Every dollar that you have in your possession can be traced back to you exchanging your labor for money. The labor you provided was essentially a time commitment on your part to an employer or clients. Therefore, every dollar you own, is essentially a unit of time you spent to acquire it. The problem with this type of exchange is that in order for you to earn more dollars, you need to either spend more time doing work. Therefore, your ability to earn income is limited by the amount of time you have. This is where you may decide you may need to create a perpetual income machine. This perpetual income machine would produce earnings, without much labor effort and without requiring you to show up to a specific location for a scheduled period of time every day. With the passive income generated from this income machine, you are essentially buying time.
This perpetual income machine would produce income to you, which would likely grow above the rate of inflation, and therefore would maintain your standard of living. This of course is much more than what the average American has been receiving in raises over the past six years. All of the corporations I have worked over the past six - eight years have been characterized by increase in responsibilities for employees, increase in hours they have to exchange for the same pay, meager or non-existent pay raises, and higher levels of stress. It is no wonder that so many are dissatisfied with their jobs, and want to retire early to pursue their passions. In this article, I would discuss how I am planning to earn income without having to exchange labor for money, by setting up my perpetual income machine.
The perpetual income machine I am talking about is my dividend portfolio. For other readers, the PIM would be their pension, social security, rental income or royalty income. Since I am decades away from receiving Social Security, and I am not very skilled about rental properties or how to earn royalties, I would not focus on those ideas.
The basic ingredients of setting up your dividend machine are:
1) Your savings rate
2) How long you compound your money for
3) Rate of compounding for income and capital
Let's assume that I am earning $20/hour. Therefore, for every $20 in dividend income I receive, I gain one hour of financial freedom where I do not have to spend at an employer, provided my compensation is $20/hour.
The first step to create this dividend machine is to exchange money for labor. Unfortunately, that is the painstaking reality for anyone who has a dream of financial independence. If you earn $20/hour, you need to spend 100 hours at work, before amassing enough to purchase dividend paying stocks yielding 3%. However, this investment will result in $60 in annual dividend income, which is equivalent to 3 hours every year that you would never have to work for someone else. So for every one hundred hours of savings, you get 3 hours of freedom forever. If you therefore work 2000 hours per year, and save 50% of your income, it would mean that you would save an amount equivalent to 1000 hours ( roughly $20,000/year). This can easily generate 30 hours of freedom for you, every single year ( roughly $600 in annual dividend income). Using a very conservative dividend growth rates of 4%/year, and dividend reinvestment yield of 3%, and assuming you keep saving 50% of your income, you will be able to retire within 17 - 18 years.
The second step is purchasing dividend stocks. I would be honest with you that it takes time to learn about dividend investing. One needs to learn basic financial concepts, they also need to have good common sense, read a lot to develop their strategy, and then screen for and analyze companies in order to find attractive dividend compounders. However, this time spent learning about investments will pay dividends for decades down the road, no matter what investing strategy you choose for yourself. If you are not willing to learn about investing, chances are you will never be able to create your own income machine. However, I believe that anyone who tries to learn continuously, could succeed. The mere fact that you are on this site today, trying to learn about how to earn money from your hard earned capital is a testament to the fact that you are planting the seeds for your potential for future success in investing.
The third step is regularly maintaining the dividend machine. While it does not require much in terms of maintenance, there are some decisions that need to be made as you build your dividend income towards the dividend crossover point. When new savings and dividends received need to be invested, the proprietor of the dividend machine has to do some work in order to allocate the capital most efficiently. Efficiency means paying a fair price for a future dividend income stream today, while thinking probabilistically about the dividend yield and dividend growth tradeoffs. Keeping expenses low, such as taxes, is very important as well.
If I were starting out today, a few quality companies available at attractive valuation include:
Johnson & Johnson (JNJ), researches and develops, manufactures, and sells various products in the health care field worldwide. It operates through three segments: Consumer, Pharmaceutical, and Medical Devices. The company is a dividend king, which has managed to increase dividends for 54 years in a row. The ten year dividend growth rate is 8.80%/year. The stock is selling for 17.80 times expected earnings and yields 2.70%. Check my analysis for more information.
Abbott Laboratories (ABT) manufactures and sells health care products worldwide. The company is a dividend aristocrat, which has managed to increase dividends for 43 years in a row. The stock is selling for 20 times expected earnings and yields 2.40%.
Target Corporation (TGT) operates as a general merchandise retailer. The company is a dividend champion, which has managed to increase dividends for 49 years in a row. The ten year dividend growth rate is 19.60%/year. The stock is selling for 14.10 times expected earnings and yields 3.40%. Check my analysis for more information.
Aflac Incorporated (AFL) provides supplemental health and life insurance products. It operates through two segments, Aflac Japan and Aflac U.S. The company is a dividend champion, which has managed to increase dividends for 33 years in a row. The ten year dividend growth rate is 13.60%/year. The stock is selling for 10.60 times expected earnings and yields 2.30%. Check my analysis for more information.
Verizon Communications Inc. (VZ), through its subsidiaries, provides communications, information, and entertainment products and services to consumers, businesses, and governmental agencies worldwide. The company is a dividend achiever, which has managed to increase dividends for 11 years in a row. The ten year dividend growth rate is 3.30%/year. The stock is selling for 13.50 times expected earnings and yields 4.30%. Check my analysis for more information.
United Technologies Corporation (UTX) provides technology products and services to building systems and aerospace industries worldwide. The company is a dividend achiever, which has managed to increase dividends for 23 years in a row. The ten year dividend growth rate is 11.30%/year. The stock is selling for 16.50 times expected earnings and yields 2.40%. Check my analysis for more information.
The Walt Disney Company (DIS), operates as an entertainment company worldwide. The company operates broadcast and cable television networks, domestic television stations, and radio networks and stations; and is involved in the television production and television distribution operations. The company has managed to increase dividends for 6 years in a row. The ten year dividend growth rate is 19%/year. The stock is selling for 16.50 times expected earnings and yields 1.50%. Check my analysis for more information.
V.F. Corporation (VFC) engages in the design, production, procurement, marketing, and distribution of branded lifestyle apparel, footwear, and related products in the United States and Europe. The company is a dividend champion, which has managed to increase dividends for 43 years in a row. The ten year dividend growth rate is 17.10%/year. The stock is selling for 20 times expected earnings and yields 2.30%.
W.W. Grainger, Inc. (GWW) distributes maintenance, repair, and operating supplies; and other related products and services that are used by businesses and institutions. The company is a dividend champion, which has managed to increase dividends for 45 years in a row. The ten year dividend growth rate is 17.40%/year. The stock is selling for 20 times expected earnings and yields 2.10%. Check my analysis for more information.
Ameriprise Financial, Inc. (AMP), through its subsidiaries, provides various financial products and services to individual and institutional clients in the United States and internationally. The company is a dividend achiever, which has managed to increase dividends for 12 years in a row. The ten year dividend growth rate is 37.10%/year. The stock is selling for 10.30 times expected earnings and yields 3.10%. Check my analysis for more information.
Flowers Foods, Inc. (FLO) produces and markets bakery products in the United States. It operates through two segments, Direct-Store-Delivery (DSD) and Warehouse Delivery. The company is a dividend achiever, which has managed to increase dividends for 15 years in a row. The ten year dividend growth rate is 17.50%/year. The stock is selling for 16.80 times expected earnings and yields 4.20%. Check the analysis by Sure Dividend for more information.
Full Disclosure: Long AMP, GWW, VFC, DIS, UTX, VZ, AFL, TGT, ABT, JNJ
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