When I first started researching the dividend growth strategy back in early 2010 I became quite excited by what I found to be a very robust strategy. The tangible benefits of dividends are obvious: you collect real cash that you can easily touch and see. That tangibility allows one’s emotions to be less affected by the daily gyrations of the stock market. While for many it’s still tough to see their net worth fluctuate wildly, rising cash payouts that you can can either reinvest or use to pay for living expenses cushions the blows.
But I will admit that I was a bit confounded by the dividends themselves at first. Specifically, the relatively small amount of them.
I would look at Johnson & Johnson’s (JNJ) payout and see the $0.49 they were paying to shareholders quarterly (the dividend in early 2010) and wonder how someone is actually supposed to build wealth off of that. I mean we’re talking a little more than 50 cents here. Every three months?! What am I going to buy with that? A McNugget?
And then I looked to another high quality company with growing dividends that interested me, PepsiCo, Inc. (PEP), and I could see they were only paying out $0.45 per share every three months. 45 pennies. Not exactly awe-inspiring.
But I was missing the forest for the trees.
When we’re talking about dividend payments we are indeed talking about pennies. But these pennies add up in a hurry. And much like a stone isn’t impressive by itself, gather enough of them and you can build a castle.
And you could say I’m building Chateau Freedom here.
My first year of dividend payments weren’t spectacular. These pennies take a little while to build up. My very first public dividend income report that went live on this blog back in early 2011 showed that I earned $33.35 in January of that year. This was after almost an entire year of regularly investing the savings I was able to amass from a middle-class salary. Now $33.00 isn’t anything that I could retire off of, but you can already see that $0.50 here and $0.40 there is adding up.
Fast-forward to January of this year and I’m receiving a lot more pennies now. I earned $347.97 in dividend income last month. That’s a tenfold increase in passive dividend income over the course of three years. Pennies aren’t so funny anymore.
I progressed like this because I wasn’t thinking of the dividends as just pennies trickling in. I thought of every equity investment I made along the way as buying time.
By that, I mean I’m looking at the total annual income I’m able to generate through an investment and compare that to my total annual expenditures. Every equity investment I make is paying me growing dividends because I strictly invest in stocks that adhere to this criteria.
I’ll give you an example. My annual expenditures right now hover somewhere near $20,000. Let’s say I invest $2,000 in Philip Morris International Inc. (PM) today at $80/share. The company pays out a $0.94 dividend per share every quarter. That means my $2,000 bought me 25 shares producing $94.00 in annual passive dividend income. I now just covered ~.5% of my annual expenses with just one investment. Doesn’t sound like much, but it adds up in a hurry. Repeat these results over the course of a year and I’m already up to a little over $1,100 in annual income. That’s now more than five percent of my annual expenses that I don’t have to work for.
But as I said before I look at these investments in terms of time. And this year of saving and investing just bought me about three weeks of freedom every single year for the rest of my life! Even better, that three weeks of freedom will only surely grow as Philip Morris’s dividend grows faster than the rate of inflation. 21 days of freedom now becomes 22 days next year, so on and so forth.
So you could look at Philip Morris’s dividend in one of two ways: an unimpressive handful of 94 pennies, or a gateway to freedom. I choose the latter.
And this works for every dividend out there. You don’t want to focus on the fact that you’re being paid pennies per share. You want to focus on the fact that every dividend growth stock you purchase is buying you a small ticket to freedom. And enough of these tickets gets you to the big game: financial independence!
Pennies are indeed powerful and they do add up. Take any fortune in the world and you can break it down a penny at a time. Do you think Warren Buffett is complaining about the “lousy” $0.28 per share he collects on every share of The Coca-Cola Company (KO) he owns? Definitely not, since he owns 400 million shares.
Financial freedom is bought one penny at a time, because each penny buys you just a little time. I started out with nothing four years ago and I’m now aiming to collect $5,200 in dividends during 2014. That’s about 25% of my annual expenses! That means three months per year are completely covered for the rest of my life. Chateau Freedom may not be completely built yet, but I’ve definitely got one wing completed. And this castle will be a testament to the power of pennies.
Full Disclosure: Long JNJ, PEP, PM, KO
How about you? Believe in the power of pennies?
Thanks for reading.
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