One of my favourite times of the week is to read emails sent in via the contact form. Yes, I do read each and every email even though it may take me a few days to reply. One of the emails I received recently was from Thomas C who mentioned that he was a long time reader of this site. Tom’s letter was particularly interesting as he wrote in to tell me that he had built a six figure Unilever position over the years to the point where he is now able to withdraw dividends to fund his needs.
In his letter to me, Tom mentioned that he had managed to build up a position of £450,000 in Unilever stock at the end of last year. Over the last few years, Tom has been withdrawing his dividend as cash – as opposed to reinvesting it which he did in the early years – in order to help pay off his mortgage and fund any holidays or activities he wanted to partake in. Whilst most of us would wait to take early retirement before we would splash that dividend cash, Tom proves that dividend investing isn’t something that requires you waiting until retirement to benefit from. Dividend investing can benefit anybody regardless of their retirement goals.
You know what I like so much about hearing stories like the above? Tom was able to realise very real benefits from his Unilever holdings during the four times per year that he cashed his dividend checks, and even though he was directly benefitting from the company financially, he was still able to get richer. He had built up a Unilever stock holding value of £300,000 when he stopped re-investing his dividends 3 years ago. Today, the value of that stock has risen to just over £450,000. He was able to increase the capital value of his holding by £150,000 whilst still enjoying the dividend money along the way.
This is what the great business do. They build you wealth and shower you with cash. Great businesses build you riches in three ways:
- The company is growing profits either organically, by acquisition or through share buybacks that remove owners so that each investor can lay claim to a higher percentage of the remaining ownership pie.
- The company is paying out some of those profits in the form of dividends.
- As the company grows profits, the total net worth value increases (e.g. Unilever usually trades at 18-20x profits, so if it grows profits from £2 to £4 over a seven-year stretch, it turns a £40 stock into a stock worth £80).
There are a lot of perks that come with having a portfolio consisting of £100,000 – £450,000 by the time you reach age 40, particularly if some of it is in an ISA account. You can withdraw your dividend payments by taking option 2 above so you can actually benefit from the investing process – which is why you do it in the first place. Even by withdrawing dividends, at this stage you will still get richer due to the company growing profits per share so that future dividends will be higher even as you spend the ones you collected and your net worth will climb due to the growing profits being valued at 20x earnings over the long term.
Those 11,000+ shares of Unilever are a great friend to have especially in a tax sheltered account —you get a dividend of approx £4,730 tax free every three months that you get to spend as you want, and then next, the amount you will be sent is even higher as people around the globe continue to use Dove soap, continue to spray Lynx deodorant, continue to eat Ben & Jerrys ice cream and continue to drink PG tips.
I’ve written about this before, but the real joy of dividend growth investing starts to hit you as you cross the six-figure mark with your holdings. This is when compounding really takes action. I hope each and every one reading this gets to experience it. Those £4700+ dividend checks I just mentioned get replenished with more money each year. It’s such a different style compared to how most Britons are conditioned to think about money.
The dividend growth investing strategy is about reaching a point in your life where you can get beyond giving up your life in the form of labor you may not desire to do so that the money comes regardless of how you allocate your time. Once you start collecting £4,700 in tax free quarterly dividend cheques from a great intergenerational company , you’ve won. Even when you spend your money, you continue to get richer each year due to the plain growth of the business. You don’t need to reinvest to boost your way to the promised land, anymore. You’ve unleashed the beast, and you’re free to spend every dividend check that comes your way. You’ll still continue to get richer over time, anyway.