Monday, February 3, 2014

How to retire in 10 years with dividend stocks

The goal of every dividend investor is to generate a sufficient stream of passive dividend income, that would adequately cover their expenses. In order to achieve this goal however, investors need to select a strategy and fine-tune it over time to reflect current market conditions. In most of my articles I tend to focus on investing that would generate dividends for several decades to come. But how would someone who wants to retire in one decade afford to retire? Follow the guidelines in this article, and you might end up being one of the lucky ones who can afford to quit the rat race in a decade.

The first guideline is to contribute regularly to your dividend portfolio. This is important, because it allows our investor to dollar cost average their way over many years. This would provide them with the opportunity to build their portfolio brick by brick, without purchasing everything as a lump sum. Many articles on retirement focus on lump sum investing, which is not relevant to most future retirees.

The second guideline is to focus on dividend growth stocks, which are companies that regularly raise distributions. Since our dividend investor is likely to live off distributions for decades to come, they need to overcome the risk of inflation. As a result, they need to invest in stocks that can afford to regularly increase dividends, thus ensuring an inflation adjusted stream of income. Luckily, David Fish has the dividend champions list, which can be accessed from here. Investors can use this list as a starting point to identify dividend growth stocks, and apply their screening criteria.

The third guideline is to buy quality dividend stocks at attractive valuations. This is the step where the savings added to the brokerage account need to be invested. Investors should develop a set of standard screening criteria, in order to narrow down the list of dividend champions or achievers to a more manageable level. I typically look for companies yielding more than 2.50%, which have raised dividends for at least ten years in a row and trade at less than 20 times earnings. I then further avoid companies with high dividend payout ratios, depending on their industry and business form. After I do this, I research each stock in detail, in order to determine if it has what it takes to keep raising earnings and dividends over time. This is the most subjective part of the process. However, if you create a properly diversified portfolio of income stocks as outlined in the next step, you have a very good chance of success, even if you picked average companies.

The fourth rule is to focus on creating a diversified income portfolio, in order to reduce risk. In order to protect yourself, your goal is to have your income stream come from as many companies as possible. Leave the task of outperforming the market each year to the people who want to manage other people’s money or who are trying to sell you expensive newsletters. Your goal is to create an income stream that grows over time, which will support you in your retirement. As a result, in order to have a defensible income stream, you need to own at least 30 individual income stocks representative from as many industries as possible. Ideally, you would own three stocks from each of the ten sectors identified by Standard and Poor's, which comprise the S&P 500 index. In reality however, it might be difficult to achieve this strict diversification. However, since you are building your portfolio over a long period of time, you will likely be able to purchase quality stocks from different sectors, which would be priced right at different times over the next decade.

The fifth rule is to reinvest dividends selectively in these quality income stocks over the next decade. Until you reach your target dividend income, you need to use the power of dividend growth, new capital contributions and dividends received to plow back into your portfolio and turbocharge your dividend income. I typically avoid reinvesting dividends automatically. Instead, I wait for my dividends to accumulate, and then either add to an existing position, or initiate a new position in an attractively valued stock. While some might say I am missing out on compounding my income while waiting for my dividends to accumulate and buy a stock, I disagree. Re-investing dividends in an overvalued stock is a much worse offense than simply patiently accumulating cash in my book, and deploying it in the best values at the moment. This is another tool that will increase your odds of growing your dividend income stream faster.

Now that I outlined a list of few basic guidelines to follow, I will show how an individual can retire in ten years. Let’s assume that our individual manages to save $1,000/month for the next 120 months (10 years). The first month they only manage to save $1000. Let us also assume that our investor invests his or her hard earned money in dividend stocks yielding 4%, that grow distributions by 6%/year. Let's also assume that share prices grow by 6%/year as well (Such linear growth in share prices does not work in reality, but is only used for the model) If the distributions are paid monthly, and are reinvested back in stocks yielding 4% and growing distributions at 6%, our investor will generate approximately $659/month after 10 years. Now granted, they only saved $1000/month for ten years. However, if they saved $2,000/month instead, their dividend income will rise to $1,317/month in 10 years. If your dividend crossover point is around $1,300, then after ten years of meticulously saving and investing $2,000/month, you will be able to retire. The table below shows how investing $2,000/month in dividend paying stocks that yield 4% and grow dividends by 6%/year, can result in monthly incomes exceeding $1,300/month in 10 years, and $2,000/month in 13 years.

As you can see, the second column shows number of shares purchased with the $2000 savings every month, plus the amount of dividends received as well. After the first year, the $2000 buys less than 2000 shares, because the share price goes up in lockstep with the dividend growth.

This spreadsheet is a guideline on the forces that will help someone reach financial independence. Your dividend crossover point will be dependent the amount you can save, amounts you need, returns you can generate, and time to retirement. By carefully managing those variable, the retiree will be able to devise a proper plan that will help them accomplish their ultimate goals of attaining freedom over their time.

Relevant Articles:

Complete List of Articles on Dividend Growth Investor Website
What are your dividend investing goals?
Dividend Growth Stocks – The best kept secret on Wall Street
Dividend Growth Investing is a Perfect Strategy for Young Investors
Dividend Growth Strategy for Retirement Income


  1. DGI - I think something happened in your table between rows 12 and 13. The shares value for row 12 = 23407.64...shouldn't the shares value for row 13 be something like 25484.67??? 23407.64 + 2000 + 78.03 Right now the table show a value of 25369.04...

  2. Where can I obtain a copy of the spreadsheet from your article "How to retire in 10 years with dividend stocks"

  3. What do you think of TGT now as an investment as it is 25 percent down from its 52-week high? Still a good buy?

  4. I appreciate the breakdown - it really helps me stick to my goals for created dividend income.

    One question - Are you accounting for taxes in month 13? The total value between months 12 and 13 is less than your monthly investment of $2,000.


  5. It really is that simple. Save, invest, reinvest and eventually you'll hit that crossover point. Now that's not to say everyone can do it in 10 years, but everyone has the ability to hit the crossover point.

  6. Love this article on dividend investing and am trying to implement it. I use the iDRiP app for iPhone to track it all.

  7. Hi John and Paul,

    Actually, the second column does not show dollars, but number of shares. I assume that I am buying shares at $1, that pay 4 cent annual dividend in month 1. Then the share price and dividend increase by 6% to $1.06/share and $0.0424/share in month 13.

    Therefore in month 13, the $2000 in contributions, and the $78.03 in cash is not reinvested at $1/share, but at $1.06/share.

    That is a good question, and I should have probably explained it a little better.

  8. Hi Fred,

    Try accessing the spreadsheet from this link:

    Otherwise, you might want to email me at name of my site as one word at gmail dot com.


    As I mentioned in an earlier article, I am buying equal dollar amounts of TGT every month this year, as long as it is below $69

    PIP and TCC,

    Thank you for stopping by and commenting. It does require a tremendous amount of dedication, patience, persistence, perseverance to save money, and then put it to work for long periods of time ( like 10 years for example). I believe that most people can succeed if they put their minds and souls to it, but in reality it is super hard to accomplish it given the daily distractions that life throws at everyone.

    Thanks everyone for reading Dividend Growth Investor

  9. DGI - You don't mention in the article that the share price also grows by 6% as well as the dividend. This is important distinction. The other issue is that unless the stock is paying dividends monthly you will not have the compounding on a monthly basis, only quarterly. The trick is to build a portfolio with receiving dividends each month. 30 stocks may not be sufficient to achieve this.

  10. Everyone else,

    I did add more information about share prices increasing and that the second column is shares, not dollars. I also added that the $2000 will buy less than 2000 shares after year 1, since share prices have increased.

  11. RTD,

    Welcome to the site. While I didn't explicitly mention the fact about stock prices, the table did show that share prices were increasing.

    In regards to your comment for monthly dividend compounding: In a portfolio of 30 - 40 securities, you will get dividends paid out to you every month, though they will be lumpy. The dividends roughly approximate that fact. I would rather be partially right, than totally wrong. No investor will buy just one stock - rather I used generic stock prices and dividends to illustrate a point, and make calculations easier.

    I do not want anyone to get bogged down in details, since this is simply a model. Sure, I could add extra complexity, but how would that add any value to you? You won't get anything additional out of it, and by complicating simplicity further, everyone is much more likely to get lost and miss the point of the article.

  12. DGI,

    Great article.

    Perseverance is definitely the name of the game.

    My personal journey is probably going to be about 12 years long, but if I can get it to 10 I certainly will. :)

    You're doing great so far. You'll be FI in a few years here, so I'm looking forward to what that looks like for you.

    Best wishes!

  13. Is it just me or why has nobody pointed out that your numbers are based on a stock that is at $1. If dividend income is paid on the number of shares you own then isn't your spreadsheet inflated grossly by having a stock purchase at $1 to show how big an income you'll get? In reality won't that stock price be $15 to $50 or more a share depending on the company thereby greatly reducing your dividend income because you're limited in the number of shares you can actually buy with 1k a month.

  14. Hi Jonathan,

    I don't think your question makes much sense.

    What is the difference in total dividend income on a $1000 investment for those two scenarios:
    A) You put the entire amount in a stock that sells for $1/share and pays an annual dividend of 4 cents/share
    B) You put the entire amount in a stock that sells for $50/share and pays an annual dividend of $2/share
    If you go through the thought process of answering this question, you would realize that the question you asked doesn’t make much sense.

  15. Why does investing double ($2,000) per month result in LESS than double the monthly dividend payments after 10 years?

    We're penalized for saving more money, sooner?

    10 years @ $1,000 monthly = $659, but
    10 years @ $2,000 monthly = $1,309...

    ...according to above.
    $659 x 2 (twice the amount invested) is $1,318?

    Just trying to learn, thank you.
    Justin Barracosa,
    CEO @
    Aspiring Canadian Investor. :)

    1. Hi Justin,

      Great question and catch. I looked at the calculations, and apparently under the scenario of $2K savings I used $1,000 for the first month. So the amount should be $1317 - which is more than 1309 ( this is the cost of 2 - 3 beers, so it is material)


Questions or comments? You can reach out to me at my website address name at gmail dot com.

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