You want to know what real freedom is? For me, it is watching my income grow while I do absolutely nothing while the businesses I own earn money and reward shareholders. The rest of freedom is pursuing a life of adventure, enjoying family or doing nothing at all. All things I sacrificed early in my career to earn enough to save enough to be retired at 55.
If your serious about living off passive dividend income in retirement, at some point before you retire you should have sat down and taken a hard look at your holdings. That hard look includes deep diving into a:
- Reasonable understanding of where the company’s revenue is made
- Where profits come from
- How capital spending leads to growth
- How much free cash flow is really available for shareholders
- The dividend’s coverage ratio and what that means
Once you have done that, regularly keeping an eye on what the investing community says about the stock will make more sense. If you just read analysis or pundits, you have no basis to agree or disagree with whether you should take a position or keep holding a stock.
If you’re not willing to put in the work, stick with index funds.
When you have done the work and you think you know your portfolio the next question is will the dividend income meet my future needs. To do this with any chance of success in reaching the crossover point, where your income exceeds your expenses, you must make some guess as to where you believe the income will be at points in the future.
Otherwise, you could find yourself welcoming shoppers at WalMart when you planned on being at the beach. Not a place I hope to find myself in.
Projecting that income is not an exact science. It requires variables that do not remain static over a period. You must make some assumption on stock prices, dividend growth rates and even whether you think the company can safely pay the dividend in the future.
To keep it simple, let us look at generic numbers over a single year with a $1000 investment. Assume 100 shares of XYZ at $10 per share with a current 5% dividend yield reinvested each quarter. We want to know how much that 5% means in real dollars for the year.
In the 1st quarter, we get 12.5 cents per share for our 100 shares for a total dividend of $12.50. Those shares are reinvested at a price per share of $10.10 reflecting a 1% gain in stock price for the quarter. We now have 1.24 new shares.
In the 2nd quarter, we get 12.5 cents per share for our 101.24 shares for a total dividend of $12.655. An increase in income of 10.5 cents. Those shares are reinvested at a price per share of $10.10 for a flat quarter. We now have 1.25 new shares.
In the 3rd quarter, we get 12.5 cents per share for our 102.49 shares for a total dividend of $12.81. An increase in income of 15.5 cents. Those shares are reinvested at a price per share of $9.9 reflecting a 1.98% loss for the quarter in market price per share. We now have 1.294 new shares.
In the 4th quarter, we get 12.5 cents per share for our 103.784 for a total dividend of $12.97. An increase in income of 16 cents. Those shares are reinvested at a price per share of $10.12 reflecting ~1% gain for the quarter. We now have 1.28 new shares.
So for the year, we project $50.94 in total dividends. 94 cents of increased income and total new shares of 105.064.
This scenario included no increase in dividend. Every position I hold has at least an annual increase of 2% with some increasing their dividend by over 10% per year. I ignore dividend growth when I project income because it isn’t guaranteed, and I like a natural conservative variable to give myself a crossover cushion. For some real numbers, because no one is counting on retiring with just $1000 of investments if the same scenario is applied.
At $10,000 invested you would have $509.40 in annual income.
At $100,000 invested you would have $5,094.00 in annual income. The first $100k is the hardest but with that income it starts growing faster and fasters.
At $500,000 invested you would have $25,470 in annual income. That is starting to cover some serious expenses.
At the mythical $1,000,000 invested you would have $50,940 in income. Probably not enough for most people to retire at a lifestyle but lifestyle is your choice.
My personal projections for the freedom portfolio in 2021 are to generate $40,436.70 in dividend income. 100% of that without any new Capital and without me lifting one finger in anything resembling work. Just the way I like my income, free of effort.
In the next 5 years while the portfolio sits and reinvests, and dividends are increased I conservatively project the Freedom Portfolio to throw off over $80,000.00 in annual income. $80k without working and even when I am asleep.
Stick around and watch how that works out for me. Maybe we can all learn something.
How do you project your income?
Thanks for reading!
One thought on “Projecting Dividend Income”
Great write up! At some point I’m going to take a hard look at diversifying into dividend stocks. Your info here helps feed that desire.
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