Initial commit
– Common first message in new software project’s version control system
When starting something new, it’s often beneficial to pause and consider what you are trying to achieve. In some cases, the need to do initial planning doesn’t weigh a lot. If you are hungry, you can just get up, go to the kitchen and start preparing for food. The time scale from being hungry to being satisfied usually takes 20 minutes to one hour, depending on your cooking skills. In other cases, like dividend growth investing, the rewards are not immediate. Instead, dividend growth investing is a long-term commitment. Depending, for example, on one’s free income and savings rate, the timeline to reach the goal could be from 10 years to many more decades. That probably requires some more planning and I’d expect you to agree.
Defining the End Goal
Let’s refine my goals in a bit more detailed fashion. Currently I don’t aim to retire early. I want to have income from my portfolio to help me cover my expenses in the future. I like my job in IT and therefore would not retire early, but I could consider working a shortened week.
To cover my living expenses including things like rent, food, bills I’d need around 1000€ per month. On top of that I’d wish to have another 1000€ for other expenses like hobbies, eating out, entertainment, and well, to feel financially totally secure. In total the sum would be:
2000€ * 12 months = 24000€ per year.
When taking dividend tax of ~25% into account we get:
24000€ / 0.75 = 32000€ per year.
These calculations don’t account for inflation. In reality, the same amount of money will not have the same value in a few decades as they have now. Beating the inflation rate can be held a one of the valid goals for investing money in the stock market in the first place.
How the heck I’m going to achieve that?
Let’s first think about the portfolio’s total value. We can easily calculate the needed portfolio size in relation to the dividend yield it offers with following formula:
Portfolio size = Annual income / Dividend yield.
| Dividend yield | Portfolio size |
|---|---|
| 1% | 3 200 000€ |
| 2% | 1 600 000€ |
| 3% | 1 066 666€ |
| 4% | 800 000€ |
| 5% | 640 000€ |
| 6% | 533 333€ |
| 7% | 457 000€ |
| 8% | 400 000€ |
| … | even fewer euros |
As we can see, the higher the yield the less we need to have invested! So why don’t I do calculations beyond 8%? Generally speaking higher yielding stocks might have more risk associated with them. This could mean dividend cuts or irregularity in the dividend or even the business itself.
If we then look at the lower yields, I almost start feeling dizzy. If I’d aim for stocks yielding 1%, id need to be millionare… And not just a millionare, but millionare with over 3 million euros invested. Realistically speaking, I don’t consider that option achievable.
When we move into the middle section of the table, we start approaching a bit more realistic figures. Even 4% yield and 800k portfolio size seems like a lot. 5% again is already 160k lower. Therefore I think I should be aiming for 5% yield. I think achieving quite stable 5% dividend could be achievable. And it wouldn’t limit the stocks that much. I could combine companies with lower and higher yields, but still aim for the total yield of 5%.
That’s many hundreds of thousands of euros!
Six hundred forty thousands. If I’d had that money right now I’d honestly feel like a billionare. That maybe puts it in perspective the amount of money we are talking about in my life.
Well… Let’s start to crunch some numbers. I’m currently circa 30 years old. I have about 35 years until I retire. We assume that I start the journey from 0€ (although I have some other investments already).
To simulate the growth of the portfolio, we’ll use widely referenced growth rate of stock market of 7% per year. This number is the mean annualised growth with ups and downs of the market. With this and defined time frames, we can calculate how much money I’d need to invest per month to reach the goal.
Scenario 1 - 35 years to go
If I’d start from 0€ with end goal of having 640 000€ after 35 years.
I started out by asking ChatGPT to do this but quick sanity check showed that the results were quite random. I guess the AI overlords aren’t here yet. I ended up using this savings goal calculator.
And the result is: 386€! That’s is actually quite a lot lower number than I thought. The power of compound interest is quite amazing.
Scenario 2 - 25 years to go
After 35 years I hope to be retired. But what if I decided to aim to start living off dividends 10 years earlier? Let’s input the numbers.
And it gave me: 843€. Quite a stark contrast. By removing roughly a third of the investment time, the monthly contribution over doubled!
Scenario 3 - 15 years to go and retire early
Let’s do the calculation with 15 years as well just to see what it would require for me.
Insert a drum roll here
The monthly contribution would be: around 2122€ per month!!!
Heavy panting… That would be around 85% of my whole take home pay. That would already result in me having no roof as I couldn’t afford to pay rent. So maybe I’ll scratch this idea for now.
I’ll go for scenario 2 - 25 years to go
Investing 843€ is a ton of money. But with my current salary that could be achievable. I have net pay of around 2500€ per month. That’d mean my savings rate would equate to about 34%. Seems decent.
Although, I’m not 100% sure how large my actual expenses are. I haven’t been tracking those that closely, but it could also be a good topic for a blog post.
I need to also remember, that as the time passes and I start to gain dividends, I plan to reinvest those fully. This in return means that my monthly contribution will get higher over time and that is the beauty of compounding. However, I think it would be interesting to separate these two into two categories:
- organic dividend growth - including dividends received from holdings I had e.g., a year ago
- total dividend growth - including the organic growth + dividends from new investments
Conclusions
I have now set myself a time frame and a goal that is fairly achievable. These plans might be revisited as time goes by, but it’s a great starting point.
Next, I’ll setup the automatic transfer of 850€ (decided to round the number up) each time my salary hits the bank account. I aim to invest that money before the next time I hit the same transfer into my brokerage account.
I need to remind, that at this point, I have a decent safety buffer in bank to cover expenses up to 3-4 months. Therefore I’m not in acute need of money. Stock markets are quite risky, at least at the current economic situation, and it’s usually a good habit to only invest money you aren’t dependant on.
With much love, Dividend Growth Quest