The Nerdy Excitement of Dividend Investing (I promise it's not boring)

For any of you that know me well or have worked with me for a while, you all know how much of a nerd I am when it comes to retirement investing. For the last 16 years or so, my wife and I have consistently put away money for retirement in growth stock mutual funds. This has served us well however I have in recent years looked at different strategies in addition to this plain, boring investment strategy. What have I found? Another boring strategy that gives me more potential upside. What I am referring to is Aristocrat Investing and I'm telling you, hold onto your pocket calculators because this is exciting stuff!

What is Aristocrat Investing you may ask? Well, I can assure you it has nothing to do with the latest drama of the self ostracized Prince Harry and Meghan Markle. Aristocrat Investing refers to investing in single stocks that have a 20+ year history of paying dividends year over year. These stocks tend to be large, boring companies such as Coca-Cola (61 years paying dividends), Procter & Gamble (67 years paying dividends), and IBM (28 years paying dividends) just to name a few. In fact, my list contains 64 such companies.

And what are dividends? This is profit the company has made and pays out to its shareholders. So if the company made a bunch of extra money and decides to return a $3 dividend for each stock, then you as a shareholder gets paid $3 for every stock you hold. Free money, cool right?

So now you are asking, "So what? $3 isn't crap!" and you would be right. This is a simplified explanation of things. The reality is things are a bit more complicated as some companies pay a dividend quarterly, maybe every 6 months, or yearly and the amount paid is usually a percentage of the stock price (2-5% typically). Furthermore, the key to this strategy is not taking out the cash from these dividends but reinvesting those dividends back into the same company they came from. I'll explain.

Let's take Proctor & Gamble who has paid out for 67 consecutive years. They pay dividends quarterly and historically the expected Annual Dividend Increase is 6.21% with an Annual Share Price Appreciation of 3%. Don't worry, I'm going to use the Market Beat Dividend Calculator (https://www.marketbeat.com/dividends/calculator/) to ensure everything makes sense in a moment. Putting P&G information into that calculator, I'm going to start with 1 share and do an annual contribution of $100 over 20 years. All the other fields are populated automatically.

This will net you an incredible $4,190.27 after 20 years! Do I hear Miami calling? Terrible, right? Wrong. Your return on this one single stock is 94%.

The reality is you will be doing this across multiple stocks; 64 to be exact. But let me show you something that will hit home how dividend investing helps increase your wealth over the long term.

Most people in America have a 401k retirement plan. The average salary in America is $55,000. If you save 15% of your income for retirement, that means you are putting away $8,250 per year towards retirement. In a 401k, let's say you put in that $8,250 per year for 20 years with an 8% return and an employer match of 50% up to 5% of what you put in. At the end of 20 years you will have $440,458.91. Not terrible at all!

Now let's look at a generic dividend portfolio where you put away the same $8,250 per year and have an 8% appreciation in stock price with an average 5% annual dividend increase. After 20 years, your portfolio would be $515,703.14; an extra $75,244.23!

So on an average salary, investing only 15% of your income for 20 years, you can have about a half million in retirement. What if your time horizon is longer? What if you are younger than I am and you have another 15 years before you retire? Well let's see what that looks like in the calculator.

Congratulations friend! Making an average income and investing 15% of your income for 35 years, you now have over $2 million in your retirement account!

There are a lot more complexities that one can go into about this and if you are interested in the nuances of dividend investing, I highly suggest getting a hold of David Bahnsen's book The Case for Dividend Growth: Investing in a Post-Crisis World. He highlights some of the math and market conditions that make this a superior tool for investing. WARNING: Bahnsen tends to write like a PhD grad at times so you will have to slug through it a bit however it is worth the read!

I hope this makes you a little excited and I encourage you to start plugging into the calculator what your 15% would be and different time horizons; perhaps Miami may not be out of reach for your retirement years!