Projected Dividend Income Growth

It’s no secret in looking at my site, that I’m a fan of dividend growth investing.  I’ve built up enough of a portfolio that triggers a decent amount of dividends that I’m able to live off comfortably to cover my freakishly low and debt free living expenses and also allows for what I consider a fair amount of discretionary spending (while at the same time no having to worry about selling stock).

I’ve already talked about why I love dividends, so no need to rehash that stuff.  However, I do want to point out 3 ways dividend income grows over time, with very little effort.  Then I’ll get into a few of my own personal projections.

3 Ways Dividend Income Grows Over Time

1.  The company raises their dividend for the year.  This is an obvious one.  There are a bunch of boring companies out there that slowly but surely raise their dividend payment to shareholders every year.  Those little increases year by year can add up big over time.  Check out my write up on K showing how your dividend income would almost double over the prior decade with these slow and steady increases.  Nothing exciting, but looking back pretty cool how your income quietly doubles.  I use K, because it’s boring.  There are more exciting holdings out there like CBOE, RAI, MPC, or any of my 5 basic stock portfolio for beginners growing their dividend at a faster rate than K.  Point is, those 2-3 cent annual dividend increases per year can really add up over time.  It’s probably best explained from this clip in “Office Space”:

2.  Dividend Re-Investment.  This is a cool one, because you shouldn’t have to pay for it, if you have a decent brokerage company.  Every time you receive a dividend and reinvest it back into the company, you have just purchased additional, future dividend income.  Again, those small fractional shares you are purchasing each quarter won’t seem like much, initially.  But keep your eye on the prize.  10 years down the road, those fractional amount of shares add up.  Even though I’m retired and living off some of my dividends, I am still reinvesting a good portion of my dividends.  It only makes my dividend income for the following year increase that much more.  More disposable income…sweet!  Again, check out this RAI article to see what a difference reinvesting dividends can make.  Alright, I get it, you’re too lazy to click it, so I’ll just tell you.  Over a 12.57 year holding period, reinvesting dividends on RAI would have added a little over $51,000 to your balance on an initial $10,000 investment.  So, now that I have your attention, go click that article and read it (there’s a funny video in there for you).

3.  Purchasing shares of stock over time.  So this one takes a little effort on your part.  I mean, you have to try to not spend all of your paycheck and actually invest some of it.  You’re not living paycheck to paycheck are you?  Cut that shit out, you future older self is going to hate you for doing that.  When I was working, I got a kick out of investing in individual stocks each month after getting paid, updating my spreadsheets and seeing how my future dividend income was going up.  You should get a kick out of it too, it’s future streams of income that you don’t have to show up to work to receive.

All 3 of the above points make for a kick ass compounding dividend machine that slowly builds up over time and should get you excited as you stroll towards hitting financial independence.  The power of all 3 of those combined, while I was working, allowed me to grow my dividend income on average a little over 25% per year.  Pretty cool stuff.

So, now lets take a personal look at my dividend income projections.  I currently receive a little of $24,000 in dividend income from my portfolio (I’ll use $24k to make it a nice even number).  I stated a while back that my goal was to hit $40,000 by the year 2036 (I forgot about my rollover money!) and will actually crush that goal and hit it a lot earlier.  My other goal is for my dividend income to approximately double within every 10 years.  So, $24,000 annually isn’t a whole lot of money, I admit.  But, for those who have been reading a while, you know I generously round up to $7,000 for my total essential living expenses (more like $6200 in actuality).  That number is that low because I haven’t had a mortgage payment for years, so I have been absolutely debt free for a while now, and I monitor my spending and shop smart.  So in comparing my dividend income to the expenses, that looks pretty good (there are a ton of FIRE bloggers living like kings on $24,000 and they have a family of 4, I’m just a bachelor).

Now, I’d be a fool to take out the full $24,000 in dividends when I don’t need it to live off.  Also, I should state the $24,000 in dividends is across 3 accounts Roth IRA ($6,000), Traditional IRA ($12,000), and Brokerage account ($6000).  So basically, I won’t touch any money in the Roth IRA until I reach a more “normal” retirement age and just let that account do it’s thing.  It should build to a pretty sick tax free balance by then (currently in the area of $200k).  I just started living off my dividends from my brokerage account beginning in June of this year (it hurt not reinvesting those dividends), and next year I’ll start my 72(t) distributions on the Traditional IRA (I didn’t do it this year, because I got bonus $ when I left work) and begin taking out the dividends from that account to live off.  You really should read that 72(t) article if  you think I have to pay the 10% penalty on my ira withdrawals.  So in actuality, I’ll have about $18,000 in dividend income coming in to cover my $7000 living expenses, that leaves me with a little over $900 monthly/$11,000 annually in absolute discretionary spending to pick up bad habits.  In all seriousness, though much of that $11,000 will probably be reinvested in some stocks, some of that money will be used for light travel.

I’ll have a very detailed post about my withdrawals coming soon on how I set up my Reg 72(t) distributions and takes into account inflation and how to properly adjust your 72(t) distribution down the road.  I’ll also go into why I’m basically ignoring the 4% rule (if you look at the above paragraph, you can figure it out).  Basically, because the government considers me poor, my federal income tax bill is non-existent, and state income taxes are minimal, so that vast majority of that income will essentially be tax free!

Now back to dividend income projections.  My goal is to have my dividends grow at least by 5% per year.  This is a little higher than my conservative (i.e. high) inflation rate of 4%.  I’ve run projections using 5%, 7%, and an overly optimistic 10%.  In reality, I think somewhere between 5-7% is doable for my portfolio as a whole.  Again, these figures are just for normal dividends off my portfolio and do not include and premiums received from covered calls, special dividends, adjunct teaching, this web site, or consulting.

So drum roll please:

I’m pretty happy with the number crunch.  Basically, by the year 2026 I should hit my goal of the $40,000 in dividends at my most conservative expectation.  That’s a full 10 years earlier than I thought years ago, because I didn’t even factor in the rollover of my retirement plan.

Another interesting thing is looking at my FRA (full retirement age for Social Security Purposes) of age 67.  I have something like 20 years of paying into social security, and will have 15 years with goose eggs factored in the equation.  I’ve never really planned to count on social security by the time I got to normal retirement age, because that whole system is fucked unless politicians actually get off there asses and make legit changes.  So, worst case scenario, at FRA I have a little over $100,000 coming in from dividends.  That number doesn’t even include balances from my portfolio, again this is just dividend income.  Any SS income I might receive at that point is just extra disposable.

The last interesting thing to look at, would be the total dividend income I received during my retirement years.  At 5%, just shy of $1.7 million.  At 7% growth rate, a little under $2.5 million.  Realistically, probably somewhere in between those 2 figures.  Again, this is just dividend income, as I don’t really plan to touch my actual stock holdings, since there would be no real need to.

And for those who like pretty pictures of the data:

What will be interesting over time, I plan to come back to this post and update the actual dividends received.  I can probably use that data, apply some regression analysis to it and see how I have been tracking in the past, and project into the future a little bit more accurately.  Anyways, it will be fun just to track projections vs actual numbers.

So, there’s a little number crunch that may give insight into why I feel pretty confident about my ability to retire early.  Have you tracked or looked at how your passive dividend income has grown over time?

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Readers Comments (26)

  1. Splitting the baby and assuming 6% also gets you to $40000 in dividend income really soon. Will you increase your lifestyle spending at any point? Or just keep investing?

    • Hey ZJ, that’s been the hard part for me is having a loose grip on the wallet, but I’m working on it.
      I’ll probably never just truly splurge, as it’s not really my style. I also genuinely get a kick out of investing.

      Discounting that $40k back todays dollars at a 4% discount rate is only $27k after all.

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