How to reach your dividend income goals?

The goal of every dividend investor is to reach their dividend crossover point, which is the time when financial independence is attained. Many articles provide sources of inspiration touting the advantages of dividend stocks, while others show how to select the best dividend stocks at the best prices possible. Other articles focus on high yield, low yield, or a combination of all of them. Few articles however provide a concrete and actionable plan on how to utilize everything you know in order to reach your goals.

There are three key factors that can determine whether someone can retire with dividend paying stocks. In general, in order to be able to retire with dividend stocks, investors need to have a starting amount of capital to commit to the strategy. If they do not have a nest egg available, then the aspiring dividend investor would have to dedicate themselves to patiently building their portfolio of income producing securities, one stock at a time. This process takes time, and requires plenty of patience in order to build wealth. It also takes a lot of dedication to save money these days, rather than spend it on frivolous purchases such as new cars, big homes, expensive vacations or big screen TV’s.

Let’s look at a scenario where we have a dividend investor with zero assets, who commits to saving $1,000/month. This investor chooses to focus on dividend paying stocks yielding 4% at the time of purchase, which grow distributions at 6% annually. Our investor decides to reinvest distributions, in order to be able to compound distributions growth more rapidly.




After 10 years of saving and investing, our dedicated income investor is generating almost $2,000/quarter, which equates to $659/month in distributions. After 15 years, the monthly dividend income jumps to $1,325.

For the purposes of this example, I assumed that the investor purchases stocks which pay 4 cents/annual dividends and whose starting price is $1/share. I assume that dividends are going to increase by 6%/annually and that all future purchases will be invested in companies yielding 4% that offer a 6% dividend growth.

Now that we discussed saving money, and compounding at a given rates of return, we need to discuss how to actually invest the funds. In reality, it is difficult to predict the yield and dividend growth that new investments will generate even a few short years from now. However, having a disciplined approach where investments from approved lists are pre-screened using predetermined entry criteria is a very good start. Adapting to the current environment and keeping an open mind would be helpful as well, and keep you flexible.

In addition, it would be very helpful to focus entirely on researching companies, how they make their money, whether they can keep growing, who their competitors are and whether they have any strong competitive advantages. If you are able to invest in a few companies such as PepsiCo (PEP), Procter & Gamble (PG), Johnson & Johnson (JNJ) or Wal-Mart (WMT) over time, chances are that hitting your investment goals would be much closer. Worrying about interest rates, the general level of economic activity or unemployment in Brazil would be counter-productive. Instead, focus on factors that would help the companies you pick succeed and pay you higher dividends in the process.

In addition, in order to ensure that a sustainable stream of divided income flows to them every month, investors need to make sure that a diversified income portfolio is constructed over time. A diversified income portfolio should consist of at least 30 - 40 individual stocks, representative of as many sectors that make sense at the time. If in a given year 2 companies in a 30 stock portfolio completely eliminate distributions and go to zero, but the other 28% raise distributions by 7.10%, the amount of dividend income would be unchanged. The types of companies which fit the profile today include:

Eaton Vance Corp. (EV), through its subsidiaries, engages in the creation, marketing, and management of investment funds in the United States. This dividend champion has managed to boost distributions for 34 years in a row and has a ten year dividend growth rate of 15.10%/year. Currently, the stock is attractively valued at 15.70 times forward earnings and yields 2.40%. Check my analysis of Eaton Vance.

PepsiCo, Inc. (PEP) operates as a food and beverage company worldwide. This dividend champion has managed to boost distributions for 42 years in a row and has a ten year dividend growth rate of 13.70%/year. Currently, the stock is slightly overvalued at 20.90 times forward earnings and yields 2.70%. Check my analysis of PepsiCo.

Emerson Electric Co. (EMR) provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. This dividend king has managed to boost distributions for 58 years in a row and has a ten year dividend growth rate of 7.70%/year. Currently, the stock is attractively valued at 15.70 times forward earnings and yields 3.10%. Check my analysis of Emerson Electric.

ConocoPhillips (COP) explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to boost distributions for 14 years in a row and has a ten year dividend growth rate of 15.70%/year. Currently, the stock is attractively valued at 12.50 times forward earnings and yields 4.20%. Check my analysis of ConocoPhillips.

Chevron Corporation (CVX), through its subsidiaries, is engaged in petroleum, chemicals, mining, power generation, and energy operations worldwide. This dividend champion has managed to boost distributions for 27 years in a row and has a ten year dividend growth rate of 10.50%/year. Currently, the stock is attractively valued at 11.40 times forward earnings and yields 3.80%. Check my analysis of Chevron.

Aflac Incorporated (AFL), through its subsidiary, American Family Life Assurance Company of Columbus, provides supplemental health and life insurance products. This dividend champion has managed to boost distributions for 32 years in a row and has a ten year dividend growth rate of 16.80%/year. Currently, the stock is attractively valued at 10 times forward earnings and yields 2.50%. Check my analysis of Aflac.

Johnson & Johnson (JNJ), together with its subsidiaries, is engaged in the research and development, manufacture, and sale of various products in the health care field worldwide. This dividend king has managed to boost distributions for 52 years in a row and has a ten year dividend growth rate of 10.80%/year. Currently, the stock is attractively valued at 17.70 times forward earnings and yields 2.60%. Check my analysis of Johnson & Johnson.

Full Disclosure: Long all companies listed above

Relevant Articles:

- Diversified Dividend Portfolios – Don’t forget about quality
- How to increase your dividend income
- Successful Dividend Investing Requires Patience
- How to turbocharge dividend growth
- My dividend crossover point