If you’ve been following this blog, you know that we are investing in dividend stocks to generate dividend income. Our goal is to have sufficient dividend income to cover our expenses one day in the near future. When this happens, we can say that we’re financially independent. We are adding fresh capital regularly to purchase more dividend stocks, this in terms will generate more dividend income. The fresh capital is the main reason why our dividend income has grown over the years. However, an important factor to consider is organic dividend growth from the stocks that we are holding.
Dividend growth is important because without it, the yield on cost of our dividend portfolio will stay the same forever. Without any dividend growth, inflation will start de-value our dividend income. One thing to keep in mind is that dividend growth provides a huge exponential compounding effect, allowing our dividend income to grow over time.
Below are stocks in our dividend portfolio that have seen dividend increases since the beginning of this year.
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These dividend increases meant an additional $503.19 in dividend income going forward for us.
Our annual dividend income has increased by over $500 without us having to do anything at all. Isn’t this amazing or what?
I love dividend income because we get paid for doing absolutely nothing at all. Now I just showed you that our dividend income is growing itself as well. Talk about icing on the cake!
But wait Tawcan, that’s just an extra $500, what’s the big deal? You are probably wondering...
Sure it may not sound like a big amount at all. But wait a moment and reconsider. Consider how much money you need to generate that kind of money.
At 3% dividend yield, you'd need to invest $16,773 new capital to generate an additional $503.19 in dividend income.
Do you have $16,773 laying around in the house that you can invest this moment?
For the most us, probably not.
The dividend growth from our dividend portfolio meant two things.
First, the fresh capital that we are adding regularly can generate more dividend income and the additional dividend income can grow whenever companies announce dividend increases.
Second, the additional $500 can grow more next year when companies announce dividend increases.
The power of compounding interest really takes off after a few years. Let’s not forget that we’re DRIPing many of our stock holdings too.
This is definitely icing on the cake!
I like to treat each dollar like a seed. We can either eat it by spending it, or we can plant it, nurture it, and wait for it to grow and produce more seeds. The dividend growth within our dividend portfolio is a perfect example of this concept. Each dollar invested inside our portfolio will produce more and more money each year. Although the growth may seem small, a few dollar here and there all add up in the long run.
The cool thing about running the dividend growth numbers that you saw above? I learned a few things about our dividend portfolio.
I learn that we need to focus owning more stocks that grow dividends at annual rate of 15% or higher. Typically these stocks have lower starting yield, so we must invest for the long term to benefit the high dividend growth rate.
Another lesson I learned is that we need to lower our exposure to REITs. We current have about 15% of our portfolio in REITs. Many of the Canadian REITs have not increased their dividends for many years (and they probably won’t due to how they're structured). Although we do get a high dividend yield from REITs, the lack of growth will be a concern once we start using our dividend income, because inflation will impact the real yield. We need to diversify further and not focus too much on the initial dividend yield. High dividend yield stocks may be nice for the initial income but perhaps they're not meant for long term holding.
With these lessons in mind, I'll most likely restructure our portfolio slightly moving forward. Perhaps selling some higher yield stocks that doesn't offer much dividend growth and focus on higher growth dividend stocks. A combination of stocks with high yield and stocks with high dividend growth will be the key.
I'm very excited about the lessons I have learned. Make sure to come back later or sign up our email newsletter to read the latest updates on our dividend portfolio.