JNJ, I don’t lose sleep on the daily qyrations of the stock price. But you can see the reinvestment prices on my spreadsheet. Hint, my initial purchase was way lower than where JNJ is today. So we get capital appreciation and growing income.
If that previous spread sheet looks a little too intimidating, then here is a Simple Dividend Chart that just compares year over year dividend history and has a pretty picture as well. People like pictures. While working, my goal became to increase this dividend income by an average of 20% per year. Again this would be achieved by new investments in dividend paying companies, increases in dividends from existing investments, and the DRIP. For the most part, I was able to hit the 20% goal. Some years missing, some going well over the target, and 2015 coming in at par. (The chart looks ugly in 2016, well because it’s a new year and we start at 0). Now that I won’t be working, I have to adjust my expected growth on my dividend income going forward. In retirement, my target dividend growth rate is to hit on average 5%. To his the 5%, I’ll have to lean on companies increasing profits and allowing for increased dividend payouts. Any unused dividends will be just reinvested (all dividends in my ROTH IRA, since I won’t touch this account until age 60 is the plan), but for the most part all dividends in my regular brokerage will be used to live off, and a Reg 72(t) distribution will be established on an IRA to pull dividends out of my traditional IRA penalty free. The mysterious 72(t) will be explored later, and you’ll get a peek into my mind on why I’m setting things up in a particular way. I’ll have to revisit the $40,000 in dividends by 2036 goal. After I retire and get to move my retirement plan into an IRA, I anticipate a little more than doubling my dividend income, and assuming a 5% rate of growth on the dividend I’ll have to see where that lands me.
Edit: In 2016, I’m expecting starting dividends to be at $10538.64 for the year. If the original goal was to hit $40,000 by the year 2036, I would need to have annualized growth of my dividend income of 6.89% per year. So it is within striking distance of my 5% goal, I just may have to reassess this a couple years into retirement. Also, I will look at it again after I get the rollover done, and that should more than make it doable.
Here are the inputs for your calculator:
Solve for I. I = 6.89%
Now, lets get real nerdy. You’re probably already thinking, $40k today is not the same as $40k 20 years from now. So what is the present value of $40,000 received 20 years from now discounted by a 4% inflation rate?
N= 20 (years)
I= 4% (inflation)
Solve for PV (present value). You should get $18,255.47. So $18,255.47 received today is the same as $40,000 received 20 years from now with a 4% inflation rate. That will still be more than enough for me to live off of as a 56 year old bachelor who has everything paid for and has everything he needs.
I’ll just be happy to get my money out of overpriced actively managed funds, and into individual stocks and a sprinkling of ETFs. No seriously, the underperformance of the fund in my retirement plan relative to the Russell 2000 in just the past 2 days has cost me about $2k, not including the privilege of paying a 1.3% annual fee. In some countries, I think that crime is called rape or robbery, I’m not sure, but it’s freaking ridiculous. Basically for every $10,000 I have invested, over 10 years I am paying $1599 in fees. Read that again slowly and let it sink in. On $400k, you would be paying $64,000 in fees to some ass clown fund manager. And yes, the fund underperforms its benchmark. So, not only does a hand reach into my wallet and steal my money, I get kicked in the balls as well. This is he fleecing of Americans 401(k) plans. But I digress.
The last spreadsheet I like to use to track dividends is useful to project the upcoming monthly dividends. When ever a drip takes place the number of shares is updated, or if a dividend is increase that figure gets updated. Dividend Worksheet It helps me basically know dividend income for each upcoming month. A couple of notes on this spreadsheet about the color coding. Green = high confidence in dividend payment increase for the year, yellow = probably no increase or don’t count on it happening, red=cautious about dividend cut. At the start of the year, none of the data is in bold, but as a company increases their dividend I like to bold it to bring attention to the increase. The Cycle columns just indicates the months that the dividends get paid. For example, 1/4/7/10 is January, April, July, October. Sometimes the companies may veer by one month from time to time, but normally there is consistency. The last thing to point out on the spreadsheet is the unnamed column showing Q1, Q2, Q3, etc. This is the estimated quarter for any potential increase in the dividend payment. It just helps to keep track.
Towards the bottom of the spreadsheet, I’m able to project upcoming quarterly and upcoming annual dividend income. Yep, I’m OCD like that.
So what’s the point of all of the above. First to show how income can grow over time with little effort on my part, but also going back to the A-L=OE accounting formula. If we change ALOE up a little and say Income – Expense = Surplus/Shortage we can pair the passive income with expense info to determine if I can live off my passive income to retire. Then using FV (future value) formulas, project out into the future potential income vs expenses to see if early retirement is possible.
Sound off below. Have you tracked the growth of your passive dividend income before? How has that worked out for you. What sorts of other passive income do you have built up.
On a side note, retirement may be this week, rather than next month. Look for a post going over that situation.
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