Retiring on dividends is a dream come true for many people. On the other hand, many have never heard of dividends. I never heard of dividends until I was the age of 38 years old.
I became fascinated with the words passive income when I was overseas, and the idea of living off investments was a possibility. Dividend growth investing was the type of passive income that interested me, and it had a profound impact on my thought process.
Full disclosure: I am an active duty Marine currently at 22 years in the Corps. I will have a very lovely pension in retirement. My wife and I also have three rental homes that will bring in income. Dividend investing will be a portion of our larger retirement strategy.
Investing for Dividends 102: Keeping Score
Disclaimer being said, we take dividend investing very seriously. We plan to make enough money in dividends to live off of them completely. Then I will be able to invest my entire retirement check back into our dividend portfolio.
Why do we want to build such an extensive dividend portfolio? My military retirement ends with my wife and me. It is not an asset that we can leave to my children. However, if I can invest all of my military retirement money over the years, our kids will have millions of dollars invested in dividends.
Where do we stand now? We started our dividend portfolio in June 2019, when I opened my first brokerage account. In less than two years, we have amassed $150,000 in our portfolio. The goal is to reach $1 million five years from now—which means we aim to reach $1 million by June 2026.
How much do dividends pay you? The amount that dividends pay you depends on the securities that you purchased. Our goal is to have 4% capital appreciation and 4% dividend yield. Capital appreciation is the price going up, and the dividend yield is what is paid to your pocket.
Right now, with $150,000, we are getting paid roughly $500/month in dividends. I will go more into the math in subsequent posts. With 4% capital appreciation, the value of $150,00 will earn us +$6,000 annually. Of course, we plan to put most of our earnings into the portfolio to accelerate the process.
Investing for Dividends 101: Dividends to the Rescue
How do you build a dividend portfolio? First and foremost, I recommend that you read a few books before putting any money into the stock market. The first book I recommend is “The Intelligent Investor” by Benjamin Graham. It is long and dry but will give you a solid base of information on the actual stock market.
Next, I would read “How to Retire on Dividends” and “The Passive Income Myth.” These books will give you insight into how dividends will translate into your overall retirement plan. After reading these books, it is time to pick your portfolio slowly.
How do you start picking the stocks and ETFs? There are many ways to get started, and there is a lot to know before you decide. You can read my series Stock Market Investing 101 for details on how I choose my picks.
When you are searching only for dividend growth investing, you will hear a lot of varying opinions. Some will say you only need blue-chip stocks like Apple and McDonald’s. Others will say that you need high-yielding products like closed-end funds and REITs. Finally, many will say that you do not need to worry about your stocks’ capital appreciation; you just want the cash.
Build the Mindset of an Investor
For me, the answer lies somewhere in the middle of all this commentary. I tried to build a portfolio of all high-yield products. It did not do very well. In fact, it sucked. I had to scrap that project, lose some money, and go with a more balanced portfolio. These are the five parts of my dividend strategy.
Pure Growth. These stocks do not even pay a dividend yet; however, they have a high capital appreciation, and I predict that they will pay dividends one day. I have Google, Amazon, and Palantir, etc. I have about 2-3% of my portfolio in these stocks.
Capital Appreciation. These are stocks that consistently go up. You may hear that the stock market goes up, on average, 8% a year. I want to tap into this growth by investing directly in the stock market. My primary capital appreciation vehicle is the Vanguard Total Stock Market ETF or VTI.
Bond Funds. Bonds are boring, but they serve a purpose. Stocks and bonds usually have an inverse relationship. When one goes up, the other goes down. Do your own research and see what you find. Bond funds pay nice 3-4% dividends, and they pay monthly. They can also have slight price appreciation as well. My favorite bond funds are Long Term Bonds (BLV) and Corporate Junk Bonds (JNK).
Dividends vs. Capital Gains
Dividend Growth Stocks. The DGI stocks are blue-chip stocks and future blue-chip stocks. Some of the older companies pay 6-7%, like Altria (MO), AT&T (T), and Phillip Morris (PM). Then you have some of the stocks that will appreciate and pay you 2-3%. These include McDonald’s (MCD) and Johnson & Johnson (JNJ). Finally, you have some of the younger companies that pay lower dividends but can give more growth; these include Costco (COST) and Ally Bank (ALLY).
Money Makers. Money Makers are your high-yielding, take-no-prisoners, all income plays. These are my favorite securities, but they can be risky because they provide little or no growth. For this reason, I like to start with these and layer on other growth vehicles. Some categories of money are closed-end funds, preferred shares, REITs, and business development companies (BDCs).
As you can see, there is a lot to talk about—dividend investing is the long game. After two years, Kris and I are getting to the point where we can actually do exciting stuff with our dividends, like go to restaurants and buy video games (me). I will also go over more fun that will have spending dividends over the next few years.
You will see many people sharing how they have made so much money in crypto-currency, growth stocks like Tesla, and personal residence. Your only goal is to keep your eye on the prize. Very few people can live off their investments. You can be one of the few to understand how passive income works and the power of compounding. Look for more of my works in the future.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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