Hitting $1,000 in Monthly Dividend Income
This is a question which I frequently receive from readers, who signed up for my premium newsletter.
As you know, I try to invest $1,000 every month, in ten attractively valued companies. I try to invest in what I find to be some of the best values that I can find at the time. As a result, one of my frequent answer is that the time it would take to generate $1,000 in monthly dividend income will depend on the circumstances during the next decade or so.
When pressed for a timeline, I usually answer that it would take anywhere between ten to fifteen years. As you can see, I am offering a range of potential outcomes, because life is uncertain and because I see a likely range of how things will unfold in the future. The range of outcomes is in dividend yields available when I have money to invest, as well as the estimated dividend growth I will experience during the investing journey. The only constant will be the amount of money I plan to invest each month, which will be around $1,000/month.
As a general rule, if stocks are overvalued during the next decade, it could take longer to reach my objectives. If stocks are undervalued, it should take much less time to reach out my goals.
I then looked at a few different scenarios, the likelihood of which is pretty difficult to estimate. But I did make those projections anyways.
I used the following spreadsheet to input my estimates. You may give it a try.
It lists a few different inputs on cells C1, C2 and C3, notably dividend growth, dividend yield and amount I plan to invest.
The calculations in rows 6 through 305 show the projections, using inputs above.
The first column shows the month.
The second column shows the number of shares accumulated through new investment and dividend reinvestment.
The third column is showing the share price for the average company that the model is investing in.
Initially, the share price is at $1, but then it tends to increase by the rate of annual dividend growth. This is why when you invest $1,000 initially, you can buy 1000 shares. In 12 months, after the dividend increases by 6%, the share price increases by 6% as well. As a result, the same $1,000 only buys 943 new shares. The fourth column simply shows the monthly dividend amount per share, which tends to increase by the rate expected in cell C1. The last column is simply the monthly dividend income generate by the portfolio. This is the column where I look for the amount that is at or above $1,000, in order to see how many months it would take me to reach the stated portfolio goals and objectives.
I am going to run through a few of the scenarios listed below:
The first scenario uses a dividend yield of 3% and an annual dividend growth of 6%/year. If I can find securities yielding 3%, which also grow dividends by 6%/year, I would be able to reach $1,000 in monthly dividend income within 188 months, which is about 15 and a half years. Based on how I have been investing over the past 10 months, this sounds like a decent possibility for an outcome. This example assumes that I can invest my portfolio in a basket of securities every single month with an average dividend yield of 3% and an average annual dividend growth of 6%/year. This and all the other assumptions listed below also take into consideration dividend reinvestment – essentially dividends are reinvested into a basket of stocks yielding 3%, with a 6% rate of organic dividend growth.
Per the model, someone who invested for 23 months should have an estimated monthly dividend income of $60.98, which translates to an annual dividend income of $731.76. Coincidentally, after investing for 23 months in the Dividend Growth Portfolio Newsletter, I have invested $24,410 and have an estimated dividend income of $791.40/year. This translates to a monthly dividend income of $65.95.
Increasing the dividend growth rate to 7% only shaves off a few months, as it will only take 180 months to reach the goals and objectives of my real money experiment. Now, if my dividend growth portfolio that yields 3% ends up growing distributions at an annual rate of 10%/year, I would reach my goals within 157 months. Given the state of the available opportunities today, I am not sure that I can find companies growing dividends above 6%/year, which will also yield 3% or more.
If share prices become overvalued from here, to the point where the average portfolio yield is 2%, but the dividend growth is 7%/year, it would take me 229 months (19 years) to reach my goal of earnings $1,000 in monthly dividend income from my portfolio. This is a scenario with a low likelihood in my opinion.
If on the other hand we get better entry yields, and we see dividend yield of 4% and dividend growth of 6%/year, I will reach my goals within 154 months. This is close to 13 years. This is a likely scenario, which will likely present itself during the next bear market. It is possible that dividend investing falls out of favor with the investment community, which may translate into lower prices and better starting yields. Around the time of the financial crisis, and even up to 2012, it was possible to build a portfolio of attractively valued securities yielding around 4%. This was the when utilities such as Con Edison (ED) yielded close to 6%.
If we get the recession that everyone has been warning about over the past decade, we would likely get depressed stock prices for a long period of time. Under such a scenario, it may be possible to build a portfolio yielding 5% or even 6%, while everyone else is selling securities and building underground bunkers. For this to happen of course, we would likely be seeing some type of an economic contraction, high inflation and high interest rates. For example, in 1980, Coca-Cola (KO) was yielding close to 6% at one time. Colgate-Palmolive (CL) yielded 8%, Clorox (CLX) had a dividend yield of close to 9%, while Procter & Gamble (PG) yielded 5%.
If I use the estimate for a 5% dividend yield, coupled with 6% in dividend growth, I can see myself reaching the goals and objectives within 130 months. At a 6% dividend yield, I will reach the goals and objectives within 110 months. That doesn’t mean that I will be chasing yield however.
I want to caution you against chasing yield to reach the goals. I want to build a sustainable dividend portfolio, where safety of the dividend income is of primary importance. I want a dividend income stream that grows at least at the rate of inflation over time, in order to maintain purchasing power of my dollars. I also want to have a margin of safety in dividend payments, in order to minimize the risk and impact of dividend cuts on the income stream. Most companies with higher yields today have higher dividend payout ratios. If the underlying business suffers short-term turbulence in earnings due to a recession for example, or increased competition, there is a high risk of a dividend cut. A 6% dividend yield is of no help to the retired investor, if the dividend is slashed in half during the next recession. Managing risks to the portfolio is of utmost importance to the retired dividend investor.
The other thing I want to state is that future projections are fairly linear in nature. In my projections I use a flat expectations in terms of yield and growth. It is possible that we may have one set of outcomes that span a few years, followed by another set of outcomes for a few years. For example, we may have valuations where dividend yield is 3% for a few years, followed by a couple of years where valuations are very attractive and yields on blue chip securities reach 5% - 6%. Since I have the discipline to keep investing every month, I will be in a good position to take advantage of fire sales occurring along the way. The lower valuations along the way will help me reach my goals sooner.
If on the other hand stocks become overvalued and do not experience declines of any sustained kind, it will take a very long time to reach my goals and objectives. I will still try to turn over hundreds of rocks, in order to find the best values at the moment. However, results will suffer if quality companies are overvalued at available at a starting yield of 2% versus a starting yield of 4%.
I am also trying to maintain a diversified dividend portfolio, and not swing for the fences by taking concentrated bets which can work greatly or fail miserably. I am a conservative investor who is building this portfolio as if it will be the only stream of income providing for me in old age, when I cannot work or generate any other form of income. As such I emphasize on the security of the dividend stream, valuation, and company’s ability to maintain and grow that dividend stream through growth in the business. However, I do not want to rely too much on a single security for my fortune. I want a group of companies, working as a team, to shower me with more cash every year.
I look beyond sector and company allocations in terms of diversifiecation however. I also try to stack companies with the three different types of dividend growth and dividend yield characteristics. The first group is comprised of companies with lower current yields, which is compensated by higher expected dividend growth. The second group is comprised of companies in the sweet spot, where dividend yields are adequate, while dividend growth is above the mid single digits. The last group includes companies which offer higher yields today, but the dividend growth is expected to be slower.
The nature of the stock market is that the attractively valued securities and sectors do not come at a predictable timeline. Sometimes, whole sectors are overvalued for extended periods of time, which is why I may not build out significant positions there for extended periods of time. Then all of a sudden, investor sentiment may shift, and these companies may be available at a better valuation. For example, REITs were richly valued in late 2019. Just a little over an year or two before that, the likes of Realty Income were selling at attractive valuations. Realty Income went to an attractive valuation in March - June 2020 again.
Alternatively, many sectors and securities are almost always available at attractive valuations. This is great when building out a dividend portfolio, but the risk is that I may end up being overly concentrated there. This is why it pays to keep monitoring the situation and take advantage of any declines in prices. However, it is also important to manage risks appropriately, in order to avoid concentrating too much in a given sector or company.
The most important lesson I learned from investing in dividend growth stocks over the years is to enjoy the journey!
Thank you for reading!
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- Types of dividend growth stocks
- The Dividend Crossover Point
- Three stages of dividend growth
- Risk Management