Dividend growth investing is one of the easiest and surest paths to financial independence. It’s a true “Set it and Forget it” approach. A dividend growth portfolio is nothing more than band of loyal indentured elves that go to work every day while you sleep, at jobs that will give you quasi-guaranteed ~10% income raises each year.
Indeed, just look at the scatterplot to the right where I’ve mapped the dividend yield against the dividend growth (last 3 years) of the 30 stocks in the Dow (plus a trendline). Think of the yield as your salary and the growth as your annual raise. This is notably a small sample, but the relationship holds for larger samples of stocks that one would consider “dividend growth.” For every $100 invested in this basket, it’s reasonable to expect a perpetual income stream that starts at maybe $2.50 and provides raises of 10% per year. Empirically speaking, the average Dow stock has actually gotten 2.7% yield with 14.3% growth over the last 3 years, but I’m forecasting conservatively.*
This is powerful stuff. To illustrate, we had the pay the hospital $300 for the delivery of our baby girl. I haven’t forgotten; I’m going to have the baby pay me back for that once she’s old enough to push a lawnmower. We also bought a baby monitor and swing, neither of which has ever been used, for another $200. Add in the crib, dresser, and other “nesting” components, maybe another $500. So, the “Day One” costs of having a baby in the U.S. are $1,000…
So, let’s say that I take that $1,000 and invest it in a basket of dividend paying stocks, like the low-fee ETF VYM, and check off the “Reinvest Dividends” box. Then, I just forget about it. Notice that I’m not saying “add $100 each year,” or “adjust your asset mix to account for risk tolerance as you age,” or anything like that. I’m talking about ‘I-forgot-the-password-to-the-account’ kind of forgetting. I’m talking about logging into Scottrade in the warm afterglow of your child’s birth, before the first poopy diaper and when all is right with the world. In an act of pure altruism, you add the $1,000 and hit “Buy” on VYM. You write down the password on a napkin and put it in the back of the baby book. Moments later, while standing outside the nursery and gazing fondly at your new creation, an industrial light fixture detaches from the ceiling, knocking you out cold. Any knowledge of the Scottrade transaction is wiped from memory.
Fast forward 67 years. Your now-grown child is an utter disappointment. You’re an old geezer and you lament the fact that your offspring has lived their life as a spendthrift. They moved from one fast food job to another, staying just long enough to qualify for unemployment, at which time they’d create some disgusting viral video in the walk-in cooler in order to get fired. At your 95thbirthday, your eldest shows up and you begin sobbing. She has no money for retirement, not one red cent. You know that she’ll be working until she dies. You open up her baby book to recall better times. Ah yes, first solid foods…a picture of the first time at the zoo…the price of a gallon of milk was $2.99…the tiny feet prints, and—wait a minute—a napkin with a password. Wtf?
The memories flood back to you as if you entered a Christopher Nolan film. Yes, the Scottrade account! You grab your laptop and log in. You think, for a second, maybe there’s some money here to help the child with their retirement. You see that VYM still sits there, churning dividends at 2.74% and growing dividends at 11% (which is less than the 14% they’ve done the last 8 years). Equities have gained 8% a year (as per average). Account balance, oh my Holy God, $1,008,770.97.
Now, a million bucks won’t go quite as far as it does now, but it’s still a good heap of coin. You tell Junior of her good fortune. Against your best advice, she decides to buy one million double cheeseburgers (which have astonishingly not increased in price) to feed the city of Detroit. The Motor City honors her with a bronze statue in the courthouse square. It all worked out.
But seriously, dividend growth investing is truly a wonder. I wish I’d gotten into the game sooner. I wrote a previous post talking about how to build a dividend growth portfolio. In a subsequent post I offer some core dividend growth stocks. I hope this illustration shows how time, dividends and compounding can have lifetime effects and that this gives you the motivation to get started. Even over shorter timeframes, though, (like my five-year strategy for financial independence), I’m forecasting dividend income growth of 25% per year (4% dividend reinvestment + 10% dividend growth + 11% added principal).
Come for a ride with me on the dividend growth train, and start a wealth dynasty today!
As always, thank you for reading!
– Mr. 29
*: please note that the Dow Jones Industrial Average index is ridiculously price weighted, somehow making Visa the most important company in the world, so the numbers I give here (straight average) won’t match the actual index.