When I told my wife what I thought was going on, she gave her typical response, “Eric, have you been drinking the homemade liquor again?”
Of course I had, but that was beside the point. My mind, just like the moonshine distilling in the garage, was clear. The fact is, it was the most reasonable explanation for what was occurring.
“It must be a Leprechaun, hun. It has to be. It doesn’t add up any other way. Clovers by the house. Clovers by the gas station. An extra $1,000 in the bank account. Tell me I’m not crazy.”
“Shhhh. Hun, keep it down. You’re gonna mess this up. Even if it’s not a leprechaun, we got a good thing going here. Think of it, one…thousand…dollars…. In ONE month. And, by the looks of it, next month is going to be slightly more. Leprechaun or not, I don’t want your doubting nature to jinx this.”
Retire29: Heroin Mule?
You see, funny things have been happening recently in the Retire29 household bank account. I haven’t done anything different. I still work the same hours, at the same job, and at pretty much the same salary. But, a couple months ago, my wife started seeing these huge amounts of money flowing into our bank account. Over $1,000 a month, and steadily rising. Already today, it’s risen to $1,044. I, being generally oblivious to all things dealing with money, had no idea—the wife keeps tabs on those sort of things.
When she saw all this new money, my wife came to the only natural conclusion. I’d been talking about it for years—bringing up the idea every time money got tight. So, she could only figure that, yep, Eric finally became a heroin mule. When she confronted me about it, I adamantly denied any knowledge or wrongdoing. I mean, I don’t even like heroin.
I couldn’t explain the money. I was as clueless as she was. Then, one day I was jogging around my neighborhood and I saw them. First, in my backyard. Then, down the street by our local minimum-wage gas station—WaWa.
Thousands of them. Three leaves on each. A smoking gun if there ever was one.
I ran home and told my wife what I thought was going on. These $1,000 payments had to be coming from somewhere, from….someone. But, who? And….why? The clovers did the talking.
By my estimation, on or around St. Patty’s Day, a leprechaun had taken up residence in our backyard. Around the same time, said leprechaun had found employment at the local WaWa. At $7.25 per hour, a full-time, minimum-wage leprechaun would take home around $1,000 after payroll taxes and 15% for federal and state. The leprechaun would have had no trouble lifting my routing and account numbers from the sensitive documents I often place neatly on top of our recycling bin. The puzzle was putting itself together.
“Minimum-wage leprechaun, hun,” I said. “Just accept it.”
It seemed plausible. But, of course my wife is far more discerning.
Dividends Douse Cold Water on Leprechaun Theory
“There’s just too many unanswered questions!” my wife henned. “If it’s a leprechaun, where is he sleeping? What does he eat? What’s his motivation for doing this?!”
“Not our problem, baby. Now, hand me a cigar.”
Just as I’m lighting my eight-dollar Cohiba with a twenty-dollar bill, my wife shouts a startling realization:
“Hun, quiet please. It’s Cohiba time.”
“No, really. Dividends. Remember those thousands of dollars you’ve been funneling your 401k?”
“And remember how you’ve been diligently plowing money into your dividend-growth-stock portfolio, month after month?”
I drag long and hard on the cigar as I ponder her point. I wave my hand, “Proceed.”
“Well, dividends. The $1,000 per month we’ve been getting is from dividends. I’ve seen your portfolio, and the numbers add up. 600 shares of Kinder Morgan. 190 shares of Apple. 128 shares of AT&T. 79 shares of Starbucks. GO EASY ON THAT CIGAR! I could go on, but it’s all there.”
I wanted nothing more than for her to just be quiet, but I couldn’t deny her logic. The cigar smoke dissipated above me like so many disproved theories of leprechauns. “It makes sense, but how could it be? I mean, $1,000 per month? For doing nothing? In the first year I worked at McDonalds I only made like eight-hundred-bucks. All that just from 401k deferrals?”
“Well, the 401k deferrals are just part of it. You know the basics of dividend growth investing, don’t you?”
“Babe, I barely remember to put on socks in the morning. What do you think I am, some sort of finance blogger? Refresh my memory, please.”
“Maxing our 401k deferrals are just the start. We’ve also been maxing-out our IRAs into dividend-growth stocks. Then those covered calls you’ve been writing add some fuel to the fire. Then there’s the constant reinvesting of paid dividends. In 2016 alone you received over $10,000 in dividends that all got thrown back in the kitty. Most of these dividends are of the qualified variety, also. So, no taxes in our 15% tax bracket.
“That, along with those aforementioned IRA and 401k deferrals, result in a pretty sweet tax refund even though we claim 9 on our W-4. Then…there’s the biggie. All these companies tend to increase their dividends over time. Just yesterday, Apple upped its dividend by 10.5%, creating another $4 per month into perpetuity. The day before that, Pepsi gave us another 50-cents per month.”
I scoff, “Four-fifty?! What am I supposed to do with that? That’s not even halfway to a dime bag.”
Wife29 presses on, “True, but that’s a stupid way to look at it. You’ll still buy your dime bag, but with money you’re earning. That $4.50, along with the other $1,040, just sits there, compounding. It buys more and more dividend-paying shares, and those shares tend to increase their payout over time. So, yeah, $4.50 ain’t much, but over time it will build a dynasty.”
I ponder this point thoroughly….”Interesting. So, if I’m hearing you correctly, you’re saying that there’s no leprechaun?”
Let’s Get Serious About These Dividends
Okay, time to get somewhat more serious. The above story is fake, or at least the part about the leprechaun. What I was trying to do was exemplify the principle of “letting your money work for you.”
For all intents and purposes, my current nest-egg now kicks out enough cash via dividends that the portfolio now makes more money each month than a person (or leprechaun) working full-time at the national minimum wage. That’s pretty cool.
This journey to, presently, $1,044 per month in dividends was not without hiccups, of course. I’ve experienced about a half-dozen dividend cuts (Kinder Morgan, HCP, BHP Billiton, National Oilwell Varco, to name a few) and another half-dozen or so all-out dividend suspensions (Atwood Oceanics, Hi-Crush, Textainer). The oil and commodities rout of 2013-14 was brutal on earnings and dividends of energy companies, resulting in a lot of lost income.
However—and this is important—a diversified portfolio crossing many sectors and levels of growth will withstand those company- and sector-specific trials. So, despite the oil selloff, many other companies flourished over the same time (like Vail Resorts, McDonalds, or Microsoft), hugely increasing their dividends.
My Preferred Form of Passive Income
The best part about dividends, and any form of passive income really, is that no matter what happens with the fluctuation of markets or periods of heightened expenses, dividends offer that steady and ever-increasing upward pressure on net worth:
This is particular reassuring when expenses seem a bit out of control. When we lived in NYC for a year between 2014-15, we were vastly overspending our income. Likewise, these past six months we’ve spent a fair amount of money finishing our basement. Dividends softened the blow of these periods of financial stress. While I was spending most of my “active” income, I knew that behind the scenes (within my brokerage and retirement accounts) shares were paying dividends, being reinvested, and slowly but continually pushing me toward financial independence.
Speaking of Financial Independence
Since I mentioned it, here’s where I stand on the path to financial independence.
My net worth today is $490,602. That’s about six grand less than last Friday, but about 12.6% higher than my last update in mid-November. That’s been an expensive six months, too, as we spent around $22k on our basement. But, the $6k+ in dividends received in that time greatly helped push the needle upward.
There’s really no magic formula to all of this. Having a good salary helps, but we’re middle class for our zip code, and we have a StayAtHomeMom29. Paying yourself first via 401k and automatic IRA deferrals is hugely important in ensuring your effective tax rate is low and largely removing human behavior from screwing things up. Then, managing passive expenses and only spending money on what brings you happiness takes care of most of the rest.
I continue to believe that retirement around age 35 is entirely plausible. 35 is a year later than I expected when I first started Retire29. This belief is based on the careful calculation that having a million-dollar net worth, which includes a modest paid-off home, five years of expenses in current accounts, and the remaining balance in retirement accounts is sufficient enough to retire when expenses are not grandiose. Of course, knowing how much you spend is essential to having this comfort.
Financial Independence is Inevitable
Dividends historically grow at about the same rate of earnings growth, which is about 9% per year for the S&P 500. My portfolio current yields 3.06%. Thus, if I never add one more dime of new money, dividend growth and reinvestment alone will result in total passive income growth of about 12% per year. By the time I’m 45 (13 years from now), that will mean I’ll be at $4,700-ish in passive income, which is roughly our monthly expenses today (which includes a mortgage). So, if I never pay off my house (which we will), and save another dime (which we are), I’ll still be financially independent at age 45. No leprechauns necessary, just dividends.
That’s pretty cool.
Thanks for reading!