Dividend growth investing as income booster

This is a guest post. The author runs the blog My Financial Shape, documenting his family’s journey to Financial Independence by 2024 by establishing various passive income sources such as dividend-paying stocks, etc.

My pursuit to achieve Financial Independence as a Dividend Growth Investor has had plenty of positive side effects over the years such as  

  • the tendancy to challenge and improve the way we structure our “work life”,
  • constantly learning new things (e.g. about businesses, stock investing etc.), 
  • setting a strong focus on our work-life-balance, 
  • the possibility to connect with like-minded people (through blogging etc.)
  • etc.

which gave us great motivation to work hard and save as much money as possible in order to invest with the purpose to establish passive income sources and to accumulate wealth over time.

As it turned out, already setting the target to reach Financial Independence has had a life-changing effect. We lead a more down to earth and conscious lifestyle than ever before and it is tremendously important for us to make the path as enjoyable as possible.

And just to be clear: there is still A WAY to go until I and my family can live of our passive income streams. We set December 2024 as our target, by then, our investment portfolio and other passive income sources should generate around USD 50’0000, which will cover our annual spendings.

How to stay motivated on the path to Achieve Financial Independence

Being a Dividend Growth Investor with a long term oriented buy and hold approach requires a lot of patience. The whole process takes time.

It’s an unspectacular and even “boring” investment approach, and that’s exactly what makes it so incredibly powerful. In fact, the establishing of every passive income source needs a big initial effort, good ideas and a well followed plan. And once it’s set in motion, there is the prospect of having implemented an ever growing cash generating machine working like clockwork.  

So, how to stay motivated, passionate and keep a long term focus to achieve Financial Independence through Dividend Growth Investing?  

Well, here’s what I do. I see the journey, the whole process as a wonderful game. Like a game with domino pieces. The purpose is to throwing down a huge domino piece in a couple of years, which symbolizes Financial Independence. That’s the goal.

But to get there, we need to break it down in small steps.  

For instance, each month is one Domino Piece that has to be thrown down another domino piece in the same month next year which is larger than the one before.

Let’s make an example: my September 2022 passive income should be higher than the same month in the current year. Or my next September savings should be at least 10 % higher than in the year before.  

It’s a step by step approach that let’s you appreciate small improvements, you become aware of the magic of small numbers, small steps. And over time, that can lead to just extraordinary results.   

Example on how to build a powerful stock portfolio which provides growing cash income

Let’s assume a household with annual work income of USD 50’000 (net, after taxes) and spendings of USD 40’000, which would imply a savings rate of 20 %.

So, each year, USD 10’000 in savings shall be invested into dividend paying stocks such as The Coca Cola Company, Johnson & Johnson, Hershey, PepsiCo, Brown-Forman, Nestlé etc.

The average dividend yield is assumed to be 3 % with a dividend growth rate 5 %.   

For matters of simplicity, let’s assume inflation rate to be zero and also let’s assume that there were no book gains (performance) on the stocks bought. In fact, let’s just assume that dividend income and the portfolio value depended only of 

  • investments in the amount of USD 10’000 each year
  • re-investment of all the dividends plus
  • dividend income growing organically by 5 % annually.

Now let’s look at how the numbers develop over 15 years.    

Now these are incredibly strong results!  

Putting USD 150’000 to work over a time frame of 15 years results in

  • a stock portfolio that grew quite substantially over time (let’s bear in mind, that we completely neglect the possibility of massive book gains trhough positive performance) plus
  • an annual dividend income of around USD 6’000

The dividend income is quite spectacular, if put into relation of the job income of USD 50’000 and the annual spendings of USD 40’000.  

In year 15, total income – factoring in dividend inflows plus work income – would be USD 56’000. These are very nice pay rises, arent’s they?

The compound effect gets stronger and stronger over time, the heavy weight is always lifted in the last few years of the time period we focus on. Just stretching it from 15 to 18 years would lift the total income to 66’000.  It’s incredibly how strong a consistent investment- and reinvestment porcess benefits conservative and long term oriented dividend grwoth investors.  

And the whole thing could be put on turbo, by increasing the invested amount which is put to work each year.

It’s the small positive changes that lead to great success over the long haul.

You are responsible for your own investment and financial decisions. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action.

About Financial Shaper

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