Let us, for instance, look at what happens when you reach the conclusion that Procter & Gamble would be an excellent stock to carry with you throughout life, and you only get a chance to make a $5,000 investment in 1970, and to combat the temptation to needlessly accumulate wealth, you decide to collect the dividends along the way.
How does that story play out? Well, the initial $5,000 in 1970 would be immediately paying out $155 in immediate income. By 1980, things were starting to move along, as your $5k investment doubled into $10.1k that was now paying out $325 in dividends. That’s a steady advancement, but not to the point of life-changing from a dividend generating standpoint.
From years 10 to 20, things started to get a little more interesting. Procter & Gamble started hitting its stride, and your $5k advanced to $68.4k. For comparison purposes, the average adult male with a bachelor’s degree was earning $39,200 per year. You were getting around $1,400 in dividends per year. All of a sudden, this Procter & Gamble position was turning into a baby pension, putting a little over $100+ in your pocket every month, just because of the wisdom of your decision to delay gratification and possess the intelligence to select a superior business as an investment.
Now that we are reaching a point where we are going from years 20 to 30, the accelerator is in full force; your $5k investment in Procter & Gamble with dividends spent by you along the way would be worth $219,000 at the millennium mark. Now, you’d be collecting $365 per month from your investment, and you’re starting to flirt with receiving as much dividend income in a single year as you originally set aside to invest.
By 2010, you would have reached $609,000, and by 2014, you would have reached $903,000. What’s wild, though, is this: you were collecting and receiving dividend payments for each of the forty-four years along the journey. It wasn’t some situation where you had to put the money in a lockbox, and receive no material benefit until you were an old man or woman. No, it didn’t work that way.
The first ten years were negligible from a dividend payment standpoint, and that’s why people don’t do this. You’re not going to see MTV start a series for 21 year-olds called, “Build That Dividend Check!” Because people aren’t equipped to have that kind of patience unless they have a clear conception of their future self and what the financial requirements of long-term happiness are, that initial hurdle doesn’t get jumped by a lot of people.
But look at what happens when you do. In the 1980s, you were getting $100 per month in walking-around-money (roughly the equivalent of getting a $250 check each month in today’s dollars) while also simultaneously seeing your net worth grow due to the growing profits that would get capitalized in the form of a higher stock price which would then give you higher dividends down the road. This is cake-and-eat-it-too territory.
In the 1990s, you started collecting $365 per month, which has the spending power of $550-$600 today. These are real, significant benefits in the moment. This conception that dividend investing must be a “come up with money in your 20s” and then don’t touch it until you’re 65 is a wrong way to convey the message because it implies a restriction of choice where one doesn’t exist. Better advice would be this: Find a superior business, selling at a reasonable price, come up with a meaningful amount of money as an initial purchase, let it compound for ten or so years, and then start spending the dividend checks each year so your life can benefit from it and your net worth can continue to advance higher.
And the benefits keep getting sweeter each year. Imagine if you retired in 2004, and used those Procter & Gamble dividend checks as a key component of your wealth generating story? You kept getting more and more money each year. That’s the distinguishing characteristic of a dividend growth retirement strategy: it’s not bonds paying you 3% each year, year after year. It’s not a pension paying you $750 per month, every month, with no adjustment for inflation. It’s a quarterly cash check that increases each year, when you limit yourself to those five dozen businesses that rule the world.
A forty year plan for an investment might look something like this: come up with a decent chunk of change, reinvest the dividends, and add to it when you can for the first ten years. In year eleven or so, say, “It’s time I start reaping the benefits of my harvest for the seeds I’ve sown.” Then, you receive your check every quarter as you go through life, and if it is a company like Procter & Gamble, it will keep going up year after year. Because the dividend growth is a product of profit growth, the stock price rises, and your net worth increases even as you’re spending the money. Dividend growth investing isn’t always about waiting for some far-off future; it can simply be a manner of busting your tail for ten years to put something respectable together, and then collecting a check every three months for the rest of the time you grace this world.
Originally posted 2014-08-04 08:00:16.
