The ultimate goal with my investment portfolio is to replace the income from my full time job and allow me to pay all of my monthly bills with dividends. I believe it's realistic to achieve this by my 60th birthday, in 28 years. Reaching that goal is far from a certitude, but based on my projections, I know it is possible. In the decades between now and then, I think it'll be helpful to view my investment income in terms of what bills I could pay with dividends. I don't intend to actually start paying bills from my portfolio income, but I enjoy seeing the concrete progress and growth.
At the beginning of every quarter, I review my income totals and compare them to previous quarters and years. All of my current holdings pay dividends and by participating in dividend reinvestment programs (DRIPs), my dividends are always higher than the previous quarter. In October 2014, my review of Quarter 3 sparked a realization. My income had totaled $94.05 and I was hopeful Quarter 4 would put me over $100 per quarter. I did appreciate the fact that I had reached $30 per month and noticed that would be just enough to cover the monthly water bill. I realized using monthly bills as a measure of my portfolio's growth would serve as great motivation for me going forward. It was only a minor accomplishment, but it showed me how much I had improved as an investor since my early days as documented in Lessons From A Former Neophyte. I took this success and looked for the next bill I could work towards.
Unfortunately, my water bill was by far the lowest monthly bill that I had. The next closest bill was a quarterly sewer bill of $147.89. I knew it would take quite a while to add that much to my dividend stream, but I just saw it as a stepping stone towards my ultimate goal. After 2 years of sticking to my plan, I knew I was getting very close. This past October, while doing my Quarter 3 review, I was thrilled to see my dividend income hit $148.47. It took discipline and more patience than I anticipated, but being able to pay another bill provided a boost of confidence and a real sense of accomplishment. I searched out the next bill I could eliminate.
What I found on my search was the monthly payment to my 401k loan that I took when we purchased our house. The amount of $77.38 equates to a $232.14 quarterly bill. This is an increase of $83.67 from the most recent quarter. I decided to put a deadline on this goal of Quarter 3 of 2017. This would require about a 57% increase in income in 4 quarters as compared to the nearly identical gain in 8 quarters between Quarter 3 of 2014 and Quarter 3 of 2016. This may end up being a bit too ambitious, but I wanted to aim high. The vast majority of this increase will come from new capital that I add to the portfolio. Beginning in January, I had already increased my monthly deposit over my 2015 average, so that will certainly make this goal more attainable. I'm also anticipating dividend raises across the board, being that most of my stocks increase their dividend every 4 quarters, like Johnson & Johnson (NYSE:JNJ). The raises themselves may be difficult to project, but coupled with the compounding from DRIPs, they will account for at least a portion of the targeted growth.
As for the new capital, I plan on purchasing stocks already on my watchlist that fit my overall strategy. Most of these stocks have yields around 3% which is about what I calculate I'll need to reach the income for this goal. Since I don't want to jeopardize my long term goal by focusing too much on this intermediate goal, the low yielding, high growth Disney's (NYSE:DIS) of the market will still be considered.
When I first began dividend investing, my goal was to eventually replace all of my income over the course of 30 years. I knew with a target so far in the future, staying disciplined and motivated wouldn't be easy. After stumbling onto a tangible way to view my dividends, I've begun creating goals that will serve as intermediaries. These mini-milestones should be reached every 12 to 18 months and have already strengthened my resolve to reach full income replacement. Thank you for reading.
Disclosure: I am/we are long JNJ, DIS.
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.