Growing Dividends In 2019
Every year right around the end of January, I try to plan out my dividend income and capital allocation goals for the year. I started doing this in 2017, continued the process in 2018, and still find the process useful enough that I’m doing it again in 2019.
At the most basic level, my planning process amounts to putting excess cash to work from our Big Fat Cash Pile AND trying to put that cash into smart places that generate a growing stream of dividend income. The devil is in the details of course.
This ‘reinvesting’ of excess cash, is part of a process I call external compounding (not to be confused with internal compounding). I write about this concept fairly often on my blog, so existing readers should already know how I differentiate between the two forms of compounding. (For everyone else, please check-out the posts I’ve linked to above!)
Funding A FI Lifestyle
While there are many successful ways to fund a financially free lifestyle (bond interest, annuities, real estate income, capital gains, and so forth), the Tako family funds our lifestyle primarily using stock dividends.
Yes, we have a few things mixed-in (like interest income, REIT income, and even earned income) — but a good 80% of our spending money comes from stock dividends in our taxable accounts.
Why not more from capital gains?
Well, if you’ve read this blog for very long at all, you’ll know that I don’t like to rely on market movements to provide for our family’s lifestyle. I have no idea if the stock market is going to be higher or lower in 10 years.
I won’t even guess! Speculation on the direction of the stock market isn’t my game. We’re farmers, not hunters.
Mainly, we try to spend our dividend income, not the capital gains the market randomly hands our way.
Our Dividend Record
Last year (2018) we earned a total of $51,230 in dividends and interest income. This was slightly below my 2018 dividend goal, primarily because I didn’t find places I liked for our spare cash.
My originally 2018 Dividend Growth Plan included investing $100k in fresh capital last year, but I only managed about $50k. Ooops! This is one of the reasons why we fell behind our dividend growth goal.
2018 was the first year our dividend income declined since 2013. Primarily the declines in 2013 and 2018 are due to major preferred share redemptions (outside of our control).
(Note: Almost all of the preferred shares purchased back in 2009 have now been redeemed, and it’s unlikely we’ll get that tremendous income opportunity again.)
One bad year is certainly not a trend, but I would like to turn this around in 2019 and see our dividend income begin growing again.
How Will We Grow Dividend Income In 2019?
To map it out, there’s three main ways our dividend income is going to grow in 2019:
1. Dividend Increases. One of the biggest areas of potential dividend growth in 2019 comes from our existing stock holdings. Given their history, the stocks we hold are very likely to increase dividends in 2019. Most good dividend growth stocks increase their dividend every single year, and 2019 should be no exception.
The economy is good, and unemployment is low, and consumers are still spending. I see no reason why the vast majority of our stock investments would have trouble raising their dividends in 2019.
Historically, the S&P 500 has raised dividends at a 6% rate annually (about 3% after adjusting for inflation), and for planning purposes, I’m going to use this 6% growth rate to estimate the increases we can expect in 2019.
2. Picking Up Stocks “On Sale”. If the opportunity presents itself, I’ll be hunting for sales in 2019. As the year progresses there might be a few buying opportunities in beat-up sectors. We’ll see how the year goes. I’ll keep my eyes open for any juicy bargains the stock market creates.
Generally I’m not a stock “hunter”, but if a some “fresh game” happens to stroll onto my farm, I don’t have an issue with taking advantage of good opportunities.
3. Growing Existing Long Term Holdings. When valuations are reasonable in 2019, I plan to continue adding to our existing long-term stock positions. These are stocks we hold long-term.
To continue with the farmer/hunter metaphor — This is like growing the size of our ‘farm’ by adding more land.
Typically this kind of stock investment will earn good returns on capital, and pays out a sensible portion of its earnings as dividends (I usually look for payout ratios less than 60% of earnings). These stocks represent the bulk of our taxable portfolios and will continue to earn good returns well into 2019 the future.
If we can get a good price, it makes sense to keep adding to my existing positions.
Growth Difficulties
While those three investing strategies represent our best opportunities for dividend growth in 2019, the year won’t be without its difficulties. Despite selling pressure at the end of 2018, stock prices are still high. Yields are not great.
Currently, the S&P 500 is yielding about 2.04% at the time of writing. Even higher yielding stocks are only yielding around 3%. (Several banks and energy companies fit this bill and still have reasonable growth prospects.)
For planning purposes this year, I’m going to estimate I can invest our cash and earn a 2.5% yield.
Yes, I know that investments with much higher yields do exist, but at the cost of considerably increased risk (or poor growth prospects). I usually avoid high-yield low-growth stocks because they tend to be value-traps.
We don’t chase value traps, because I intend to sleep well at night… I don’t want to worry if the dividends are going to be cut and the investment is going to drop like a rock.
Passive Income Goals for 2018
Using my target yield for new investments at 2.5%, and dividend growth estimate of 6%, I’m going to set our 2019 dividend income goal at $57,000.
This goal represents $108k in new capital invested during 2019. Knowing how conservative I was last year this might sound like a bit of stretch — but if I don’t push myself to keep investing our excess cash just keeps piling up.
I think I can do it. I’m going to try at any rate. That $108k invested should be generate about $2,700 in new dividend income for the year. The remaining $3k should come from regular dividend increases, giving us a total of $57k for the year.
Just like last year, you’ll be able to follow along and watch our dividend progress throughout the year by reading our Dividend Income and Expense reports. I’ll publish the dividend totals every month.
Wish me luck in 2019!
Conclusion
While I don’t claim to have the ability to predict what the stock market will do in 2019, it really doesn’t matter much to a dividend growth investor like myself.
You see, stocks are just small pieces of businesses and the best businesses regularly spit off cash in the form of dividends.
I find this facet of stock investing to be a far more reliable way to generate cash flow than trying to regularly harvest capital gains.
There’s nothing wrong with capital gains of course (I like capital gains as much as the next investor), but those paper profits can appear and disappear in an instant.
My strategy remains the same as it has in previous years — Always be compounding money, and try to isolate myself from the swings of the market. Dividend growth investing is a perfect fit for this strategy.
Great breakdown of how you plan to increase dividend income in 2019, Mr. Tako. Sounds like a very logical plan. $57,000 from dividends is an incredible target. Good luck with that goal! I look forward to following along this year.
Thanks RTC! I hope I can be a little more energetic in my stock purchases this year!
Hi Mr Tako,
I like your break down there on how to model dividend income this year.
Last year my dividend income was at $91.8k and this year is currently on track for $100.8k and this incorporates the announced dividends but not yet the unannounced ones that will happen during the year. I will also have perhaps $50-100k to add to the portfolio. I was originally hoping to hit $108k in income for this year but that seems increasingly unlikely.
Stay well and warm up there in the PNW.
-Mike
Thanks MikeH! $91.8k is an impressive dividen total for the year! I’d like to get to that level someday, but alas it is a far off dream! 😉
This is a great strategy Mr. Tako and one that I am trying to emulate myself.
I am hoping that I can get to a state where I don’t have to consume any of the principal and just live off the passive income via dividends or real estate distributions.
In my head I would love to get to a $125k/yr stream which would essentially provide me more than I need to live quite well when I do retire. I am almost at that level now if you include retirement accounts into the mix, but I try to keep them separate as I am hoping to retire 10+ years ahead of traditional retirement age and would like to have the income stream from the non-retirement vehicles do the heavy lifting in the beginning.
That’s an awesome goal xrayvsn! I’ll be rooting for you to reach it! 🙂
very nice Tako. Same to your readers mike and xray.
Those are some massive totals. Got to love how much it will increase just based on dividend raises.
Inspirations to all of us. Keep it up, it sure is great to see!
cheers
Thanks PCI! 🙂 At some point in the distant future when our giant cash pile begins to dwindle, it might only be the regular increases that grow our income.
Hi Mr Tako!
Good approach to attack the dividend grown target for 2019. I believe that with the current prices the hunting work will be challenging, but looking your investiment ideas posts you proved to be skilled enough 🙂 . Talking about yield, do you have a control about the YOC of your holdings? I did it last year for the first time and so far the top 3 for me are OHI (9.42%), NEE (6.85%) and IRM (5.87%). I hope OHI to break the 10% barrier this year
For this year I’m planning to continue investing into the positions that I have into my portfolio. Last year, after reading your post about the Dividend Scorecard, I have done the same and for the moment I have 2 positions that have a yellow flag on it… My passive income goal for the year is €11.000 (~USD 12.500), about +20% from 2018.
Good luck for us.
Cheers!
I don’t have a specific control around yields. For example, I won’t say ‘no’ to an investment that has a 1.5% yield if the business is a good one.
See my Southwest Airlines investment (LUV) as an example.
Hi Mr Tako!
I meant Yield on Cost 🙂
I do agree with you that yield is just one of the parameters that has do be checked before start investing.
All the best.
Cheers!
Great breakdown. You’re one of the few dividend focused blogs that I follow. This year will be a big dividend investing year for us. We’re selling our rental and we’ll have some cash infusion. I’ll invest most of that in dividend stocks. Let’s hope I don’t screw up too much. And I need another correction. I was in Thailand last time and couldn’t take advantage of it. 🙁
Huh, I didn’t know I was a dividend focused blog! It’s just the easiest and most passive way to generate cash flow when busy with a family. I’m sure I could hustle and make a percentage point or two extra trying to invest in some local real estate, but it’s not a game I have time for with two kids. 😉
With PG&E bankrupt, my quarterly dividends have taken a nose-dive. I’m hoping it won’t die completely because my nightmare is trying to figure out cost-basis for it (the stock was a “gift” from my father the last time it went bankrupt). Another reminder that single stocks are not great to rely on. (With my other stuff I’m more interested in growth than paying taxes.)
Yikes, you were invested in PG&E? Utilities are one area I’ve stayed well away from. Best of luck to you.
I gotta admit getting dividends is pretty sweet when markets were plummeting at the end of last year. Helps you sleep at night for sure. It’s not good to only chase dividends and ignore growth, so the combo of index investing + yield has worked out great for us. Going forward, as our portfolio grows and we exit the sequence-of-returns risk period, we’ll pivot more towards capital gains.
Here’s to growing your dividends in 2019!
In general I always like a good dividend strategy, but with short term bond yields where they are, and even the occasional curve inversion, why wouldn’t you devote a bigger chunk to short term bonds (even CDs)? Certainly in favor of general diversification so wouldn’t throw it all there, but if your target div yield is 2.5%, it sounds like you’re still hoping for some cap gains (even if you’re not counting on it) 🙂
I’m trying to understand how much income (generally) it takes to produce $50,000+ in dividends. Are there other articles on your site that provide some examples?
Do you mean assets needed to produce $50k in dividends? If so, yes I post my net worth once a year, and it’s linked near the top of the blog.
Yes, assets. OK, thanks, I’ll look for that article.