# Time To Double Your Dividend Income: A Reference For Dividend Reinvestors

by: FinancialStorm

One of the most attractive features of using a dividend growth investment strategy to generate income is that an investor's yearly realized income from dividends should increase over time, ideally at a rate higher than inflation.

If an investor is not reinvesting the dividends, then the income received in a particular year is a function of the initial yield, the compound average dividend growth rate, and taxes. Pretax, you can estimate how long it will take for the dividend income to double by using the "Rule of 72": dividing 72 by the estimated compound average growth rate of the dividend.

If, however, an investor is fortunate to be able to reinvest dividends, then there is a double compounding effect: as the dividend per share grows and as the number of shares owned grows through dividend reinvestment. In this case, one can expect the yearly amount of dividends paid to increase more rapidly. There are a number of factors that affect how quickly the yearly dividend income received grows in this case: the initial yield, the compound average dividend growth rate, and the rate at which the share price changes. In fact, if the goal is purely an increase in dividend income, increasing share prices are a menace as they reduce the number of shares purchased upon dividend reinvestment!

To help myself think through the potential long-term consequences of today's stock purchases, I put together a reference chart highlighting the time to double and the time to quadruple dividend income given different assumptions about initial yield, dividend growth rate, and share price growth rate. As I imagine many other investors are interested, I share it here.

First, as a reference, here is a chart created by using the Rule of 72 to estimate how long it will take dividend income to grow when dividends are not being reinvested. In this table, DGR is the compound average growth rate of the dividend, and time to double is the estimated number of years for the dividend to double.

 DGR Time to double 5% 14.4 6% 12.0 7% 10.3 8% 9.0 9% 8.0 10% 7.2 11% 6.5 12% 6.0 13% 5.5 14% 5.1 15% 4.8

The next chart assumes dividends are paid and reinvested on a yearly basis. The first column is the initial dividend yield upon purchase. The second column is the compound average dividend growth rate. The third column is the amount by which the share price appreciates each year. The final two columns give the time for the dividend paid to double and to quadruple, respectively. I have sorted the table so that the combinations leading to the least amount of time for the dividend to quadruple are listed first. To keep the table manageable as a reference guide, I had to limit the number of inputs in each category. I chose starting yields of 2.5%, 3.5%, 4.5%, and 5.5%; dividend growth rates of 6%, 9%, and 12%; and share appreciation rates of 4%, 8%, and 12%. Here are the results:

 Initial Yield DGR Share appreciation Time to double Time to quadruple 5.50% 12% 4% 5 8 5.50% 12% 8% 5 9 5.50% 12% 12% 5 9 4.50% 12% 4% 5 9 4.50% 12% 8% 5 9 3.50% 12% 4% 5 9 5.50% 9% 4% 5 10 4.50% 12% 12% 5 10 4.50% 9% 4% 6 10 3.50% 12% 8% 5 10 3.50% 12% 12% 5 10 2.50% 12% 4% 5 10 2.50% 12% 8% 6 10 5.50% 9% 8% 6 11 5.50% 9% 12% 6 11 4.50% 9% 8% 6 11 3.50% 9% 4% 6 11 2.50% 12% 12% 6 11 4.50% 9% 12% 6 12 3.50% 9% 8% 6 12 2.50% 9% 4% 7 12 5.50% 6% 4% 7 13 3.50% 9% 12% 7 13 2.50% 9% 8% 7 13 5.50% 6% 8% 7 14 4.50% 6% 4% 7 14 2.50% 9% 12% 7 14 4.50% 6% 8% 8 15 3.50% 6% 4% 8 15 5.50% 6% 12% 7 16 4.50% 6% 12% 8 17 3.50% 6% 8% 8 17 2.50% 6% 4% 9 17 3.50% 6% 12% 9 18 2.50% 6% 8% 9 18 2.50% 6% 12% 10 20

From the above table, we can immediately see a couple of things. First, reinvesting dividends can make a big difference in how quickly the income stream grows. It takes 24 years to quadruple the dividend paid out if the dividend grows at 6%; however, by reinvesting dividends, this number is cut to 20 years in the "worst" scenario in our table and is as low as 13 years in an unrealistic scenario of a stock initially yielding 5.5% that grows the dividend at 6% a year but only has price appreciation of 4% a year (so that the dividend yield would be increasing yearly).

We also get some sense of how share price appreciation can affect matters. To me, this makes it much easier to hold stocks through a down period. The longer a stock is down (with fundamentals remaining intact and growing dividend payments coming in), the higher up the chart we're moving in terms of dividend income growth...

Also, we see that initial yield can have significant impact on the time it takes to double and quadruple the dividend income received. A stock yielding 5.5% that grows the dividend at 6% per year and has share price appreciation of 4% a year will quadruple an investor's dividend received roughly 4 years faster than a stock of similar characteristics that began with a 2.5% yield.

Finally, in what is likely no surprise to the seasoned dividend growth investor, we see the top of the chart dominated by the combinations including higher dividend growth rates.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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