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Long-term horizon, dividend growth investing
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Summary

  • Small, more reachable goals pave the way toward major objectives.
  • As targets are met, take a moment to celebrate and then establish new goals.
  • Passive and active investing combine to create powerful compounding of dividends and successful portfolios.

Be it financial, career-related or personal, achieving a major goal is a rush. Let's not undersell how satisfying it is to reach the little milestones along the way, however, because hitting those targets can keep us focused on The Big One.

In that spirit, I am thrilled to report that my wife and I have reached the second milepost on our road to a stress-free retirement - and we have arrived a year and a half ahead of schedule.

What's our secret? Please. There are no secrets. One need not hire a stock-market sleuth to uncover the likes of Johnson & Johnson (NYSE:JNJ), Chevron (NYSE:CVX), 3M (NYSE:MMM) and General Mills (NYSE:GIS), four of the 42 companies we own.

Roberta and I primarily have used the Dividend Growth Investing philosophy, buying stakes in high-quality companies that have been increasing dividends for years (decades, in most cases). We have tried to make purchases only at fair value or less. We also have continued to max out our 401(k) and Roth IRA contributions because the simple act of plowing money into investments is nearly as important as stock selection. (Some might argue it's more important.)

The Goal

In the first three parts of this series, which ran in October, January and March, I discussed our long-term investing goal: Establish a portfolio that will generate at least $3,000 in income per month (in today's dollars) to complement the Social Security and pension payments we expect to receive in retirement.

Our shorter-term goal was to reach $25,000 in annual dividends by the end of 2014. Doing so, and continuing to reinvest dividends, would put us on pace to get to our grander $36K goal by 2023, when Roberta will turn 62.

The following table, first used in Part 1, illustrated what I was talking about. It made very conservative assumptions: 5.5% annual income growth, 3% dividend yield and 4% inflation rate.

TABLE 1

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.)

As you can see, even though we would reach $36K in 2019, we wouldn't arrive at that sum in inflation-adjusted dollars until 2023.

Establishing A New Goal

By the time I wrote Part 3 in March, Roberta and I had gotten to the $25,000 plateau. We celebrated with a couple of cold beers and the promise to keep on keeping on.

Every company's dividend-hike announcement has been greeted with a rousing "Huzzah!" We update our income spreadsheet after those raises and also on dividend paydays, and the progress has been eye-opening. Just last week, our "Divvy Dollar" total surpassed the $27,125 we had projected for the end of 2015.

Here is an updated (albeit truncated) table using $28,000 in dividend income as a new end-of-2014 goal.

TABLE 2

YEARDIVIDENDSDIV GROWTHNEW DIVSINFLATION
2014$28,000$1,540$840$36,000
2015$30,380$1,671$911$37,440
2016$32,962$1,813$989$38,938
2017$35,764$1,967$1,073$40,495
2018$38,804$2,134$1,164$42,115
2019$42,102$2,316$1,263$43,800
2020$45,681$2,512$1,370$45,551
2021$49,563$2,727$1,487$47,374
2022$53,777$2,958$1,613$49,268
2023$58,348$3,209$1,750$51,239

If we reach $28K by year's end and our assumptions prove correct, we will get to $3,000 in monthly income in early 2018 and will hit $36K in today's dollars by 2020 - three years ahead of the pace set forth in Table 1.

Generating Divvy Dollars Passively AND Actively

Is $28,000 realistic by Dec. 31? Absolutely! Heck, we'll get hundreds of dollars in income just this month as Altria (NYSE:MO), Philip Morris (NYSE:PM), BCE (NYSE:BCE), Realty Income (NYSE:O), Main Street Capital (NYSE:MAIN), General Electric (NYSE:GE), Kraft Foods (NASDAQ:KRFT) and a few smaller holdings pay dividends. We'll reinvest that money to buy additional shares, which will generate Divvy Dollars of their own. In addition, Walgreen's (WAG), ConocoPhillips (NYSE:COP) and National Retail Properties (NYSE:NNN) are expected to announce dividend increases. The compounding effect of all that activity is a huge part of our success.

The other major factor in our rapid income growth is that we are still investing new money. Roberta's 401(k) plan has a brokerage option and she takes full advantage; by year's end, she will have contributed the maximum $23,000 ($17,500, plus $5,500 in "catch-up contributions" for those at least 50 years old). We also have maxed out our Roth IRAs ($6,500 each).

I have every reason to believe we will continue investing as much as the law allows until Roberta retires. Again, assuming at least a 5.5% annual DGR, 3% yield and the dripping of all dividends, here is how the income generated within our Roth and 401(k) accounts will grow beginning in 2015:

TABLE 3

YEARDIVIDENDSDIV GROWTHNEW DIVS
2015$1,080$59$33
2016$2,252$124$68
2017$3,523$194$106
2018$4,903$270$147
2019$6,399$352$192
2020$8,023$441$241
2021$9,785$538$294
2022$11,697$643$351
2023$13,771$757$413

Add the results from Table 3 to those from Table 2, and our portfolio should be generating $43,707 in dividends by the end of 2018. That will put us well ahead of the $42,115 figure representing the inflation-adjusted $36K for that year.

Future Divvy Dollars = Another New Goal

Just like that, we will have achieved our original objective five full years ahead of schedule. It will be time to update our ultimate goal ... and why not? Our monthly income by the time Roberta turns 62 in 2023 will be at least $6,000 - double what we had envisioned!

We can get there faster still if our portfolio's dividend yield is more than 3% (it currently drifts between 3.5% and 4%), if our combined DGR exceeds 5.5% (it's north of 8% now), and if the government increases Roth and 401(k) limits (as it does periodically).

We also can arrive faster if we invest some of the cash we have sitting on the sideline. About 7.5% of our portfolio is in "investable" money (in other words, above and beyond our emergency fund). We used a bit last week to top off our Procter & Gamble (NYSE:PG) position at $78.78. I considered that reasonable; so does Morningstar, which estimates PG's fair value at $89.

Our PG purchase will generate more than $100 in additional Divvy Dollars every year, pushing us past the mini-milestone that led me to write this article - and led to yet another mini-celebration!

And on and on it will go: harvesting dividends, toasting successes, adjusting goals upward and, ultimately, enjoying decades of financial independence.

Disclosure: The author is long BCE, COP, CVX, GE, GIS, JNJ, KRFT, MAIN, MMM, MO, NNN, O, PG, PM, WAG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: What's Your (Dividend Growth) Number?: Part 4 - Creating And Surpassing Goals