As the Baby Boomer age cohort gets older, more and more folks in amongst that group want to find comfort in knowing their assets will actually produce real revenue to support their lifestyle in later years.
And while many investors may not realize this in all the noise of the world that we live in, history shows there’s a valid series of solutions for using a dividend growth portfolio.
This solution is effective for all age brackets – and the earlier you start, the better.
Let’s Go To The Numbers…
Assume a 55-year-old has $1,000,000 (about £800.000) invested and, with the historical average spanning decades of time (even with recessions in between), can target about a 7% annual dividend income increase each year.
These numbers suggest an annual Income Portfolio of $37,500 (about £30,000) today.
But the secret sauce that many overlook as time unfolds is the Rule of 72, which says: Divide your rate of return into the number 72 and you will find the number of years it takes to double your base.
In other words, if I have $1,000,000 earning 7.2% each year, I will have $2,000,000 (£1,600,000) in 10 years.
But this formula also works on Dividend Income as well, even as the original investment a) does not get added to and, b) continues to rise over time as base values increase.
While underlying capital value will ebb and flow over time, if the dividend income itself is also expanding alongside the value, your investment sees an average 7% increase each year in the income received.
In this scenario, if the original $37,500 dividend income in Year 1 for the 55-year old noted above, grows each year for 10 years at a 7.2% annual rate, you would have $75,000 in income in year 10 - at age 65.
Hence, a 55-year old, starting with $1,000,000 in the Income Portfolio and seeing their dividends grow 7% each year, will have $75,000 in annual income at age 65.
Here is an even more substantial point: If this were a 45-year old, then he or she will see two 10-year increments unfold before they turn 65.
Using the very same scenario - They could see a $37,500 annual income base today become a $75,000 annual income base at 55 and then a whopping $150,000 annual income base at 65.
An understanding of this value in a dividend structure helps a client recognize how, over time, capital values will always be shifting. In some windows of time - usually comparably short ones - that capital value can shift dramatically.
And a well-structured dividend portfolio tends to see increasing or steady income even as markets shift.
Remember: As investors and advisors, we all have two choices:
- We can look at data through the perspective of fear, and react, or
- We can look at data with logic, patience and discipline, and plan.
The outcomes will very likely be dynamically different in most cases.
It is always risky.
And it’s also always scary (for one reason or another), dangerous, challenging and hard to read the future.
And yes, at times stocks will be in a soft spot. And that’s actually a very good thing; something we should hope for more of.
That’s because when we get choppy weeks like the last few, the pause serves a purpose; it drives the low sentiment shift and causes the mass investor audience to move back on their heels, once again.
That fact is written all over the sentiment data, week after week.
As ugly as it feels listening to any press coverage, the United States is sitting in a wonderful spot.
The fears of the past have all been birthed on the back of a market that has risen to new highs during all of the noted fear-mongering.
And as the noise is getting louder and the tensions are increasing, sentiment is falling and stocks are pulling back slowly while churning internally quite a bit more.
These are all good things for patient investors who can discipline themselves to look beyond what others see as a time to cut and run.