Wednesday, November 4, 2015

Building my dividend snowball to $30,000 in annual dividend income by 2024

One of my favorite books on investing is “The Snowball: Warren Buffett and the Business of Life” by Alice Schroeder. The book describes how Warren Buffett accumulated his fortune starting at a young age, up until early 2008 when he became one of the richest people on earth.

I like the concept of a snowball, where you start small, accumulate snowflakes as you start pushing it down the hill, and then you keep rolling the snowball until it turns huge. After that, the snowball grows even larger, without any additional input from you.

With dividend investing, you start small, and immediately get hooked the moment you receive the first dividend paycheck. The realization that you earned passive income without even lifting a finger has had a huge impact on the dividend investing community. The second realization that if you manage to put more money to work, and if you reinvest those dividends, you are going to grow that passive dividend income in the future. Let’s assume that I earn $20/hour from my job. The way I think about it is that for each $20 in dividend income I can receive today, I am essentially buying an hour of freedom from work. The following story from The Snowball, about Charlie Munger ( Warren Buffett's investing partner at Berkshire Hathaway) really resonated with me:

Charlie, as a very young lawyer, was probably getting $20 an hour. He thought to himself, ‘Who’s my most valuable client?’ And he decided it was himself. So he decided to sell himself an hour each day. He did it early in the morning, working on these construction projects and real estate deals. Everybody should do this, be the client, and then work for other people, too, and sell yourself an hour a day.


Once those dividends exceed the level of expenses by a nice margin of safety at the dividend crossover point, you are financially independent.

Last month, I wrote two articles about my financial position. In the first one, I discussed how much I spend per month. In the second, I discussed how much dividend income I am generating. I received a lot of comments, so I will try to address some of them today.

In today's article, I am going to put things in perspective a little bit. I am going to discuss the future of this dividend portfolio of mine. Please stay along.

One of the comments I received was that $1,500 - $2,000 today might be sufficient today, but might be totally inadequate for me in the future.

The problem with these comments is that they only focused on the expense side, but not the income side. Assuming that I can earn $1,500 - $2,000 in monthly dividend income around 2018, then that would mean that I would be Financially Independent (FI) around that time. I would have become FI in approximately 10 – 11 years of meticulous saving and investing. Easy peezy.

The other problem is that the comment assumes that a frugal person like myself, who has the discipline to always spend less than what they earn, would just go ahead and start spending like crazy. I believe that no matter what curve-balls life throws me in the next decades, my frugal attitude would be helpful in containing costs.

Just because I will be FI around late 2018 however, doesn’t mean that I will simply go off and retire to a beach. After all, for someone who achieves FI in their early 30s, chances are that they will get really bored if they had no challenges to conquer. If I decide to do something productive with my time after FI, chances are that I will earn some income from this activity. Because of my frugal habits, I can live really well on $1,500 - $2,000/month. I can keep working, or I can focus more on blogging, or I can simply find another thing that may bring income – write a book for example. Even if I decide to work a seasonal job where I provide tax or accounting services, I will be able to cover expenses and let dividend income grow.

The nice thing to remember however is the fact that this dividend machine that is producing $18,000 - $24,000 in annual dividend income will grow that dividend income over time. But before looking too much about 2018, let’s think about the expected dividend income I shared for year 2016.

I expect to generate $15,000 in annual dividend income next year. This estimate doesn’t take into account any new capital I will add to my portfolio. This estimate also doesn’t take into account any dividend increase announcements from the companies I hold in my portfolio.

Assuming a very conservative growth of 3% - 4%/year, as well as average dividend reinvestment yield of 3%- 4%, I could reasonably expect to double my dividend income every nine to ten years from here. This would mean that if I never touch my dividend income today (but also that I will never add a single cent of fresh capital to my portfolio), I will expect to generate:

$30,000 in annual dividend income in 2024
$60,000 in annual dividend income in 2033
$120,000 in annual dividend income in 2042

This assumes no money is ever added to this portfolio, and it also includes pretty conservative projections on dividend growth and dividend yield reinvestment. The snowball effect of compounding and reinvesting dividend income is truly evident once you accumulate the first $1,000 in monthly dividend income. When you generate more than $12,000 in annual dividend income, even modest rates of dividend reinvestment and dividend growth can result in $1,000 in additional annual dividend income coming your way without any new capital. The point at which money earns money for you without any additional capital input is when the dividend snowball truly starts to gain traction on its way to achieving its full potential.

These projections were one of the reasons why I am putting as much money as I legally can in any type of tax-deferred account I am eligible for today – including 401 (k), Roth IRA, SEP IRA, H S A etc. I found out that I may end up generating too much dividend income, which may end up being taxed heavily. Plus, if I ever end up earning a lot of money on the side ( maybe DGI blog becomes so mainstream that I end up earning too much from it) I will be just paying taxes through the nose in that case.

So to summarize, I expect to generate enough dividend income that will cover expenses by 2018. Those projections already account for a nice margin of safety in dividend income. Most of the excess dividend income from that margin of safety buffer will be coming from tax-deferred accounts ( and hopefully won't be touched for decades if ever). I do expect to continue earning money at some capacity too however, since I like to stay active and to keep an open mind about learning new skills. Either way, I project that my dividend income will double to $30,000/year by 2024. After that, I expect that my dividend income will keep doubling every nine or ten years, even without adding any new funds to my portfolio. Once you create critical mass in a dividend portfolio, the dividend income could compound to some pretty impressive figures over time.

How far along are you on your journey to financial independence? What are your plans after you reach the dividend crossover point?

Thank you for reading.

Relevant Articles:

How to retire in 10 years with dividend stocks
Happy Financial Independence Day
Margin of Safety in Financial Independence
How to stay motivated on your road to financial independence
From zero to $15,000 in dividend income in 8 years

47 comments:

  1. Great job! It's exciting to imagine those dollar amounts rolling in each month.
    I'm currently at $6k annually. Not as impressive as yours, but I'm catching up!

    ReplyDelete
    Replies
    1. Earning $500 in monthly dividend income is pretty impressive.This amount can easily cover utilities, internet, cell phone, cable for many people, or groceries for over a month. Pretty soon you will be hitting $1,000 in monthly dividend income - through dividend growth, dividend reinvestment and new capital.

      Good luck in your dividend investing journey!

      DGI

      Delete
  2. I'd guess we're still 5-7 years away from FI. Although more projections need to be made once we get to around $10k forward dividends to figure out paying down our mortgage vs investing that capital. Paying down the mortgage drastically decreases our annual dividend needs so I have to figure out what's the point to aggressively pay that down. Or if it's better to keep investing but keep the mortgage.

    Once I reach FI I plan to do a lot more volunteering for charities as well as looking at possible new careers and of course continuing to write on the blog. Also a long slow road trip will be in the making.

    ReplyDelete
    Replies
    1. Hi PIP,

      Thanks for stopping by and commenting. You are only 5 - 7 years away from FI - and you only started less than five years ago, didn't you? You are halfway there it seems like it.

      I am curious, do you plan do maybe sell the house and/or downsize if you are going to travel? Either way, if you can generate more returns than the mortgage, it may make sense to keep the mortgage. However, I do understand that having debt feels limiting.

      Good luck in your passive income pursuit!

      DGI

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    2. We don't have any plans just yet of downsizing or selling the house so it's going to be there no matter which route we go. It's just going to be figuring out an optimization strategy that works for us. Paying down the mortgage would reduce our monthly dividend requirements by $900 but the interest rate is low enough that it's an easy hurdle to beat via the market over a given period. We could actually build a portfolio that yields close to the mortgage and would likely grow as well to provide a buffer. Lots to think about but we're still a couple years away from making that decision.

      Delete
    3. That would make for an interesting article to write down your thought process and alternative outcomes.

      I do not own my residence - and I am debating if it makes sense to own or to rent. I do like my location, though I could see myself moving out in less than a decade. The fact that I do not know much about house repairs is another factor that is stopping me from buying. For example, do you expect to spend on average 1% of house value per year on maintenance ( roof, AC etc)?

      Delete
  3. Good for you, DGI. Nice article and congratulations on your well thought out plan / success.

    SAK

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    Replies
    1. Hi SAK,

      Thanks for commenting. The funny thing is that I never earned six figure income, but through frugality I am on my way to covering 60% - 80% of expenses through my dividend income in about 8 years of investing. A small seed could indeed turn into a mighty oak!

      DGI

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  4. DGI,
    It seems funny that people forget the growth portion of DGI and just assume you will run out of money. It's not like we invest in a SDI (stagnant dividend investing) portfolio. Since Karen and I are not yet taking distributions, but are instead reinvesting dividends, my projections show our dividends doubling in about 4 or 5 years. But as you say, even after we start taking distributions, they will still increase (hopefully) faster than the rate of inflation.

    2018 is just around the corner. :)
    Keith

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    Replies
    1. Keith,

      I know right? I have to discuss almost daily that dividend growth stocks manage to grow earnings, dividends and intrinsic values over time.

      I still cannot believe the numbers when I log on to my brokerage accounts. It feels like I am in a dream. You are right on the money that DGI stocks grow income over time. Even if I were to spend all my dividends starting in late 2018, I would still expect distributions to grow over time.

      I am reinvesting dividends, enjoying dividend growth and slowly adding new cash to the portfolio. It is likely that the annual dividend income will reach $30K earlier, due to new capital additions.

      Thanks for stopping by. Looks like you are doing well with a nice dividend income, a good pension, and paid off house, and will be soon eligible for SS ( in a few short years).

      Take care!

      DGI

      Delete
  5. I admire those who don't live a high consumption lifestyle. No doubt their lives are much less stressful than those who are always tapped out. I always sort of chuckle to myself watching neighbors and friends purchase new vehicles every two or three years as they make snide comments about my twelve year old Ford. They never stop to think that their spendthrift ways provide the cash flow that make my investing activities work. I don't envy them but I should be thanking them. They should have paid attention in math class like I did. LOL!

    ReplyDelete
    Replies
    1. What you are doing is very smart. The less money you spend, the more money you can afford to save and invest. This also translates into need for a much lower nest egg to support you in financial independence.retirement.

      Very soon the amount of savings starts generating a sizeable stream of dividends on its own. I equate dividends to another employee I have at my household, who works 24 hours/day & 7 days a week, never takes a sick day and always shares their income with me.

      Good luck on your investing journey!

      DGI

      Delete
  6. we moved to fl. in 1996,bought a home with a 30 yr. mortgage. paid it off in 10 yrs. we would put some of our extract money on the principle, money from tax returns, overtime, etc. one of the best feeling in the world to make that last payment. good luck and keep the articles coming.

    ReplyDelete
    Replies
    1. Congratulations on this achievement - paying off a house 20 years earlier is a big accomplishment. It must feel great to live in a fully paid for house.

      Are you retired now, or do you still work on accumulating your nest egg for retirement?

      Best Regards,

      DGI

      Delete
  7. Long time reader since your beginning DGI. You have planned the work and worked the plan. Kudos to you in your financial and life discipline. As the saying goes, " a victory over oneself is the greatest victory of all." I am at $18k per year, and the snowball does truly roll about years 8-10.

    ReplyDelete
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    1. $1,500 in monthly dividend income is a very impressive amount. Some people have to work close to 1000 hours/year to make the same amount of income as you ( which is equivalent to half a work year)

      You are a few years ahead of me. But I am working my way to catch up with you. You are right that having a plan, following it for several years, will lead to victory.

      What is your target monthly dividend income you are aiming for?

      Best Regards,

      DGI

      Delete
    2. DGI- my target is $50-60k per year. Factoring in taxes, which admittedly may change, I want to be able to "rely" on $36k ($3000 per month)per year after the 50-60k in gross income is taxed, as all of this is separate from 401k, etc.
      I lack an exact figure because I am unsure of how much wife and family will want to travel or enjoy hobbies at home. Of course, life always throws you unforeseen variables. Some other pearls:
      1. Best "investment" ever was driving my sophomore year college car for 17 years- even as my career advanced. Frugality gave me the seeds to plant in the DGI stock soil. I still miss that car!
      I aim to retire in 12-15 years.

      Delete
  8. So do you use DRIP on all your stocks?

    ReplyDelete
    Replies
    1. I only DRIP in my retirement accounts. For taxable accounts, I pool dividends in cash, and allocate them in the best ideas I have at the moment.


      You might like this article: http://www.dividendgrowthinvestor.com/2014/01/the-only-reason-for-automatic-dividend.html

      Delete
  9. HI DGI,
    I may have missed it but what are your plans for healthcare assuming you quite your job and work for yourself (write book for example?)
    Thanks,
    DFG

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    Replies
    1. Hi DFG,

      I switched jobs last year, so I am currently liking my position - so I may do that for a little after my FI date. A job comes with insurance.

      Otherwise, I could do the ACA. Or I could move abroad for a while. I probably need to write a post about that - but I am also learning more about the specifics/intricacies of Obamacare too.

      Best Regards,

      DGI

      Delete
  10. My son bought 10 shares of PM in late 2012 (at age 20, Roth IRA) and reinvests the dividends. If the PM dividend and stock price increase 4%/year, by the time he reaches current SS retirement age of 67 he will have 66 shares worth $37k. His initial investment of $878 will produce annual dividends of $1,475 or 40X his first full year of $37. Valuable snowball = patience and vision.

    ReplyDelete
    Replies
    1. That is pretty good teaching lesson for your son. I didn't even know about Roth IRAs at age 20 - he is years ahead of his age cohort too.

      I wish him good luck in his investing journey!

      DGI

      Delete
  11. Once I've reached what I believe is my dividend cross over point, I plan on doing nothing different...initially. I would imagine that I'll force myself to do more due diligence...for example, determining any anticipated large expenses...like possibly moving to a different home or possibly helping the kids with grad school (emphasis on 'possibly'). Will need to review the healthcare/insurance situation. With the mortgage and college costs hopefully addressed, I expect taxes will be a significant cost to contend with if I were to kick my 9-5 job to the curb. So additional time will need to be spent looking at the tax landscape once FI is achieved (in addition to the planning I'm already doing). I've got a more than a few years to go, so lots of time for stuff to change.

    In short...measure twice (a bunch of due diligence) and cut once (quit existing job).

    Thanks for your posts!

    ReplyDelete
    Replies
    1. Hi Paul,

      I like your plan, because I expect to be doing something similar around my dividend crossover time. I may stay at the job for a little while, and then slowly transition to whatever else I am going to do next.

      The funny thing is that the tax code is set up in a way that heavily taxes working for someone else, but provides a lot of benefits and flexibility for early retirees.

      I wish you good luck in your dividend investing journey. When do you think you can reasonably expect to hit your dividend crossover point?

      Delete
    2. The crossover point. It's a long way off mostly because my mortgage represents such a large portion of my monthly expenditures. I've done the refinancing thing in order to reduce the monthly amount. I've also gone shopping for better insurance to further reduce the monthly cost. I live in the Washington D.C. area, which is known for having an above average cost of living. That said, assuming my current savings rate, my crossover point is in the distant future....like 2026.

      It's difficult to not get discouraged. The spreadsheet I've constructed helps to lay things out and it looks like the compounding will really start to roll after about 10 years of sticking to the plan. I suppose if it was easy, everyone would be doing it.

      Now that I've become comfortable with the DI approach, I need to figure out ways to further turbo charge the savings to get the crossover point sooner......

      I'm looking forward to your future articles!

      Delete
  12. You say you have index funds in 401k which you recently maxed out along with Roth and HSA. Would you illustrate for me your ability to convert index funds in 401k via the Roth conversion ladder into individual DG stocks in Roth? For example say I own 500k in the S&P 500 index fund in 401k and am 40 years old. I can either 72t these funds over my life expectancy 2-3% starting yield or covert the 500k in maybe 20k installments to my ROTH by liquidating and transfer to ROTH and purchase DG stocks. 100% of conversion taxable at current rates if working would be 28% if not more like 15%. Still I can withdraw those contributions from Roth tax and penalty free after 5 years, I believe this is your thought process as well if you need income? I just started maxing out HSA this year thanks to your information as well. As any early retiree will certainly have medical expenses to pay with a HDHP. As always thank you for illustrations and continue the good work .

    ReplyDelete
    Replies
    1. Hi Matt,

      Thanks for stopping by and commenting. I would be more in favor of a Roth Conversion Ladder, where I can move $20K annually from 401K into Roth IRA. That way I think I have more flexibility than with 72t - SEPP.

      The actual process depends on your 401 k - I had a 401K that would allow me to convert money from pre-tax into Roth within the 401K plan - and pay taxes from my checking account separately ( rather than from the retirement account). Some 401K plans might allow you to do a partial 401K rollover into an IRA, which you will then have to convert into a Roth. From what I have read, an IRA to Roth IRA conversion is a little messier, which is why I would prefer an 401K to Roth IRA rollover.

      My 401K is limited to low cost funds today. I would think that I would simply sell the $20K in funds, convert to Roth and either keep it in the 401K plan as Roth mutual funds or rollover into a Roth IRa and pick individual dividend stocks.

      Of course, I didn't start maxing tax-deferred accounts until early 2013. So I have taxable resources, which have compounded for a relatively long period of time already. A larger portion of dividend money will likely be generated from taxable accounts in 3 years.

      Hope that answers your question.

      Best Regards,

      DGI

      Delete
  13. Very impressive, I am just starting my dividend income journey after years of paying off debt, both student loans and mortgage. Looking at where you are vs where I am it seems almost out of reach. Any advice?

    Andrew

    ReplyDelete
    Replies
    1. Hi Andrew,

      You should never despise the days of small beginnings. The most important thing is to get started in investing, and then work towards achieving your goals. Everyone starts somewhere with a small amount of money – where you go from there depends on your desire to reach your goals.
      http://www.dividendgrowthinvestor.com/2013/10/do-not-despise-days-of-small-beginnings.html

      Best Regards,

      DGI

      Delete
  14. I've been a dividend investor for most of my life. But its only in ghe past few years I've seriously pursued growing my portfolio.

    In the last three years I've gone from a few hundred dollars in annual dividend income to $3000 this year. This is all in retirement accounts. And this does not include what I have in my 401k either.

    I'm happy with my progress. I'm not sure my dividends will ever support me 100%, but it will certainly make my life a little easier.

    ReplyDelete
    Replies
    1. Hello JM,

      This sounds like a very impressive growth in dividend income. Plus, it is in a tax-deferred account, so you are reducing waste due to investment taxes during the accumulation phase.

      In retirement, you will have access to SS and dividend income, so this would be a good way to replace wages.

      Best Regards,
      DGI

      Delete
  15. Hi DGI for some reason I always assumed you were older and wiser than me from reading your posts - now I'm thinking its younger and wiser. Keep up the good work.

    I actually just crossed 30K in forward dividends last week when HON announced its increase. Took 17 years and change to get there (although for a few of those most savings went to paying off the house). I think I will probably end up transitioning to part-time next spring/summer and try that for a while, but I go back and forth on it some days I think I should have retired a year ago and others I get paranoid about all the what ifs and think I should keep working as long as I can tolerate it.

    mdc

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    Replies
    1. Hi MDC,

      $30K in annual dividend income and what it looks like a fully paid off home in 17 years or less is an amazing achievement. That is some great safety net for you. I understand that change is both exciting and scary as well, but please do not let fear get in the way. Try to evaluate your options and pursue interests . Being FI doesn’t mean doing nothing, so transitioning to part-time could be helpful for transition into retirement. On the other hand, what are you retiring to?

      Of course, if expenses are lower than $30K/year, then you can afford to retire and do nothing if you choose to. Depending on your age, you may have Social Security coming in your way in a few years/decades too.

      Oh and thanks for the nice words. I just have more years to make mistakes to learn from.

      DGI

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    2. DGI thanks for the encouragement, my age is 39 - so while I think SS will provide something once I'm eligible, its far enough off that it doesn't really change my comfort level. I estimate expenses around 22-24k based on current spending + health insurance + guesstimate for averaging non-annual expenses like major home stuff or car replacement etc.

      And to the Matt below, I definitely have some of that, but I think its even worse the smaller the frame increment over which you make the decision....If you gave me the choice of quit today or be locked in to my job the next 3 yrs - it would be quit no question but if its 3 months instead then I don't know.

      mdc

      Delete
    3. MDC -

      Congrats on your achievement of 30K in forward dividends! It's inspiring to those of us who aren't as far along. I've only been doing dividend growth investing for about 4 years and I'm hooked. Thanks for sharing!

      Delete
  16. Anonymous poster above. Sounds like you might be getting a case of the OMY syndrome. One More Year. It always will look better to wait another year, but don't forget these could be your healthy active years you will enjoy more than the later years

    ReplyDelete
    Replies
    1. Good point Matt on one more year syndrome. I think I also will have this to a certain extent.

      Though on the other hand, if he/she transitions into part-time work, this might provide them with the resilience that they can make it on their own and just pursue passions full time!

      Delete
  17. DHI, can you illustrate how to get from $30k to $60k in 10 yearst? I'm aware of the formula 72/percentage=years, but it seems you need to get a 7+% raise (not 3-4% as you state) to double that amount over 10 years. Did you infer that reinvestment of that divided is needed? If so, it depends on the yield & price of the stock when it's reinvested. I think I'm missing the visualization part to see it in front of my nose before I can believe it.

    I also like DGI stuff and by DG stocks, but my income is not increasing by leaps like yours :-(, but again I was dribbling for 10 years and it's been only 3-4 yours when we decided to increase investments into DRIP's vs. savings/CDs (extremely conservative for early 40's).

    ReplyDelete
    Replies
    1. Hi,

      My dividend income went from zero to $15K in 8 years. I never made six figures. I believe that anyone who sets their mind to a goal can stand a high chance of reaching it.

      http://www.dividendgrowthinvestor.com/2015/10/from-zero-to-15000-in-dividend-income.html

      The amounts assume I reinvest dividends I receive. I am assuming that the sum of dividend growth and dividend yield will be 8%. So if my portfolio yields 4% and the dividend grows by 4%, my total dividend income will grow by about 8%. Using rule of 72, this translates into the dividend doubling every 9 years or so.

      DGI

      Delete
    2. DGI, love your articles, but I did have a question on your back of the envelope math.

      If your current portfolio yields 4%, and the dividends rise by 4% in one year, isn't the new yield 4.16%?
      0.04 x 1.04 = 0.0416 = 4.16%

      I know I'm probably missing something simple here, but where does the 8% yield come from?

      Delete
    3. You are putting words in my mouth. Please read very carefully.

      "I am assuming that the sum of dividend growth and dividend yield will be 8%. So if my portfolio yields 4% and the dividend grows by 4%, my total dividend income will grow by about 8%. "

      Delete
  18. Almost every time I read one of your articles, I love DGI even more! haha! You bring in such good examples of its power and you're an example yourself! Good job DGI!

    Cheers,

    Mike

    ReplyDelete
    Replies
    1. Thanks for reading Mike! I look forward to reading more about your adventure next year!

      Delete
  19. DGI - Love the site and analytical approach to Dividend investing.

    I also have the same question as Anonymous & FlyerM on dividend doubling every 8 yrs with no new money put in. The Dividend Growth is happening on the Dividend Yield and is not a return on the Capital. Can you explain (either via a reply here or a separate article) how it doubles?

    Thanks - Ramesh

    ReplyDelete
    Replies
    1. Hi Ramesh,

      You have to read articles very carefully, and pay attention. I cannot make it more clear than this:

      "I am assuming that the sum of dividend growth and dividend yield will be 8%. So if my portfolio yields 4% and the dividend grows by 4%, my total dividend income will grow by about 8%. "

      Please feel free to play around with a spreadsheet to test assumptions.

      DGI

      Delete
    2. ..and remember that those growing dividends are reinvested...

      Delete

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