-I am in the accumulation phase of my retirement investment portfolio. I would like to retire with adequate dividends and distributions from my retirement accounts to pay expenses.
-The date I can cover those expenses is my Paycheck Emancipation Date. It may or may not be my actual retirement date, but it represents the earliest time I can voluntarily choose to retire.
-One way to get a rough fix on that point in time is to know the Dividend Doubling Time of my portfolio.
Various metrics inform the investor of the performance of one's portfolio. You already know most of them, so it doesn't pay to recite them all. Investors in the dividend growth space have eschewed following the value of the portfolio from day to day, as well as the total return. Some of us continue to sneak a peak at those numbers, although our better selves know that anything connected to the price of a stock is subject to the vagaries of the market, rather than strictly related to the business performance of the underlying companies. Dividends and dividend growth have captured the imagination of many of us, emancipating us from addiction to the ticker tape and focusing us on a component of investment return that provides us a good deal of information about the health of the company and the philosophy of its management.
Investors who invest to produce a rising stream of income for retirement are focused on growth in dividends and distributions from their holdings. The goal is not purely rising dividends; rather, the rising dividends are a means to an end. Particularly the goal is to reach a point where it is possible to live on cash proceeds generated by the portfolio without having to sell stock.
The three components of dividend growth during the accumulation phase are dividends derived from purchase of shares with cash contributions to the account, dividend increases by company management and the compounding effect of a rising share count from dividend reinvestment.
There will be no single metric that accurately estimates the rate of dividend growth within the portfolio, so one must measure it in real dollars on an ongoing basis, or estimate it by back-of-the napkin methods. Still, it's a very important metric to the dividend investor, as it represents the real cash flow produced by the investments themselves, once cash contributions are converted to equities.
So, how does that back-of-the napkin estimation of dividend growth work? First, new contributions amount to a percentage in the growth of the share count. I contribute about 5% to the corpus of my retirement account every year, so I know that next year's dividends will grow by roughly 5%, other factors notwithstanding. Second, the composite current yield of my portfolio is between 3-4% and I reinvest all dividends, so I know that next year's dividends will increase by slightly more than that composite yield, due to the compounding effect of quarterly or monthly dividend reinvestment. That puts me between 8-9% dividend growth per year within the portfolio. To be sure, this is not the investment performance of the portfolio, because the majority of the additional dividend production is due to new purchases. However, in my real world account, it still represents growth in the cash-producing engine that will be my primary source of income in retirement, so every contribution matters.
Finally, there is the rate at which the companies I own increase their dividend payments. This varies quite a bit from company to company, so I don't have a great fix on the actual number, but it is safe to estimate that it adds something short of an additional 1% to the increase in yearly cash flow from dividends.
This rough estimation turns out to be pretty close to the truth, as I look at the brokerage statements from my retirement account. The actual dividends in the whole portfolio are growing at roughly 9-10% and my dividend doubling time looks like it is a bit under 7 years.
Getting a rough fix on the nominal rate of dividend growth within the portfolio allows one to predict the rate at which the dividend will double, or the Dividend Doubling Time (NYSE:DDT). For any given equity within the portfolio, the dividend growth will vary by the rate at which the company's board decides to adjust the dividend year by year, as well as decisions to purchase new blocks of stock. This makes calculation of an individual equity DDT fairly useless.
I get lost in the weeds when another writer does a comparison of two companies with different yields and dividend growth rates, projecting the point of dividend parity many years into the future and discussing the merits of the one stock over the other. I am very skeptical that this type of analysis is meaningful, understanding that any number of macroscopic economic factors may intervene and multiple events could occur within a single company that might change it's dividend growth over many years time. I'm much more comfortable with estimating what may occur to my entire portfolio over the next 3-5 years if I continue on the same investment pathway, understanding that I am monitoring and shaping the portfolio with my purchases.
It's important to distinguish this rate from yield of any particular company and the dividend growth rate of any particular company. The rate at which dividends flow into the account and increase year by year is determined by what the investor does with the cash. If you continue to contribute cash and reinvest cash dividends, these will have the dominant effect on your portfolio cash production. Dividend increases will accelerate the rate of growth to a lesser degree.
Have you calculated that ACTUAL rate at which the dividend stream in your portfolio is growing? Do you have a rough estimate of the dividend doubling time (DDT) of your retirement portfolio? Do you roughly know the date at which your expenses will be covered by dividends/distributions from your retirement portfolio? How does that inform your decision about managing your investment program?
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.