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Long only, long-term horizon, dividend investing, value
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I love the idea of collecting income from my investments. I own two investment properties and I get a great deal of satisfaction knowing that the mortgage payments for these two properties are being paid for by our renters. Our net worth is going up every month and it is being financed by others. What could be better than that? I expect that when we eventually sell these properties (if ever), we will have made quite a nice return on our down payment (our only expense).

After years of trying for capital appreciation, I realized that I should be looking for income investments in the stock market as well as the real estate market. Income investing is much more suited to my personality. So I dabbled with covered calls, and although they definitely can work if you understand options, follow a system, and understand that your returns will vary greatly based on what the market is doing, in the end I decided they were not for me. For one, it takes a lot of time to follow and manage your positions. Since I work full time (hence, The Part Time Investor), I could not dedicate the time necessary to do this. And in my case, the commissions were too much to handle. My funds are held in a retirement account, which is held by a conservative management company. My corporation made this decision, and I have no choice in it. There is no online access for transactions, so I am not able to make moves quickly when the situation calls for it, and although they allow me to do covered calls and cash secured puts, they charge me commissions of $20-45 per transaction. This would eat up all my profits. So I have been forced to abandon options.

I have always held dividend stocks in my portfolio, but I hadn't really focused on the dividend growth aspect. I owned them just because they were good stocks. But as I have read about dividend growth investing on SA over the past two years and learned more about the philosophy, I have come to appreciate it more and more. Over that time, I have converted my portfolio from one looking for capital appreciation to one looking for dividend income. One of the main reasons I did this, one of the major benefits of dividend growth investing, is the ability to plan ahead. I can look at the value of my portfolio right now, add in the contributions to my retirement account that will be made over the coming years, figure out the present yield and a target yield, and use this information to come up with a pretty good estimate of what my income will be each year up through retirement. If I'm not happy with the estimates, I can target a different yield and see if that satisfies my desires. And most importantly, I can follow the progress of my portfolio each quarter to see if it is meeting my expectations, and I can change the make-up of the stocks if it is not.

But to do this, I first need to ask myself "What are my expectations? What are my goals?" The answer is that I want to completely fund my retirement with income that I produce from my dividend stocks. I never want to be in a position where I have to sell any of my positions to generate funds. Of course I'm sure I will sell positions over the years, but I never want to be forced to sell them because I need the funds. This is, of course, a very common goal for dividend investors and has been discussed often on SA. But it is unique to each individual as to exactly how much of an income they will desire. Everybody's lifestyle is different and everybody's expectations and plans are different.

After thinking about my plans for what I want to do with my life after I retire, I decided that, for me, I would like to produce $10,000 a month in income (after taxes) from my stocks. Add a few thousand more per month from social security (Maybe? If it still exists?), and a little more from my investment properties, and I should have between $12-14,000 on which to live. Seems to me like that should be plenty to fund my retirement activities.

So what kind of yield should I be looking for to achieve this result? I did some calculations. I am 48 years old. Right now I have $527,000 in my account and I can contribute $49,000 more each year. In 2 years that will be increased to $55,000 due to the catch up contributions which I am allowed to do starting at age 50. At the present time, my portfolio has a dividend yield of 2.56%. If I assume market gains of 6% a year and keep my portfolio yield at 2.5%, my year by year income stream will be as follows:

Expected returns to age 65 (6% growth, 2.5% dividend)

Year

Age

Starting Acct. Val.

Div. Inc.

Add. Contr.

2013

48

$527,000.00

$13,175.00

$49,000.00

2014

49

$620,795.00

$15,519.88

$49,000.00

2015

50

$722,562.58

$18,064.06

$55,000.00

2016

51

$838,980.39

$20,974.51

$55,000.00

2017

52

$965,293.73

$24,132.34

$55,000.00

2018

53

$1,102,343.69

$27,558.59

$55,000.00

2019

54

$1,251,042.91

$31,276.07

$55,000.00

2020

55

$1,412,381.56

$35,309.54

$55,000.00

2021

56

$1,587,433.99

$39,685.85

$55,000.00

2022

57

$1,777,365.88

$44,434.15

$55,000.00

2023

58

$1,983,441.98

$49,586.05

$55,000.00

2024

59

$2,207,034.54

$55,175.86

$55,000.00

2025

60

$2,449,632.48

$61,240.81

$55,000.00

2026

61

$2,712,851.24

$67,821.28

$55,000.00

2027

62

$2,998,443.60

$74,961.09

$55,000.00

2028

63

$3,308,311.30

$82,707.78

$55,000.00

2029

64

$3,644,517.76

$91,112.94

$55,000.00

2030

65

$4,009,301.77

$100,232.54

$55,000.00

By age 65, my portfolio will be producing $100,000 a year, or about $8,300 per month, a very nice amount, but not enough to meet my goal of $10,000 after tax (about $15,000 pre-tax). So let's see what the results will be if I bump my yield up to 3%.

Expected returns to age 65 (6% growth, 3% dividend)

Year

Age

Starting Acct. Val.

Div. Income

Add. Contr.

2013

48

$527,000.00

$15,810.00

$49,000.00

2014

49

$623,430.00

$18,702.90

$49,000.00

2015

50

$728,538.70

$21,856.16

$55,000.00

2016

51

$849,107.18

$25,473.22

$55,000.00

2017

52

$980,526.83

$29,415.80

$55,000.00

2018

53

$1,123,774.24

$33,713.23

$55,000.00

2019

54

$1,279,913.93

$38,397.42

$55,000.00

2020

55

$1,450,106.18

$43,503.19

$55,000.00

2021

56

$1,635,615.74

$49,068.47

$55,000.00

2022

57

$1,837,821.15

$55,134.63

$55,000.00

2023

58

$2,058,225.06

$61,746.75

$55,000.00

2024

59

$2,298,465.31

$68,953.96

$55,000.00

2025

60

$2,560,327.19

$76,809.82

$55,000.00

2026

61

$2,845,756.64

$85,372.70

$55,000.00

2027

62

$3,156,874.73

$94,706.24

$55,000.00

2028

63

$3,495,993.46

$104,879.80

$55,000.00

2029

64

$3,865,632.87

$115,968.99

$55,000.00

2030

65

$4,268,539.83

$128,056.19

$55,000.00

With a yield of 3%, my monthly income at age 65 will be about $10,600. Due to taxes, this is still not enough to reach my goal. So I'll bump it up again to a target yield of 4%.

Expected returns to age 765 (6% growth, 4% dividend)

Year

Age

Starting Acct. Val.

Div. Income

Add. Contr.

2013

48

$527,000.00

$21,080.00

$49,000.00

2014

49

$628,700.00

$25,148.00

$49,000.00

2015

50

$740,570.00

$29,622.80

$55,000.00

2016

51

$869,627.00

$34,785.08

$55,000.00

2017

52

$1,011,589.70

$40,463.59

$55,000.00

2018

53

$1,167,748.67

$46,709.95

$55,000.00

2019

54

$1,339,523.54

$53,580.94

$55,000.00

2020

55

$1,528,475.89

$61,139.04

$55,000.00

2021

56

$1,736,323.48

$69,452.94

$55,000.00

2022

57

$1,964,955.83

$78,598.23

$55,000.00

2023

58

$2,216,451.41

$88,658.06

$55,000.00

2024

59

$2,493,096.55

$99,723.86

$55,000.00

2025

60

$2,797,406.21

$111,896.25

$55,000.00

2026

61

$3,132,146.83

$125,285.87

$55,000.00

2027

62

$3,500,361.51

$140,014.46

$55,000.00

2028

63

$3,905,397.66

$156,215.91

$55,000.00

2029

64

$4,350,937.43

$174,037.50

$55,000.00

2030

65

$4,841,031.17

$193,641.25

$55,000.00

Now we're talking! By targeting a yield of 4% per year on the entire portfolio, year after year, by the time I am ready to retire I will have an estimated income of $193,000 per year, or $16,100 per month (still >$10,000 after taxes). I will have achieved my goal!

So now I have a goal, a plan, and a guideline to follow to show me how well I am meeting that goal, year after year. I recommend that everybody, no matter what style of investing you choose, sit down before you start and decide what your goals are. This will help you focus on exactly what you are trying to do with your investing. Once you know what your goals are, come up with a plan on how to reach them. Then, once you have the plan set, you can go ahead and get started. Follow the progress of your portfolio regularly, and if you find that it is not meeting your expectations, go ahead and make changes. But always look back on what your goal was and do what you have to do to make it come true.

Thank you for reading my article and I welcome your comments.

Source: Dividend Investing: Have A Goal And A Plan On How To Reach It