An Introduction to Dividend Investing

This is Part 5 in a free five-part training series on personal finance. The other parts of this course are coming soon. If you’d like to be notified via email when they become available please click here and register for updates.

We’ve come a long way over the previous four lessons.  It has in part been for the purpose of helping you decide the following.

Do you want true financial freedom more than you want to stay the same? Do you desire it more than you are afraid of or uncomfortable with doing what is necessary to get there?

You’ll have to swim against the current created by what most people are doing.

So let me ask you…

Are you in?

If so, you’re in the right place.

Here We Will Create a Series of Small Steps That Will Lead to Where you Want to Go

Another objective of this course has been to help you formulate your game plan.

You’ll need to fill in your own details and decide how to best make implementations.

But the process follows this path no matter where you are along it.

6 Essential Steps

  1. Stop incurring consumer debt.
  2. Get out of consumer debt incrementally.
  3. Always live on less than you make no matter what you make.
  4. Live below your means from now on.
  5. Pay yourself first by using the 10% rule.
  6. Invest consistently and take advantage of compounding.

Sure, there is much, much more that could be said about these things, and you should pursue them.

Information, encouragement, practice, and guidance are things we can all use more of as we strive for wisdom.

The Secret

The big secret is that there is no secret.

There is no one formula that we can buy or stumble upon that will bring us financial freedom. The process always begins from within ourselves. Every single time.

It is first a hope or desire, a dream, information gathering, a plan, a commitment, a way of living with necessary course corrections along the way.

Every person I have ever met who attains financial independence of the sort I am referring to did so as a result of some form of following the path we’ve talked about.

Some quickly.

The majority by steady application over a long period of time.

I have and do know quite a few “trust fund” kids in the best sense of the phrase. 

They are a rare bunch who have their own set of circumstances to contend with.

For most of the rest of us, the wisdom necessary to obtain and keep wealth must be gained the hard way.

Once the Foundation is Set

Once you get your financial house in order the time will quickly come when investing is next in line. Whether you are working on it now, have already got it done, or are already investing, even with plenty of experience, I want to present to you a certain perspective about investing that you may not have considered.

It won’t take long.

So please pay close attention.

The Purpose

What is the purpose of investing for most of us?

Is it to get rich?

To live in a huge house with a Beemer or two in the garage?

Those things may come along the way but my contention is this:

In the final analysis we want independence and safety for ourselves and our loved ones, from now until the conclusion of our and their lives.

In the world we live in those things, to a large extent, require money.

The Models Available to Us

Financial planners, money managers, accountants, bankers, CPA’s, authors, lecturers, and concerned loved ones have employed, and common consent has endorsed, primarily one model to accomplish the big goal.

It is: Building Alpha.

Making the pot bigger and bigger.

Then when we get old, we start drawing from the pot.

Over the past decades, the rate at which many have suggested that we draw from the pot is 4%.

This has been commonly referred to as the 4% Rule.

But what does it really mean?

Well, if the pot is big enough taking out that 4% may not be too much to ward off the effects of ongoing inflation while keeping the principal intact. But that is the exception.

A modification to that basic 4% rule goes this way.

Take 4% of your next egg out the first year of retirement. Each year thereafter adjust the dollar amount to compensate for inflation.

It sounds reasonable on the surface, doesn’t it?

There are not many who get there. Either the next egg never got big enough to pull it off or they quit somewhere in the middle of the accumulation journey.

The primary model that has been used during our lifetime requires that we sell our nest egg off one piece at a time to finance our golden years.”

A Different Model to Consider

Okay, we finally got to where we want to go.

With the groundwork in place to begin explaining that “different way of looking at these things” that I told you about.

Instead of Investing for Alpha, Invest for income.

With this approach, we come at the challenge of keeping the money flowing in retirement from a different direction.

Instead of looking primarily for share price growth, in this approach, we look for reliable dividend growth and price growth.

Here are the key elements of this method of investing. We will use the growing dividends as an added source of investment funds until the time when we then begin using them for income.

Though I have worked up a detailed plan for my own investing, the idea is as follows.

An 8-Part Framework for You to Consider

1. Look for strong reliable companies that pay a dividend that has:

  • Increased without interruption for 10 or more years. (I personally have a detailed screening process to find these special companies).
  • A 5-year dividend growth rate that is greater than the rate of inflation.

2. We will build our own custom made no management fee “fund” using 20 or more stocks.

We may also use select ETF’s, CEF’s or REITS.

3. Instead of being concerned only about the balance of our account as Alpha investors tend to do, we are looking primarily at the following 4 things.

    1. The average dividend growth rate of our “fund.”
    2. The average dividend yield of our “fund.”
    3. The projected growth of our income stream.
    4. The growing principal balance of the fund.

4. We will reinvest the dividends received into more shares of stock along with the addition of new money to accelerate the growth of our portfolio.

5. The holding period of our investments is intended to be forever.

6. We have no plan to ever sell shares in order to raise money to be used in retirement.

7. Instead, we will eventually siphon off a portion of dividends received to fund monthly expenses as needed.

8. This portfolio is designed to keep growing in retirement instead of shrinking. Ideally, a percentage of dividends received, even in retirement, goes into increasing the portfolio.

How it Looks in Real Life

If you have been investing using the old model, what I am introducing here today may be a bit hard to fathom.

It is really quite straightforward.

We are going for growing income instead of planned withdrawals of principal.

At the moment my dividend portfolio is producing these numbers.



These numbers simply mean that my income stream is now 4.34% of the account principal.

The 4.34% income stream is itself growing by 7.8% a year while inflation is about 2%.

My spendable income will be going up by nearly 4X the rate of inflation in the coming years so long as this growth rate and inflation rate remain intact.

Happy Surprises

Just today (as I write this) I received notifications in my email box that two of my stocks just announced dividend increases.

That means I got a raise!

My income just went up.

  • T. Rowe Price (TROW) announced that the previous dividend will be raised by 20%. 
  • Cisco Systems (CSCO) announced that their dividend will increase by 2.8%.

What About the Growth of Principal?

Because we are emphasizing a portfolio of stocks that provide excellent dividends and dividend growth does not mean we must give up share price growth.

We have that as well.

Here are a few examples from my own portfolio.

  • Target (TGT) share price up 164% since purchase. 
  • Broadcom (AVGO) share price up 77.3%. 
  • Illinois Tool Works (ITW) up 63.4%. 
  • Apple Computer (AAPL) up 205.1%. 
  • Eastman Chemical (EMN) up 76.3%. 
  • NetApp (NTAP) up 55%. 
  • T. Rowe Price (TROW) up 74%.

Here are the dividend growth rates on each of the above stocks for last year.

  • Target (TGT) Dividend Growth Rate = 3% 
  • Broadcom (AVGO) DGR = 19% 
  • Illinois Tool Works (ITW) = 7% 
  • Apple Computer (AAPL) = 6% 
  • Eastman Chemical (EMN) = 6% 
  • NetApp (NTAP) = 20% 
  • T. Rowe Price (TROW) = 18%

An Example of What Dividend Growth Can Mean to You

We can run some projections on a test portfolio and see what one could expect with a dividend growth portfolio as time passes.

Using a dividend growth rate (DGR) of 7.8% for continuity we can look out 5, 10, 20 years and see what happens to income.

I will also plug-in dividend reinvesting to the parameters.

Let’s say that the current dividends received add up to $21,500 a year starting in 2021, here’s what it’d look like.

In 2026 (5 years) the dividend amount received would be,  $37,700.

Ten years down the road in 2031 the income would swell to, $65,800.

If we add another 5 years the income then would be, $115,000.

You may have some time before retirement.

If it is twenty years out the income produced in this sample scenario would be an even $200,000 per year.

Keep in mind that we are referring to just income alone without any consideration of the principal appreciation that will have undoubtedly taken place. 

The following chart provides a graphic of the above scenario.

Source: SimplySafeDividends

Another Example with a Smaller Starting Portfolio

Here is one more example using a starting portfolio amount of $10,000.

I chose a stock from my portfolio, ABBV, to plug into the calculator.

ABBV currently pays a dividend of 4.98% and has a 5-year dividend growth rate of an even 10%.

To make this closer to a possible real-life scenario we’ll also figure in a monthly savings amount of $250 that we scraped together by getting rid of a little debt and missing Starbucks a few times a month.

Again, we have activated dividend reinvestment.

Dividend Income Forecast

Source: SimplySafeDividends

The beginning annual dividend amount is $497.

After 5 years the income amount has gone up to $1,900.

At about 7/12 years…you would have received enough dividend dollars back to pay for your initial $10,000 investment.

You’ve now received as much in dividends as you originally paid for the shares!

After 10 years income has grown to $4,700.

With 15 years gone by income is now $10,010. More every year than you even paid to begin with.

After 20 years your income on this one single stock position is $20,400 a year or $1,700 a month.

And, not only do you have all of the original shares but many more because of dividend reinvestment and the monthly contributions.

When you are ready to start taking the income you simply turn off the dividend reinvestment feature right on your broker’s site.

Oh, don’t forget that all those shares of ABBV will presumably then be worth a great deal more than when you bought them, which means you still get the alpha.

Passing it Along

An issue that is very important to me as a father of six and grandfather of seven is leaving a little something to be remembered by. Not just the fond memories of the absolutely saint-like person I am, but some meaningful cash as well.

Some life-changing loot if you will.

Though one will enjoy an ever-increasing income stream using the dividend growth approach, they will also be able to pass along a fully intact portfolio that has likewise been growing.

They have not been selling off shares each month in retirement to make expenses.

If you don’t have any kids or don’t much like the ones you do have then leaving an inheritance is not such a big issue.

I knew one fellow who left all he had to his hairstylist even though he had two children.

Choice is a wonderful thing.


Now that we’re at the end of the line with the five parts of this course it is my hope that it becomes the beginning of a new and prosperous life for you.

Plug the holes in your financial bucket and then learn how to fill it up faster in the future and you’ll soon need a bigger bucket.

When it comes to filling that bucket two of our favorite methods revolve around short-term trading with stock options, which we cover in-depth in our training; The Online Option Trader Course – A Systematic Approach to Profitable Trading and long-term investing utilizing dividend-paying stocks.

Now while what we covered in this section is a great primer to dividend investing this topic can be explored much deeper and with far greater detail. That said, many have expressed such an interest in covering this topic in a fully-fledged training course or even an ongoing monthly training.

If this would be of interest to you please raise your hand here and join the interest list.  If enough folks are interested we will look to dedicate the time and resources to create such a training for you.

To that end,

Dr. C.

P.S. if you missed any of the other parts of this free training course you can discover them all here. We hope that you read them, study them, and more importantly, take the steps to apply them as that is what is needed to seek the change you are likely after.