Dividend Growth Investing Benefits Youth

15 Sep 2013 13:37

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Because DGI has the word DIVIDEND in it many people associate with basic dividend investing.

Basic dividend investing is typically associated with portfolios of people in retirement where they take their lifetime of accumulated wealth and invest in bonds, dividend paying stocks, and annuities to generate an income stream to supplement social security and/or pension. Because of this there is a misunderstanding that you need a large investment (more than $250K) for DGI to work.

The reality is you do not need a large sum at all! Instead the largest investment you need is time (10+ years) for the power of re-investing (compounding) and dividend growth to create your wealth.

When I started my professional career I had a huge advantage. I got to live at home with my parents for the first five years with little debt and virtually no financial commitments. I easily could have saved one year of salary in that time but instead squandered it away on lavish spending and good times. Looking back all it would take was two years of aggressive savings to accumulate $15,000 (a small salary even in the late 1980s) and I still would have had three years of living with my parents to spend my money anyway I wished.

Putting that $15,000 to work in a DGI portfolio with 3% yield, 10% div growth and not contributing anything other than re-investment of dividends would have resulted in an income stream as follows:

Annual Dividend Income at…

  • Age 21 - $450
  • Age 35 - $2,490
  • Age 45 - $8,454
  • Age 55- $28,699
  • Age 60 - $52,877

At age 60, the dividend would represent a large % of my base per-retirement salary and, when combined with my 401K, would allow me to retire early and not collect social security.

Of course I did not discover DGI until I was in my 40s but I still have time on my side and it’s just that the benefits will not be as large. The lesson here is that the investment of time is a lot easier than the investment of cash so DGI benefits the young more than those near or in retirement.

Since time is a critical investment I made a basic calculator for estimating potential DGI income in out years. It is not perfect as it assumes a consistent growth rate and does not adjust for when you stop re-investing dividends but is still useful for planning your goals.

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