If you’ve been reading my blog, you know that I’m a big fan of passive income. Millionaires average seven passive income streams. Dividend stocks are the next passive income stream I am investing in.
What is a Dividend anyway? A dividend is a share of the company’s profits distributed to shareholders (usually quarterly).
It is their way of thanking you, with a bonus, for owning shares in the company.
My strategy is to own a portfolio of Dividend growth stocks that have growth potential and have a consistent history of paying dividends. I will balance in some blue chip dividend stocks in four categories to diversify my risk:
- Healthcare and Pharmaceutical
- Food and Beverage (non-cyclical)
- Consumable Basic Needs (non-cyclical)
These industries have been around for a long time and won’t be going anywhere soon. Dividends are generally paid by companies who are stable and have good cash flow.
Dividend investing is also a great way to earn compound interest by taking part in a Dividend Re-Investment Plan or DRIP. This is when you use the dividend payments to buy more shares of stock.
Compound Interest is a simple yet powerful concept of reinvesting interest into the original principal sum; simply put, it’s making interest on interest.
“Proving its power in a thought experiment. David Reiss, professor of law at Brooklyn Law School, likes to convey the profound power of compound interest with a riddle of sorts.
“Would you rather receive a gift on Jan. 1 of $1 million, or a penny that doubles every day for the rest of the month?” Reiss says. “Most kids would go for the million bucks, but those who are patient enough to do the math know that they can get millions more if they are patient enough to wait the month.”
It’s true. The penny-doubler would in fact finish January with $9.7 million more than his or her instant gratification-seeking friend.”
I’m realistic and understand that you’re not going to be doubling your money everyday, but if you earn 10% (S&P 500 average historical return), minus fees, on your principal sum and reinvest those earnings/dividends, you will double your original amount in approximately 7.2 years. I came up with this number by using the rule of 72.
Learn about it here —> https://www.investopedia.com/terms/r/ruleof72.asp
Compound interest is even more powerful if you add to your original principal sum each year.
My plan is to invest $20,000 initially and $20,000 each year thereafter. At a 10% annual return, my compound interest calculator calculates that my future value in 5 years will be $166,522.40. At 10 years, my future value is $402,498.19. At 22 years (my kids should be out of college) my future value will be $1,733,665.99.
Here is the breakdown of profits by year:
5 years at 10% return – $166,522.40 (total sum with earnings) – $100,000 (principal sum) = $66,522.40 (total profit)
10 years at 10% return – $402,498.19 (total sum with earnings) – $200,000 (principal sum) = $202,498.19 (total profit)
22 years at 10% return – $1,733,665.99 (total sum with earnings) – $440,000 (principal sum) = $1,293,665.99 (total profit)
I’m ecstatic if my returns are close to these estimates and I plan on getting there with Dividend Growth Stock Investing.
Looking 22 years down the road, my passive income (if I choose to take cash dividend distributions) can be estimated: $1,733,665.99 x 4% dividend yield = $69,346.64 per year
I hope to be close to done on my mortgage and paying for my kids’ secondary education in 22 years. This is in addition to what I will accumulate in my 401k, which, gives me a lot of financial flexibility. I can keep reinvesting dividends or live off of them.
Look for updates in the future to my dividend growth stock journey.