Growing Dividends In 2018

For anyone who lives off investments, 2017 was an excellent year.  The market was up again, returning a nice 20% (with dividends reinvested).  But 2017 is behind us — Only the future matters.  It’s time to start setting investing goals for 2018!

Just like last year, I’m going to plan our dividend income and capital allocation goals for the year.

If you’ve read this blog for very long at all, you’ll know that I don’t rely on market movements to provide for our family’s lifestyle.  Speculation on the direction of the stock market isn’t our game.  We’re mostly farmers, not hunters.

So how does the Tako family pay for our lifestyle?

Mainly with passive income earned in our taxable brokerage accounts.  Last year we generated a total of $53,504 in passive dividend income, meeting our goal of 10% dividend growth for the year.  This was a fine result, and it covered the majority of our annual expenses.  Capital gains and other income covered any shortfalls.

dividend history 2017
Our dividend income history over the past 10 years.  The general trend is upward.

Passive income is what allows us to enjoy the easy life of financial independence.  Dividends just happen to be my favorite form of passive income — Taxes on dividends are low, and it costs me absolutely nothing to collect those dividends (i.e. no transaction fees).

Unfortunately when stock prices are high, growing that dividend income isn’t easy…


High Markets Are Bad For Dividends

While some investors cheer each new daily high, real investors know this is nonsense — You’re simply paying a higher price for the exact same asset.  Paying higher prices is a bad thing!

Don’t get it?  Imagine you buy groceries at the same supermarket every day.  Would you cheer if you saw higher prices each day?  No, of course not!  You’d rejoice only when you saw groceries on sale!

Buying stocks really isn’t all that different from buying groceries. You want to buy when prices are low.

There are actually a few legitimate reasons why prices of groceries could rise — inflation and larger ‘portion sizes’ are two prime examples.

What do I mean by larger ‘portion sizes’?

Imagine for a moment you regularly buy a can of pinto beans at the grocery store.  One day the supermarket restocks your favorite pinto beans and the container is 10% larger.  The can now holds 10% more pinto beans, so you’d expect to the price to rise by 10%. Right?  Not 20% or 30% more!

This same concept is the difference between market prices and the intrinsic value of a company.  Intrinsic value grows as companies reinvest earnings and grow the value of the business.  Dividends will typically grow at a rate that tracks this growth in intrinsic value fairly closely.

Over time, market prices are supposed to reflect this change in intrinsic value.

Did your can of beans grow intrinsic value? Or, did you just pay more for the same thing?

Unfortunately, stock market prices have become unhinged from intrinsic value.  Stocks are rising 2-5 times faster than intrinsic value.  This is not good for investors who like dividend income.

Finding decent yielding investments has become really hard — The S&P 500 now yields 1.72%, and has a PE of 26.52 (at the time of writing).

So what’s an investor to do?

Investors can either buy an index fund and stomach the high prices (and realize tiny returns on intrinsic value) OR they can choose to be much more selective.

If we think back to our grocery store example — these options are the equivalent of picking-up a preselected basket of groceries at “market prices” OR hunting around the store for items on sale.


How Will We Invest In 2018?

Being an opportunist, I’m going to take a two-pronged investing strategy.  First, I’ll be hunting for sales.  There might be a few opportunities in retail stocks or other beat-up sectors.  I’ll keep my eyes open (and let you know if I see juicy bargains).

Second, where valuations are reasonable I’ll be adding to our existing long-term positions.  These investments tend to earn good returns on capital, and pay out a good portion of their earnings as dividends.  These stocks represent the bulk of our taxable portfolios and will continue to earn good returns well into the future.

These two investing strategies represent our best opportunities for growing dividend income this year, but yields aren’t going to be great.  The better options only yield around 3%.  Several banks and energy companies fit this bill.

Yes, I know that higher yielding investments do exist… but at the cost of considerably increased risk (or poor growth prospects).  I usually avoid high-yielding stocks because they tend to be value-traps.  Don’t chase value traps if you want to sleep well at night.

venus fly trap
High yield investments may look all green and inviting, but beware!  They’re often value traps!

If you do find yourself chasing high-yielding investments, I recommend extreme caution.  Value traps are usually the first to cut dividends (or head into bankruptcy) when the market turns.

Occasionally though, I do find a few gems.


Passive Income Goals for 2018

Besides expensive markets, the Tako family faces another challenge in 2018 —  Many of our preferred share positions were called at par value last year.  These positions yielded in the 8-15% range.  They were purchased “on sale” and replacing them will be near-impossible.

These redemptions collectively represent $60k in capital that needs to be reinvested.  In past years these preferred shares earned us about $6k in annual income.  Without those preferred shares, our portfolio will generate $47k annually.

Using our target 3% rule, recovering that lost income represents about $200k in fresh capital that needs to be invested just to maintain last year’s dividend income.  That feels like a stretch, and it’s far more cash than I want to invest right now. (I prefer to keep a large cash balance)

Knowing these facts, I’m setting our dividend income goal very conservatively for 2018 —  Our goal is to reach $53,000 again!

My plan is to reach this level of dividend income by investing $100k in new capital.  This will generating roughly $3k in new dividend income.  The remaining $3k should come from regular dividend increases.

Yeah, I know… it’s not really an exciting goal!



Growing dividends over the long term isn’t really a sexy strategy, but it provides for a stable income.  This strategy has worked out pretty well for us.

Some years there are going to be bumps in the road where dividend income doesn’t grow.  This year is going to be one example of that.  But, if you look over the long term our passive income has generally trended upward.

The stock market can and will do anything.  Sometimes it’ll even stay flat for decades

We’ll just keep compounding money, year after year, regardless of whether the market is up or down.  That’s really the key — always be compounding and isolate yourself from the swings of the market.  Eventually, good things happen.

To quote Charlie Munger, “Understanding both the power of compound interest and the difficulty of getting it is the heart and soul of understanding a lot of things.”


[Image Credit: United Soybean Board, Flickr]

29 thoughts on “Growing Dividends In 2018

  • January 24, 2018 at 5:45 AM

    A stable cash-flow is a great thing to have from an investment side of things (our preference too). Can see how and why you choose you dividend goal, seems like a sensible thing to do considering current market evaluations.

    • January 25, 2018 at 12:54 AM

      Thanks Cheesy! It’s always nice to see the value of my portfolio increasing, but I love the steady cash flow more!

  • January 24, 2018 at 6:42 AM

    $54,000 in passive income is awesome! It’s my dream hehe. I know there has been a lot of hard work going into the total investment. Now it’s time to enjoy the fruit of your labor. 😉

    Thanks for the great analysis! 🙂

    • January 25, 2018 at 12:59 AM

      Oh we do plenty of enjoying here in the Tako household. Probably more than we should! 🙂

  • January 24, 2018 at 6:57 AM

    Our dividends this year will probably be in a similar space to yours although a touch less,, however some will be in tax advantaged accounts such as IRAs so we won’t be able to touch it.

    So we will need to draw down some money, we are well within our means though so I’m not too concerned.

    • January 25, 2018 at 1:01 AM

      All of our dividends are from taxable accounts so we can spend them all (or none), I don’t even bother to keep track in the IRAs and 401ks. Those just get reinvested.

  • January 24, 2018 at 7:02 AM

    Agreed, not much value out their right now. Almost hoping for a correction but with that you have to be careful for what you hope for. I just keep buying proven blue chip companies with lower payout ratios and keep the money spread out between many companies. I know that Buffet holds a lot of cash but holding cash a year ago, now the market has to correct about 20% just to get back to break even. Pretty tough to know when things are really expensive especially with earnings increasing and taxes going down. I just keep buying although I have been adding some bonds lately.

    • January 25, 2018 at 1:04 AM

      I’ve definitely slowed down my buying too. At these levels it’s hard to imagine the kind of growth necessary to make these prices “normal-ish”. A correction is more likely, but who knows when it’s going to happen.

  • January 24, 2018 at 7:35 AM

    Thanks for the update.
    I too love dividends.
    I don’t write about them much since I get slammed for my ignorance everytime I do. Growth stocks are in. Value and dividends are out. Well, I have been through all this cycle before. I can easily live off my passive investment income. Most of my critics cannot.

  • January 24, 2018 at 8:48 AM

    My goal is to keep dividend the same as well. The stock market is high and I think it will keep going higher this year. It just doesn’t seem like a good time for long term investor to buy dividend stocks. Eventually, the market will revert to mean and there will be a lot of opportunities then. This year, I’ll invest in real estate and stash my money in bonds.

    • January 25, 2018 at 1:05 AM

      That sounds like a smart idea Joe. Step away from the market when the prices don’t make sense. Invest in other areas and accept lower returns.

      It’s a very sensible strategy.

  • January 24, 2018 at 2:58 PM

    $53,000 is only slightly lower than the median family income in the U.S. I’d say you’re winning.


    • January 25, 2018 at 1:08 AM

      I definitely like winning! My orginal plan was to keep the div income growing every year, but unfortunately nearly all of our preferreds got called recently. (Can’t blame the companies, they’re just refinancing at lower rates)

      So this year will be a blip where income doesn’t appear to climb. If possible, my plan is to keep our dividend income growing slightly faster than inflation.

    • January 25, 2018 at 1:09 AM

      Thanks Jim — you know it seems really normal to me now. When the snowball picks up speed, it happens fast! 🙂

  • January 24, 2018 at 5:40 PM

    I am having similar issues. My stock positions have gone up by ~20% last year and have in turn reduced my average yield. But, I am still happy with the appreciation. Yield of my portfolio is ~2% and I would require 2,500,000 to generate 50,000 in dividends. Not happening anytime soon ;-). The only way I can build my portfolio is to have growth. I am starting to think Dividend Growth is a combination of dividend + long term appreciation.

    • January 25, 2018 at 1:11 AM

      I definitely believe it is. Dividends rise with intrinsic value, but with PE’s in the 26 range we’ll need some incredible growth to get back to “normal” levels.

      I just don’t see that kind of growth happening very soon.

  • January 24, 2018 at 8:17 PM

    Having the preferred stock get called at par is an unfortunate hit to your recurring passive income. However you were able to ride that horse for some time and receive the reward. Well done!

    Our 2018 income should be higher than 2017 based on dividend raises and some purchases that were made late last year. Like you, I’m slowly building up cash and will deploy only when I smell a bargain.

    I’m looking at selling out of KKR now that the share price is climbing. Since there is nothing that compelling to reinvest in, I may sit on that cash for some time to come. We’ll see over the coming days.



    • January 25, 2018 at 1:16 AM

      That might be a good idea to sell some KKR. What we have now is a situation where success in the stock market is feeding higher levels of corporate and consumer spending, which in turn causes even higher stock prices. Consumer confidence is near all time high’s, and capital spending from businesses is increasing. This will fuel the bubble even further.

      Couple that with tax decreases and you have even MORE money feeding the monster. At some point it all breaks down, but nobody knows exactly where the top and the bottom is going to be.

      Stay safe Mike!

  • January 25, 2018 at 7:45 AM

    “Yes, I know that higher yielding investments do exist… but at the cost of considerably increased risk”

    Glad you mentioned this! Yield chasing is never a good idea. It’s all fun and games when the market is rampaging ahead, but smart investors know to hedge their risks. Boring = good when it comes to investing.

  • January 25, 2018 at 6:52 PM

    Hard to argue with your strategy when you’re sitting on $50k plus of passive dividend income! Sounds like a good strategy you have for protecting your current dividend stream, rather than putting it at risk chasing even greater returns. Keep up the great work!



  • January 25, 2018 at 10:17 PM

    Passive income is also my goal. I agree the dividend investment situation is quite tough at the moment. I’ve diverted to developing commercial real estate for leasing. I’m working on a project to build a small office block with circa 450 square metres of rentable space. The building itself will be worth more than it cost to build it (so it will boost our net worth) BUT the real goal is the rent, which will bring in (after tax) close to 70% of our annual expenses. Fingers crossed the project should be well under way by the end of the year.

  • January 26, 2018 at 12:47 PM

    That dividend growth curve looks amazing! It’s pretty astonishing to see what can happen in the span of 10 years. I’ll be following along. Thanks for this!

  • January 27, 2018 at 12:42 AM

    I’m always amazed by your dividends, Mr. Tako! It’s been quite interesting observing this bull market these past several years. Thanks for sharing your strategy as the environment has shifted. I admire your discipline to not chase down high yield “opportunities” at the expense of additional risk exposure.
    You seem to have a knack for hunting down gems despite what the markets may be doing.
    Michael @ Financially Alert recently posted…Timeless Travel Savings Tips to Live By

  • January 27, 2018 at 9:06 AM

    I used to yield chase and got slammed with an unremarkable portfolio that didn’t grow very much. Now I am much more realistic. I like the 3% target of dividend yield, that is very conservative.

    $53-54K of dividend income is amazing, my target is just $25-35K for myself. I set my dividend goal to be jut $1000 higher than last year, better to not get greedy yield chasing again.

    As the wise TLC says (though they were not referring to dividend yield, haha):

    “Don’t go chasing waterfalls, please stick to the rivers and the lakes that you’re used to.”
    GYM recently posted… Review

  • January 30, 2018 at 5:56 PM

    Holy shit, completely jealous of that dividend stream. It feels like it is decades away for me. Inspiring stuff.

    In an effort to find value (and it is hard) I usually start with the dividend champion list, then look for those stocks with P/Es under their industry average, operating margin above the industry average, ROE better than the industry average and a dividend payout ratio under 60%.
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