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Long-term horizon, dividend growth investing
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If you are into Dividend Growth Investing, you probably expect the quarterly payments you receive from companies to eventually help pay for your living expenses, healthcare costs, family obligations, charitable endeavors and fun.

Have you sat down and thought about how much dividend income you will want or need to receive when that time comes?

I have. And as I said in Part 1 of this series, it is $36,000 a year (in today's dollars). When I adopted the DGI strategy about two years ago, I decided that $3,000 per month would provide a nice complement to the Social Security and pension income my wife Roberta and I will receive.

To help us take aim at that long-term goal, I have established a nice, round, more easily attainable number: $25,000.

Once we hit $25K per annum in dividends, we know we'll be only five years from hitting our $36,000 milestone and less than a decade from our ultimate goal of $36K in today's dollars.

Dividend Number, here we come

I'm thrilled to report that, barring some unforeseen circumstances, we should reach the $25,000 dividend plateau in 2014. More on that later. First, let's revisit the table from Part 1 that showed how $25K can grow if reinvested back into the portfolio.

(Because I am conservative when making financial projections, I am assuming only a 5.5% dividend growth rate and 3% average yield even though our portfolio surpasses those figures. I also am using a 4% inflation rate, roughly double what it has been for many years now. Better to err on the side of caution, right?)

YEARDIVIDENDSDIV GROWTHNEW DIVSINFLATION
2014$25,000$1,375$750$36,000
2015$27,125$1,492$814$37,440
2016$29,431$1,618$883$38,938
2017$31,932$1,756$958$40,495
2018$34,646$1,906$1,039$42,115
2019$37,591$2,068$1,128$43,800
2020$40,787$2,243$1,224$45,551
2021$44,254$2,434$1,327$47,374
2022$48,015$2,641$1,440$49,268
2023$52,096$2,866$1,563$51,239
2024$56,525$3,109$1,695$53,289
2025$61,329$3,373$1,840$55,420
2026$66,542$3,660$1,996$57,637
2027$72,198$3,971$2,166$59,943
2028$78,335$4,309$2,350$62,340
2029$84,994$4,674$2,550$64,834
2030$92,218$5,072$2,767$67,427
2031$100,057$5,503$3,001$70,124
2032$108,561$5,971$3,257$72,929
2033$117,789$6,478$3,534$75,847
2034$127,801$7,029$3,834$78,880
2035$138,664$7,627$4,160$82,036
2036$150,451$8,275$4,513$85,317
2037$163,239$8,978$4,897$88,730
2038$177,114$9,741$5,314$92,279
2039$192,169$10,569$5,765$95,970
2040$208,503$11,468$6,255$99,809
     

(Key: DIVIDENDS are annual dividends generated by investments; DIV GROWTH is money generated by growth of dividends each year; NEW DIVS represent new assets purchased by reinvested dividends; INFLATION indicates each year's equivalent in today's dollars to the annual dividend goal of $36,000.)

You can see that by 2019, the dividend income tops $36K. By 2023, it exceeds the inflation-adjust equivalent of $36,000. And less than a decade later, the divvies hit the six-figure mark. Nice!

Entering the "Distribution Phase"

Part 1 generated almost 600 comments, by far my "career high" as a Seeking Alpha contributor. One thing brought up by several readers (and I'm paraphrasing here): "Yeah, but once you start living on the dividends, your income won't grow as fast. You need to account for that."

You know what? They were absolutely right! At some point in our 60s, my wife and I will stop spending our Coca-Cola (KO) dividends on more shares of the company and start spending them on rum-and-Cokes in the Caribbean.

I decided to tweak the table to reflect that reality: Our portfolio will still have plenty of dividend growth but, at some point, the dripping will stop.

For the sake of this study, I'm identifying "some point" as 2023. I turn 63 that year and my wife turns 62. As my followers know, Roberta is my Sugar Mama, and she no doubt will be ready to stop supporting me by then -- if not sooner. (She is a pediatric nurse, making her "R.N. the R.N." Cute, huh?) Both of us will be eligible for Social Security, and that also is the year we will have reached our inflation-adjusted $36K goal. It will be time to chill out ... and to spend our hard-earned dividends on ourselves, our loved ones and our favorite causes.

YEARDIVIDENDSDIV GROWTHNEW DIVSINFLATION
2014$25,000$1,375$750$36,000
2015$27,125$1,492$814$37,440
2016$29,431$1,618$883$38,938
2017$31,932$1,756$958$40,495
2018$34,646$1,906$1,039$42,115
2019$37,591$2,068$1,128$43,800
2020$40,787$2,243$1,224$45,551
2021$44,254$2,434$1,327$47,374
2022$48,015$2,641$1,440$49,268
2023$52,096$2,8660$51,239
2024$54,962$3,0230$53,289
2025$57,985$3,1890$55,420
2026$61,174$3,3650$57,637
2027$64,539$3,5490$59,943
2028$68,088$3,7450$62,340
2029$71,833$3,9510$64,834
2030$75,784$4,1680$67,427
2031$79,952$4,3970$70,124
2032$84,349$4,6390$72,929
2033$88,988$4,8940$75,847
2034$93,882$5,1640$78,880
2035$99,046$5,4480$82,036
2036$104,494$5,7470$85,317
2037$110,241$6,0630$88,730
2038$116,304$6,3970$92,279
2039$122,701$6,7480$95,970
2040$129,449$7,1200$99,809
     

As you can see, the two charts are the exact same through 2022, producing $52K in dividend income for 2023. But then, with no new dividends coming into the portfolio because we're spending them as we go along, the income grows less each year.

Nevertheless, with the same annual 5.5% DGR figured in, we will surpass $6,000 in monthly dividends by 2030 and will hit six figures in total annual divvies just six years later. By the time I turn 80 in 2040, our dividend income will exceed the inflation-adjusted goal by some $30,000.

Time to winter in Maui, buy a couple of Harleys, take up scuba diving and help put the grandkids through college.

I said earlier that I like being conservative when making projections. Fact is, I'm being really conservative because those tables do not include the dividends generated by our tens of thousands of dollars in retirement-account contributions each of the next several years. Roberta and I max out our Roth IRAs and her 401(k), and I take advantage of tax laws to put 125% of my freelance income into my Individual 401(k).

So we actually figure to reach $36,000 in dividends well before 2019 and to hit the $50K mark well before Roberta changes out of her scrubs for the last time.

Strengthening the portfolio

What are we doing to achieve our goals? We have been big savers during our 30-year marriage but I admit now that I was fairly clueless for most of that time. A light bulb went on when I discovered Dividend Growth Investing in early 2012, but the real Eureka! moment came this past summer when I took a good, hard look at our portfolio and saw far too many "second-stringers" and not nearly enough "stars." I decided if I was going to do DGI, I was going to do it right, and I retooled our portfolio to concentrate on proven, blue-chip dividend growers. (I wrote about that process in this four-part series: 1, 2, 3, 4.)

Since concluding that series (which seemingly hit home with readers, as evidenced by 55,000 pageviews and 1,100 comments), we have continued to strengthen our 32-stock portfolio. Among our moves:

-- We sold some Walgreen (WAG) to buy more Wisconsin Electric (WEC), thereby flip-flopping their roles in our portfolio. Walgreen has nearly doubled since we bought it at $30 in 2012 and its yield has fallen to 2.2%, the lowest in our portfolio. We were overweight in consumer stocks and underweight in utilities, and WEC is that rare utility that experiences outstanding growth of both earnings and dividends. So in our portfolio, WEC has been promoted to "DGI Superstar" while WAG is now a "Role Player."

-- We established "full positions" in Western Electric, Coke, Johnson & Johnson (JNJ) ExxonMobil (XOM), Chevron (CVX), General Mills (GIS), Target (TGT) and Kinder Morgan Inc. (KMI). (I consider a position full when we have no definite plans to buy more except through dividend reinvestment.) We were fortunate to top off XOM before Warren Buffett made his major purchase; we got it just under its 3% yield mark and have enjoyed the 15% "Buffett Bump." We added to KMI after a selloff fueled by negative media reports. We regularly look to benefit from such buying opportunities.

-- Taking advantage of the new brokerage option in Roberta's 401(k), we significantly increased our McDonald's (MCD) stake. We hope to bring the position to full by spring, putting all nine of our DGI Superstars in that category.

-- We initiated a position in Baxter International (BAX), a solid healthcare company that was oversold this past fall. While it has advanced some since we got it at $65.33 (its 3% yield mark), it remains a decent value at about $70.

-- We enrolled in the Lockheed Martin (LMT) DRiP. We are making twice-monthly contributions and reinvesting dividends in the no-fee plan, which is administered by Computershare. I had wanted to invest in the defense contractor but it just kept going up, up, up. Rather than going all-in or waiting for a pullback, I decided to steadily build our position with dollar-cost averaging. If LMT keeps advancing, we'll buy fewer shares as we go along; if it pulls back, we'll accumulate more. The method had worked wonderfully for us with Procter & Gamble (PG).

-- We have continued reinvesting dividends back into the companies that pay them. We do this with each of our stocks, and I like the no-fuss, no-muss, no-cost aspect of it. Once we are out of the accumulation phase, we might start collecting dividends, pooling the cash and using the funds to buy different stocks. But for now ... if it ain't broke, don't fix it.

Eye on the future

Once all of our positions reach my definition of full, we will have to decide if we want to make some of them even "fuller" or if we want to start investing in other companies. It will be a balancing act, as I don't want to own so many stocks that our portfolio becomes unwieldy.

Among the companies near the top of our watch list are Avista (AVA), Xcel Energy (XEL) and Rogers Communications (RCI). The first two are well-run utilities with yields north of 4% and good DGR. Rogers would give us a diverse Canadian telecom/media company.

Systematically evaluating and buying one company at a time, we are working our way up the road to $25K, $36K and beyond. The journey continues to be enlightening, and I'm confident the destination will be divine.

Source: What's Your (Dividend Growth) Number?: Part 2

Additional disclosure: We also might initiate positions in AVA, RCI and XEL in the near future.