If you’ve ever been skiing, then you’ve probably seen these signs. Every ski slope on the mountain is assigned a degree of difficulty. These nearly-universal designations range from the easy, green circle, slopes to the dreaded double black diamond slopes that are not for beginners nor the faint of heart. Every slope will surely get you back to the chalet at the bottom for hot cocoa, but the speed, ease, skill and required fortitude varies depending on the path taken.
In the sport of financial independence and retiring early (FIRE), there are also a lot of slopes (ways) to get to your destination. You can assign each path its own degree of difficulty.
Most Difficult – Here, we’re talking about things like investing in savings, money markets, or just plain cash. This is so difficult for FIRE because it will take forever to achieve 25-times your yearly expenses (the rule of thumb for allowing the 4% withdrawal rule) or generate a stream of passive income from the principle because the yield is so low.
Also in this category would be private equity or venture capital investments, given the highly speculative nature and the very high risk of failure. Sure, very risky investments, if they pay off, will get you to financial independence much earlier, but the stress and skill therein makes these options only for experts.
Difficult paths to financial independence would be things like fixed income investing and rental income. Fixed income investing is simple enough, but it is so difficult to reach FIRE given how low yields have been for the past decade. Achieving FI at a 2-3% APY will barely keep up with inflation (if at all).
Rental income is highly lucrative–especially when done with leverage. However, getting started requires more time, capital, and know-how that most other types of investments. You also need a good knack for numbers, an understanding of people and negotiation, be very organized, and an understanding of the tax implications.
Intermediate Investment approaches include things like Peer-to-Peer lending and investing in non-dividend-growth stocks. Peer-to-Peer lending (Propser.com or Lending Club) will allow for above-average returns (7-10%) as well as a means of diversifying away from traditional assets. It’s also very easy to get into the game. However, there is the near guarantee for loss of some principle, complicated tax implications, the need to screen for good loan candidates, and the inability to hold borrowers accountable.
Investing in stocks is easy and awesome (!), and will yield strong returns over time. However, you are dependent on market sentiment and fluctuations. The only means of getting cash from these investments is by selling them, which may force sales at inopportune times or poor valuations.
The easiest path to financial independence is through dividend growth investing (DGI). This means investing in companies that pay out dividends on a recurring (usually quarterly) basis, and increase that dividend amount periodically (usually annually). An investor needs only enough money to buy a share of stock, and the patience to hold onto that stock. Good investing candidates increase their dividends through thick and thin, maintain strong balance sheets, and ensure that the company of tomorrow will be properly capitalized so as to maintain the ability to continue that increasing dividend. These are companies like Johnson & Johnson, Coca-Cola, Microsoft, Deere, and Canadian National Railway. Dividend.com publishes a list of Dividend Aristocrats, which are companies that have increased their dividend for 25 years. These companies are a great place to start DGI.
Vail Resorts Shows Why DGI Works
You’ve probably heard of Vail Resorts (Ticker: MTN). They operate eleven ski resorts (hence the clever “green circle” metaphor) in five different states. Their headline resorts are in all the big ski locations: Park City, Utah; Vail, Colorado; Lake Tahoe, California; several others. Their business has long been skiing and all the services around that (Hotels, Lodges, Conference Centers, Restaurants, Schools, Equipment Sales, etc.) Being tethered to such a seasonal activity creates big fluctuations in quarterly earnings (huge profits in winter, huge losses in summer).
In the last few years, Vail has instituted a program called Epic Discovery. This is essentially a program to make their resorts year-round destinations. The program turns ski mountains into havens for mountain biking, hiking, ziplining and other warm-weather activities during warmer months. It is this program that makes the company so attractive to me. If Vail can, over the next few years, get cash flow positive for the summer months, that would be hugely beneficial. Lower energy prices and a strengthening economy should be good backdrops, as well, for continued strong performance.
Vail Resorts is a dividend growth stock. At the beginning of this month, Vail had a quarterly dividend of $0.415/share, which was a yield of ~1.9%. This worked out to an average monthly payment (for my 19 shares) of $2.63. Between Vail, along with all my other stocks, I started this month with total monthly dividends of $670.50, that works out to about $22 a day.
Those dividends pay out to me in irregular increments. When they pay out to me, they sit idle in a cash balance in my brokerage account. Every time that cash balance reaches $1,000 (which currently takes an average of 45.36 days), I invest that $1,000 into another dividend-paying stock. I call this 45.36 days my “reinvestment period.”
On March 12th, Vail announced they would increase their quarterly dividend from $0.415 to $0.6225/share; a 50% increase. Because of my 19 shares, my monthly dividend income grew from $670.50 to $671.82. With that increase, it now only takes 45.28 days to hit $1,000.
My cash balance will reach that $1,000 threshold (it will actually hit about $1,200) when BBL’s (another company we own) dividend pays out next Tuesday (March 31st). With that $1,200, I’ll buy 12 shares of JNJ. That will increase my dividend income from $671.82 to $674.62. At that point, it will only take 45.09 days to hit another $1,000.
Next month (April) I expect that Proctor & Gamble, Apple, Southern Company, Costco, and a few others we own will all increase their dividends. I’m expecting those increases will be about 7% on average. These increase will be not nearly the 50% increase we had this month for Vail Resorts, but that’s expected–Vail is a smaller, higher-growth company. These companies that will increase in April are mature, established companies that are growing slowly. At a 7% increase, my monthly dividend income will rise to about $680, and it will only take 44.73 days to hit another $1,000. Next month I’ll also invest $5.5k for our 2014 IRA contribution (also in JNJ), that will bring us down to 43.9 days to hit another $1,000.
You can probably see where this is going. It’s a virtuous, and relatively unstoppable, cycle. Every month I get paid lots of money for holding companies stocks. Those companies increase that rate of payment every year (usually). I use that money that gets paid out (and more money of my own, like IRA and 401k contributions), to buy more shares of stocks. Those additional shares mean my monthly payment goes up even more. It’s this reinforcing and compounding cycle that gives me confidence that by the end of 2019, my reinvestment period (how long it takes to build a $1,000 cash balance) will be down to about two weeks.
Even after I retire and I’m taking that $1,000 cash balance and using it to pay bills and buy food (as opposed to buying stocks, like I do today), my monthly income will still increase continuously because Dividend Growth Companies (like many mentioned in this article) will still increase their payouts.
It’s an exciting thing to be a part of, and it takes very little time or money to get started. It’s not a get-rich-quick scheme. It does take time and patience, but not nearly as much time as you think. If you haven’t already, go out an buy a share or two of your favorite, well-established company (like Apple), and get your own virtuous cycle started.