Building Wealth Through Dividend Investing

This is part two of a series on the long term benefits of dividend investing:

Part 1: Pay For College With Dividend Income
Part 2: Build Wealth Through Dividend Investing (You are here!)
Part 3: Build A Dividend Business

There are many ways to go about building a successful portfolio. Day trading and short term trading were not for me. I don’t know if I could be successful at either but I do know that to move as fast as the market does it would require all of my attention. As long as I have a full time job the only sure path to making gains in my portfolio is through long term investing.

I have found that the best long term investment strategy is to invest in dividend growth stocks. The power of reinvested dividends is unmatched.

Long term investing requires research and patience. By doing research in my spare time and investing only in companies with solid growth I don’t have to worry about short term market conditions. I especially don’t have to worry about the day to day noise or minute to minute hype like a short term trader does. By being patient and having a long term vision I get to take advantage of both fear and greed when I see it in the market. I only invest in companies that earn a profit, grow and return profits to shareholders. I then reinvest the dividends I receive from the stocks I own which increases the number of shares I have and the amount of dividend income I receive each year.

Is Building Wealth Boring?

Many investors think dividend investing is boring. If only they understood that 4 out of 5 companies in the S&P 500 pay dividends. Most of these types of investors are in their 20s or early 30s and are interesting in making fast money in the market. I’ve been there so I understand. But boy do their eyes pop when I tell them about the long term benefits of dividend growth investing.

For example: “Did you know that if you started with $0 today and invested $1,000 a month in dividend growth stocks for 25 years you would have just over $1M and earn over $35k per year in dividend income? That is assuming a conservative 3.5% dividend yield and 6% stock price appreciation per year.”

The response I usually get is “Wow.”

That is just a simple reality which can be calculated with a dividend tool. Slow and steady can win the race after all.

Your Scenario

Each person reading this post will find themselves at a different income level. Maybe you can invest $500 per month now but expect to invest $2,500 a month 5 or 10 years from now. Or maybe you know you can do $2,000 a month, every month for the next 20 years. Most of our income levels will increase over time and we will be able to invest more as we age. The power of DRIPs and compounding returns is found in investing early. The earlier the better.

A Few Examples
Here are a few examples of what is possible. In each we will assume a starting portfolio value $0, dividend yield of 3.5%, appreciates at 6% per year and has a average dividend growth rate of 6%. Over a 20-40 year period those types of averages should be very attainable.

40 Year Plan

This is for a 25 year old with a plan to retire in 40 years or someone that want to work into their 70s.

$500 a Month for 40 years: Portfolio valued at $2M with $71k in annual dividend income after 40 years.

$1,000 a Month for 40 years: Portfolio valued at $4M with $142k in annual dividend income after 40 years.

A Mix of $500, $1000, $2000 for 40 years: Assuming $500 a month for the first 12 years, $1,000 a month for years 13-25 and $2,000 a month for years 26-40 – Portfolio valued at $3M with $106k in annual dividend income after 40 years.

30 Year Plan

These numbers work for anyone that wants to retire in 30 years.

$1,000 a Month for 30 years: Portfolio valued at $1.6M with $57k in annual dividend income after 30 years.

$2,000 a Month for 30 years: Portfolio valued at $3.2M with $114k in annual dividend income after 30 years.

A Mix of $1000, $2000 and $3,000 for 30 years: Assuming $1,000 a month for the first 10 years, $2,000 a month for years 10-20 and $3,000 a month for years 30-40 – Portfolio valued at $2.4M with $85k in annual dividend income after 30 years.

20 Year Plan

$2,000 a Month for 20 years: Portfolio valued at $1.2M with $43k in annual dividend income after 20 years.

$3,000 a Month for 20 years: Portfolio valued at $1.8M with $64k in annual dividend income after 20 years.

$5,000 a Month for 20 years: Portfolio valued at $3M with $107k in annual dividend income after 20 years.

A Mix of $2,000, $3,000, $5,000 for 20 years: Assuming $2,000 a month for the first 5 years, $2,000 a month for years 6-10 and $5,000 a month for years 10-20 – Portfolio valued at $1.8M with $67k in annual dividend income after 20 years.

A lot of us will find ourselves able to save more later in life when our incomes have increased or when a spouse has returned to work. For me I’d like to think that I can invest $1,000 a month for the next 2 years, then $2,000 a month for 3 years and then $3,000 a month for years 6-10. After that my wife will return to work and I’ll be earning more as well. Years 10-20 I’d like to be investing $5,000 a month. After 20 years if things work out as planned I should be looking paying for my kids college with dividend income and then early retirement where I plan to spend part of my time continuing to work on things I enjoy doing. Once I turn 65 I’ll be able to start withdrawing from my large 401k fund which I will be funding along the way.

Hopefully seeing these numbers in action inspires others to realize the power of dividend investing. Time + Disciplined Investing = Great Wealth.