Growing Dividends in 2017

Dividends are my favorite kind of passive income, probably because they’re one of the few truly passive forms of income.  Beyond making the initial investment, there’s nothing an investor needs to do in order to maintain that beautiful stream of income.

Last year was a very solid passive income year for us, with dividend income just under $48k/year.  But building that level of passive income was a long slow slog of Earning, Saving, and Investing.  Rinse and then repeat.  Over and over.

It’s been a long road getting here, but it’s been a very good ride:

My dividend history

As you can see from the graph, our dividend income bounced around as we added or sold investments, but the general trend has been upward growth over the past decade.

Years like 2009 saw us move heavily into cash and earn a paltry $5k.  That bet paid off as we re-invested funds near the bottom and realized good rates of return.  A mere six years later (2015), our passive income exceeded $100k.  (If you’re curious, I have a post that explains this exceptional year)

In future years, I’d like to see that dividend income continue to grow…year after year.


Growing Passive Income

Our passive income covers nearly 90% of our expenses.  Eventually, I’d like those dividends to exceed all of our expenses by at least 10%.  But we’re not there yet.

In order to get there we’ll need to: Keeping a lid on expenses, and grow dividend income at a rate that exceeds inflation.

Keeping expenses under control is going to be the easy part (we know how to save money), but growing dividends faster than inflation is much harder.

There are really only two ways grow dividend income:

  • Deploy additional cash into excellent dividend paying investments.
  • Finding investments that grow dividends every year

If we were growing plants, this would be the equivalent of sowing more seeds, or adding fertilizer to keep the plants healthy.  

Either method alone can grow dividend income, but having both working in tandem is better.  

We’ll be doing both in 2017.  We still have approximately 15% of our taxable accounts in cash AND we’ll seek out investments with continued dividend growth potential.


Passive Income Goals for 2017

This year I’d like to see our passive income grow by 10%, from $48k/year to $53k/year.

That’s a big increase. Using our target 3% rule, that means $160,000 of new capital deployed into investments.  That’s a lot of money to invest for someone without a source of income.  We have the money right now, but in future decades how will we keep our dividend income growing?

The answer is: dividend raises over time.

With inflation hovering around 3%, the lower end of our growth target is already set for us — If we can’t keep up with inflation our income will erode year after year.

In nominal terms, I’ve decided on a long term dividend growth goal of 5%.  This means I intent to hold investments that will raise dividends 5% a year (on average).

In real (inflation adjusted) terms, this amounts to a 2% growth in annual income.  (Assuming inflation stays around 3%)  If this goal can be achieved, it also means we’ll need less cash in order to reach our $53k income goal for 2017.  How much less?

Half as much – $80,000 in new investments this year.  This seems like an achievable goal.


Finding Good Dividend Growers

Meeting expense targets and growing passive income is only half the answer though, we still have to find good investments that will grow at rates of 5% or greater.

We could load up our portfolio with a bunch of high-yielding junk to meet the goal, but future years would suffer.  Most companies need capital to grow, and the high-yield varieties have less cash around because they pay it out as dividends.  This means lower growth in future years.

Some of these high yielders also use excessive amounts of debt to fund their business.  That’s all well and good when times are good, but when the economy goes bad big debt loads come back to bite you.

To summarize our investment criteria:

  • A solid, stable business with a dividend yield around 3%.  A little less or more is fine.
  • Dividend growth rates at 5% or greater.
  • Earnings are reinvested into the business at good returns on capital.
  • Reasonable levels of debt.

Sounds simple, right?  It’s trickier than you might think.  Let me provide a counterexample to this little dividend growth model…


America’s Most Successful Stock

Want to know what America’s most successful stock is?  It’s not Google, Facebook or Microsoft. According to Wharton professor Jeremy Siegel, it is … Phillip Morris (now called Altria).  

Yes, the cigarette company.  Mind blown yet?

Phillip Morris/Altria has grown at an annual rate of 20.6% for the past 50 years, all the while growing dividends and maintaining a high (4+%) yield.  That’s pretty incredible when you consider cigarette sales are now far lower than than they were 50 years ago.

With dividends reinvested, Altria absolutely crushed the S&P 500 over the long term.

Almost nobody I know smokes anymore.  It’s a terrible industry, with terrible growth prospects, and high debt levels, yet it’s America’s most successful investment.

How the hell is that possible?

Boring businesses in decline can be beautiful investments.  Unlike Google, or Facebook, Altira doesn’t have to spend money to innovate.  Other than maintaining machinery, very little capital is retained in the business.  Most of it gets shipped off to shareholders in the form of dividends and share repurchases.

Share repurchases have packed a big punch over the years because tobacco is one of those industries everybody hates.  Unlike current stock market darlings (I’m looking at you FANG), Altria’s shares are not usually priced high.  That means more “bang” for a shareholder “buck” when shares are repurchased.  Over time, this matters.

Altria also has some pretty incredible pricing power.  I’m not a smoker, but I read that cigarette prices have increased 5 times faster than the rate of inflation.  Earnings per share has grown continuously over time (albeit slowly) despite continuous cigarette volume declines.  Few companies have this kind of incredible pricing power.

So what can this counter-example teach us about long-term investing?

A few things:

  • Industry growth isn’t required for dividend growth.  Pricing power can matter more.
  • Share repurchases can be done correctly, effectively ‘reinvesting’ in the business but not growing it’s size.
  • Chasing growth stocks is one model for long term success.  There are other successful models too.

Incidentally, if you’re interested in learning about these ‘long term’ winners and what makes them special, professor Jeremy Siegel wrote an excellent book on the subject.  It’s called “The Future for Investors“:

The Future For Investors

Professor Siegel’s book looks at these kinds of successful investments (which are not necessarily growth stocks), and how they perform over the long term.  Well worth a read if you’re even a little bit interested in investing.



In 2017 our goal is to grow our dividend income by 10% (or more).  Roughly half of this I expect will come from additional cash invested and the other half will come from dividend growth.

With the S&P 500 only yielding a paltry 2%, getting the same results from an index funds would require $120k of new capital… significantly more than selecting companies with 3% (or soon to be 3%) yields.  As we’ve done in previous years, we’ll be selecting our own dividend growth stocks.

Is this a risky strategy?  That’s hard to say… it depends upon who you ask.  I’ve shared with your our dividend record over the years, and we’re happy with how things have turned out.  The results have been a little lumpy, but growing … despite our general focus on avoiding fast growth and high PE companies.

With this same strategy, we’ve weathered downturns in the past.  I don’t see why 2017 would be any different.


[Image Credit: Flickr]

31 thoughts on “Growing Dividends in 2017

  • January 13, 2017 at 10:13 PM

    Interesting article, Mr. Tako.

    Hopefully you’ll reach your goal of increasing your dividend income by 10% this year.

    I, myself, haven’t really played around with any dividend stocks yet except for the ones paid out by index funds. The list of criteria that you use when selecting a dividend stock and the Altria example were mind-blowing. If I had invested in dividend funds without reading your criteria, I would have chased dividend stocks that had high-yield, which would overlook some facts like diminishing cash flow or even poor growth.

  • January 14, 2017 at 7:44 AM

    All the best for your 2017 goal. May the Gods of Dividends smile down upon you and make it rain.

  • January 14, 2017 at 7:55 AM

    It’s funny how different everyone’s approaches to investing are. I know a lot of people who swear by the index funds and stay away from stocks completely. I’m actually going to the library today to check out some investing books, so I’ll try to look for a few that you’ve recommended. 🙂 I really really like your advice on picking stocks, especially taking inflation into account.

    • January 14, 2017 at 2:26 PM

      Thanks Mrs. PP! Enjoy your visit to the library!

  • January 14, 2017 at 8:44 AM

    Aggressive growth goals for the year. Good luck!

    Any concerns investing in a company like Altria knowing the negative impact they have on people’s lives and overall healthcare system?

    • January 14, 2017 at 2:25 PM

      There’s lots of toxic substances people can ingest and put themselves into the hospital with. Many do. Most processed food probably fits into this category.

      People have a right to make their own choices.

  • January 14, 2017 at 10:32 AM

    Great Job! Your website shows how persistence and knowledge applied to saving
    and investing can pay off. Thanks for the inspiration!
    Where do you store all your cash while you hunt for the right stock?
    It’s painful to leave it in low interest money markets funds but feels safer than
    putting it into bonds or overpriced stocks.

    • January 14, 2017 at 2:19 PM

      Yep, it isn’t ideal but we keep the vast majority in money markets.

  • January 14, 2017 at 8:15 PM

    “We could load up our portfolio with a bunch of high-yielding junk to meet the goal, but future years would suffer.”

    Yup. Totally agree with you on the perils of “dividend chasing”. Not only could you lose out on performance, you could also be inadvertently increasing risk.

    In Canada, we don’t have as much diversification as you guys when it comes to dividend paying stocks. Ours are heavily weighted in oil and financials, which poses a sector risk.

    But I’m glad it’s working out great for you! Go yield go!

    • January 14, 2017 at 9:12 PM

      Well, at least you have a not-so shitty healthcare system. I’d call it a wash! Go Canada!

  • January 14, 2017 at 10:35 PM

    Nice post. I long knew about Philip Morris being one of the best investments you can make. Along the way they acquired many snack companies and spun all of these off (Kraft, Heinz, Mondolez and then Philip Morris international).

    We did just over $60K in dividends in 2016 in spite of several dividend cuts in the energy sector, this was 5% growth over 2015- however an additional $270K of capital was deployed into the market so a lot of pushing took place in 2016.

    Best of luck on your 2017 goals. We hope to hit $66.5K this year with deploying less than $100k of fresh capital- we’ll see how that works out!


  • January 15, 2017 at 9:40 AM

    I think 10% dividend increase is a realistic goal. 5-6% increase could be realized just by your current portfolio, as long as it has stable, dividend paying companies (reading your articles I wouldn’t imagine otherwise). Good luck for reaching your goal in 2017!

    • January 15, 2017 at 10:41 AM

      Thanks Roadrunner, I think it’s fairly realistic too!

  • January 15, 2017 at 6:24 PM

    Well, for me, Reynolds American (RAI) has been my retirement fund. I used to smoke (socially only, while still running and eating healthy of course) but I’m not going to sell. I put in my time and then did the hard work to free myself from their addictive product. Dividends are addictive. Not having to work is addictive. Once you open your perspective toward addictions in nature (doing the same thing over and over despite a change in the benefit, for instance), then you have to wonder if you are still making progress or just taking on more risk. These are interesting times that we are about to be living in! Thanks for the great posts, thus far.

  • January 15, 2017 at 7:26 PM

    Looks like a realistic goal given that half of the growth comes from dividend raises and half comes from fresh capital. It’s awesome to see someone that has been doing this for a long period of time and getting pretty significant amount of dividend income. Best luck in 2017.

    • January 16, 2017 at 12:56 AM

      Thanks, I appreciate the kudos Tawcan! After a few years you’ll have a monster dividend income too!

  • January 16, 2017 at 6:35 AM

    You guys killed it with the dividends in 2016. Good luck deploying all that cash and meeting your 2017 goal. Sounds like a realistic plan and great result to pursue.

    We don’t hold much cash, but there might be some rebalancing for us this year as we consider harvesting some capital gains.

    • January 16, 2017 at 2:22 PM

      Thanks Mr. CK. I’m not holding cash on purpose, that’s just how things kinda worked out!

  • January 16, 2017 at 7:41 AM

    Good stuff! I have both MO and PM. They have been great performers in our portfolio. I hate tabacco, but they are great companies. Cigarettes are still pretty popular oversea, right? Are they growing there?
    Good luck in 2017. Your dividend income is pretty awesome.

    • January 16, 2017 at 2:21 PM

      Thanks Joe! Yeah, in many places smoking is still pretty heavy, but I think worldwide it continues to slowly decline.

  • January 16, 2017 at 1:35 PM

    when did yiu switch from growth stocks to dividend stocks?

    i am 38 and most of my stocks are in high growth names such as Facebook, Amazon, Netflix, Google, etc…i am focused on capital appreciation rather than income?

    • January 16, 2017 at 2:11 PM

      I never “switched”. I’ve always looked for growth and income. Long term research from books like The Innovator’s Dilemma show that those so called “growth” stocks (which really are just tech companies) can’t sustain their lead for long. Siegel goes on to show in his books The Future For Investors and Stocks For the Long Run that dividends actually make up about 50% of investor return over the long term.

      Capital appreciation isn’t the panacea that it’s often made out to be. I’m not talking one or two years as “long term” either. I’m talking decades.

  • January 17, 2017 at 2:01 PM


    I should finish the year with more than 100% of my budget covered by distributions thanks to some closed end funds purchased when market price significantly trailed NAV. I have faith you can reach your goal.

    Also, I am human or cephalopod.

  • January 18, 2017 at 8:06 AM

    I love it Mr Tako.

    My whole retirement philosophy is based on the concept that Financial Independence Is Easier to Model with Dividend Income

    It would be nicer if we get lower stock prices in 2017, so that I can buy my future retirement income on sale.

    Best Regards,

    Dividend Growth Investor

  • January 21, 2017 at 10:52 AM

    As another person commented, Altria has a long and diverse history outside of just cigarettes.
    Which brings up an interesting point. I’d be willing to bet a lot of these split offs led to temporary decreases in dividends like Baxter/baxalta. GE spun off SYF and they pay a paltry dividend and yet have appreciated quite nicely.

    Do you usually sit and wait when spin-offs occur?

  • January 21, 2017 at 8:19 PM

    I hope you find the proper investments to channel that cash into. Sitting on it must be painful when your goals are so reasonable.

  • January 28, 2017 at 10:53 AM

    Great article, I’m assuming you are managing your dividend portfolio in a brokerage account? I’m thinking of building out my dividend investment portfolio in my Rollover IRA and not worry about taxes for a while.

    • January 28, 2017 at 9:00 PM

      I have pretty much every account under the sun … regular brokerage accounts, traditional IRA’s, roth IRA’s, 401k’s, and 529b plans.


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