Let's take a trip back to our childhood. How many people remember reading Aesop's Fables and the story about the crow and the pitcher? In the story, a thirsty crow cannot reach water at the bottom of a pitcher because his beak is too short. Being the clever crow that he is, he flies away and returns with a stone and places it in the pitcher, noticing that the water level rises ever so slightly. He repeats this several more times, placing stone after stone in the pitcher until finally, the water level in the pitcher is high enough for him to reach and drink from.
"OK, great, now tell me what fables, crows, and pitchers have to do with investing," you say. Well, just as the crow had a goal of drinking water, many of us have goals with our investments. Some people have a specific dollar amount as a goal (e.g. "I want 1 million dollars in cash in my account.") while others have expense-related goals (e.g. "I want my investments to pay for my monthly expenses"). "What can I learn from this story," you ask? That persistence pays.
Many of us feel like the crow at the beginning of this story. I am in my early 30s, work a white-collar job, and have little investment experience. My goal is for my dividend income to exceed my monthly expenses. For someone like me, this seems like a huge leap, but I know it is possible. I think back to the crow. Before the water can reach the top of the pitcher, it has to reach halfway, and before that, a quarter of the way. It might take a while, but I know it is possible.
Below is a table I am using to illustrate my point that assumes a 30 year investing window. Let's assume I purchase 150 shares of Altria (NYSE:MO), a company that has been increasing their dividend for 43 straight years, at today's price of $29.50/share for a total cost of $4425. Now assume that I contribute $500 every quarter toward the purchase of additional Altria shares and that I reinvest any dividends paid by Altria as well. My calculations below also assume a 2.5% increase in share price every year as well as a 3% dividend increase every year:
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Remember, this is a hypothetical scenario but shows the power of consistent investing and rising dividends. As you can see, after the first quarter of year 15, you will be receiving a dividend check exceeding $1000. Great. And what about a quarterly check in excess of $2000? Amazingly, you only have to wait 6 more years, or the first quarter of year 21. By the end of the 4th quarter in year 30, you will be receiving a quarterly check of nearly $5200.
There are risks associated with this strategy and each stock you choose, though. In the case of Altria, since I used that in my example, they may not increase their dividend enough to keep up with inflation. In fact, they may stop paying a dividend altogether. Issues like high payout ratios, new laws against smoking, and lawsuit settlements could also affect your return. Hence, it is important to do your due diligence before investing in any company, but the reward can be gratifying.
So every month, I drop another "stone" in my "pitcher". I know that I have to take small steps, setting quarterly or yearly goals until I reach my ultimate goal. It took a little while for the dividend checks to start rolling in, but slowly and surely, I see positive results. I can already see that I am on track to exceed my goal for 2012. For those that are interested, I posted my portfolio on my website. I will update my results monthly in the hopes that someone is motivated by them or can learn from them.
The moral of Aesop's fable is that persistence pays, which is precisely what I hope someone takes away from this article. Just as the crow dropped stone after stone into the pitcher to reach his goal, if you are persistent with your dividend growth investing, soon you will be able to drink from your "pitcher" too.