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This article is a continuation of my previous article (which did not know it was going to become "Part 1" when I wrote it).

If your goal is to have an income during retirement, there are (at least) two strategies you could use to achieve your goal - capital gain investing and dividend growth investing.

Let's try capital gain investing.

You have $500,000 in cash. You buy $500,000 worth of shares in company XXX, a "growth company", which does not pay a dividend. XXX's share price grows by 10% each year. The Rule of 72 says the share price will double in 7 years. After 7 years, you have $1,000,000 worth of shares in XXX. You sell it all. You buy $1,000,000 worth of shares of company YYY, a "dividend company", which pays a dividend of 3%. In the 8th year, you have $1,000,000 worth of shares, and you receive $30,000 in income. The total return (not including the $500,000 you started with) is $530,000. You had some capital risk (what if XXX's share price did not grow by 10% each year?), but no income risk.

One example might be buying Apple (NASDAQ:AAPL) on January 2, 2004 (the first trading day of that year) at $10.59/share. Seven years later, on January 3, 2011, AAPL's price was $328.16/share, so you more than doubled your capital. (All prices were taken from Yahoo! Finance.)

Now let's try dividend growth investing.

You have $500,000 in cash. You buy $500,000 worth of shares in company YYY, a "dividend growth company", which pays a current dividend of 3%, but which grows its dividend by 10% each year. You receive $15,000 in income during the 1st year. You do not reinvest the dividends. After 7 years, the dividend will double. In the 8th year, you have $500,000 worth of shares, $142,307.57 in earlier income, and you receive $30,000 in income. The total return (not including the $500,000 you started with) is $172,307.57. You had no capital risk, but some income risk (what if YYY's dividend did not grow by 10% each year?).

Income received during 7 years
yearincome
1$15,000.00
2$16,500.00
3$18,150.00
4$19,965.00
5$21,961.50
6$24,157.65
7$26,573.42
total$142,307.57

One example might be buying Walmart (NYSE:WMT) on January 2, 2004 (the first trading day of that year). Over the next seven years, WMT raised its dividend from $0.52/share to $1.212/share, so you more than doubled your income. (All dividends were taken from Yahoo! Finance.)

Both alternatives start with $500,000; both alternatives end with $30,000 in income in the 8th year; the total return is different; the risks you took were different.

I'm not showing an alternative with dividends being reinvested, as Part 1 led to many comments about what was (or was not) realistic, so I'm deliberately avoiding that question here.

I'm not assuming you only one use investment strategy for the whole 7 years.

I'm not going to tell you which strategy is "better". I'm not going to tell you which strategy you "should" use.

I will tell you that you face this choice more than once in your life.

Part 1 was sparked by the question, "Should I switch from capital gain investing to dividend growth investing, when I retire?". That's certainly one time you face this choice.

This article shows that you also face this choice 7 years before you retire. You have $500,000. Do you (1) use a capital gain strategy to grow capital to $1,000,000, or (2) use a dividend growth strategy to grow income from $15,000 to $30,000?

You also face this choice 14 years before you retire. You have $250,000. Do you use a capital gain strategy to grow capital to $500,000, or use a dividend growth strategy to grow income from $7,500 to $15,000?

You also face this choice 21 years before you retire. You have $125,000. Do you use a capital gain strategy to grow capital to $250,000, or use a dividend growth strategy to grow income from $3,750 to $7,500?

You also face this choice 28, 35, 42, etc. years before you retire.

I'm not assuming share prices grow by 10% each year. I'm not assuming dividends grow by 10% each year. You can pick any growth percentage you like, and the Rule of 72 will tell you have many years you have to wait before it doubles. All I'm saying is that a person with an average lifespan will have enough years for multiple doubles, and will therefore face this choice multiple times.

Source: When Should I Transition From Capital Gain Investing To Dividend Growth Investing? Part 2