How much passive income can one million dollars invested in dividend paying stocks generate? I receive this question about dividend growth investing all the time! Today's video looks at this question in detail, covering several stock market investing scenarios.
My personal dividend stock portfolio contains 38 stocks. Taking my annual dividend income and dividing by the current value of my portfolio, I get a current dividend yield of 3.64%. I will use this as the starting dividend yield in today's hypothetical scenarios.
* 3.64% starting yield
* Annual compounded dividend growth rate of 5% per year in perpetuity. Probably a bit low, but do this because of inflation and also because of an assumption I make in Scenario 2 (more on this next).
* I assume no capital appreciation. This makes the modeling a bit easier to convey on YouTube. Makes both scenarios look lighter on portfolio value than will probably happen (a conservative approach). In Scenario 2, however, the reinvested dividends are generating more cash flow faster than will likely happen in reality. I taper this off a bit by assuming 5% dividend growth rate. At the end of the day, Scenario 2's all in yield on cost of ~9.3% after 10 years is quite realistic in my humble opinion.
My Golden Rule of Investing: Never cut into principal.
Scenario 1: Retire Tomorrow
In my first scenario, I discuss what it would be like to invest $1,000,000 in dividend stocks and then literally retire tomorrow, living off the passive income. The beauty of this scenario is passive income grows over time, with retirement getting better and better each year!
Year 0: $36,400 dividends
Year 1: $38,220
Year 2: $40,131
Year 5: $46,457
Year 10: $59,292 passive income
This scenario achieves 63% growth in dividend income in just 10 years (even without reinvesting dividends). The key here is avoiding the temptation to cut into principal.
Scenario 2: Delay Retirement For 10 Years, Reinvest All Dividends
My second scenario describes what it would be like to invest $1,000,000 right now, but delay retirement for 10 years. During these 10 years, this scenario reinvests all dividends.
Year 0: $36,400 dividends
Year 1: $39,611
Year 2: $43,181
Year 5: $56,582
Year 10: 92,753 passive income
Yield on cost (including reinvested dividends) is 9.3% after 10 years of investing!
By delaying retirement, income is up 155% over 10 years dividend income (a full 56% better than Scenario 1).
WORTH NOTING / CAUTION: Since I assume no capital appreciation, the starting yields are progressively higher on reinvested dividends. Makes the cash flow accelerate quicker. I do this for ease of modeling. I counter-balance this by having a slower dividend growth rate of 5%. Via sanity check on the ending yield on cost, I believe the scenario is realistic.
Key takeaway: Time is a huge lever if reinvesting dividends is utilized. Every year one can delay retirement adds more dividend income (if one reinvests dividends).
Scenario 3 (Not Covered) – Add More Capital
In addition to Scenario 2, consider adding more money to the portfolio on a regular basis! Makes the compounding go even quicker, and creates three dimensions of dividend growth.
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As referenced in today's video, here are my top 10 favorite dividend stocks of all time:
I think a stock market correction (or even a crash) may be forthcoming. Learn more in this investing video how I approach corrections in my personal portfolio:
Disclosure: I am long 3M (MMM). I own this stock in my stock portfolio.
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