Another milestone hit. Another reason to celebrate.
Eagle eyed readers would have spotted the crossing of this milestone.
In a recent post covering my latest purchase of Imperial Brands, I mentioned that my ISA portfolio has just crossed over the £3,500 mark in dividends.
It is an awesome feeling. To know that I make close to £10 a day for doing absolutely nothing is simply amazing.
Never would I have thought when I made my first dividend purchase that I would reach this milestone so quickly. That purchase only brought in £135 in annual dividend income a year. I could have looked at this paltry amount and asked what’s the point.
But I persevered. I knew that by making many small purchases over time things would start to add up quickly. I knew the power of small amounts.
When it comes to saving and investing, even the smallest of amounts can make a difference. The biggest misconception people have is that they think they have to start with an entire Napoleon-like army. They suffer from the “not enough” mentality; namely that if they aren’t making £1,000 or £5,000 investments at a time, they will never become rich. What these people don’t realise is that entire armies are built one soldier at a time; so too is their financial arsenal.
In certain months I was only able to purchase £200 worth of shares. That is all the money I had at the time. But I kept at it. I was consistent. I regularly purchased shares every month (LINK) irrespective of what the market was doing. I was fixated on growing my dividend income. And that is what you need to achieve.
Consistency Matters. Consistency is what allows you to separate from the pack. Anyone can go to the gym 3x per week for 1 week. Very few do it for years. Anyone can write 3 blog posts per week for 1 week. Few do it for years. Anyone can spend less than they earn for 1 week. Few do it for years.
It is this consistency that will allow you to achieve great things. By being consistent in my saving and spending habits, I have been able to pour money into dividend paying shares. This is how I was able to grow my dividend income from £0 a couple of years ago to £3,500 today.
And I would go on to say that these dividends I receive are worth more than £3,500. This is because Not All Money Is Created Equal (LINK). Firstly for these £3,500 worth of dividends, I do not have to put in any effort. I do not have to fight traffic every day. I do not have to go actively work for it. It is purely passive. It comes into my bank account regardless of what I do.
Secondly. the £3,500 I receive is tax free. This is because it is in an ISA account (Investment & Savings account), all of these dividends are completely tax free!
As a basic rate tax payer with National Insurance contributions, for me to earn £3,500 after tax, I would need to earn a gross amount amount of over £5000!
The amount would be even more for a higher rate or additional rate tax payer.
The £3,500 I receive from my dividends is worth way more than the same amount I would receive at work.
The Milestones Are Getting Quicker
I seem to be hitting milestone’s on a more regular basis. I don’t even know why I am surprised. With a bigger portfolio, milestones come quicker. It’s simple maths.
This is because dividend growth works better on larger figures. If you own shares in Company A and expect to receive £1,000 a year, a 10% increase will mean you’re new dividend income is £1,100 or £110 more. But if on the other hand you expected to receive £5,000 from a company, that same 10% increase will give you £5,500 in annual dividend income – or £500 more. It’s the law of larger numbers.
Another reason why further dividend milestones will occur quicker than previous ones is because my dividends are buying more dividends. I am using money to buy more money. I now have a fresh £3,500 hitting my account every year to invest as I please. With this added capital, I can add further fuel to my dividend machine.
Furthermore, I can add £20,000 to my ISA each year. Adding new capital to my portfolio further turbo charges any results.
The Trifecta of dividend growth, dividend reinvestment and additional capital investments is truly magical. It allows an investor to compound their money and grow it quicker than they can imagine.
Before I end this post, I want to share some golden rules I have learnt along this journey to achieving £3,500 in annual dividend income.
1. Build a solid foundation
In order to build a sky scrapper you need to lay a solid foundation. Similarly to build a portfolio, you need to have a stable bedrock of high quality companies.
My portfolio was built on a number of high quality blue chip companies like Shell, BP, Astra Zeneca and Coca Cola. I deliberately built my portfolio on solid high dividend payers as it gives me the additional cashflow to reinvest is shares. I use my dividends to buy even more dividends . Even though I am a dividend growth investor, it would not be a bad idea for any portfolio to have dividend payers as part of the foundations simply due to their ability give you cashflow in order to invest more money.
2. Invest on High Quality Companies
Invest in companies that you can hold onto for a long time period.This will help you avoid the ever challenging issue of buying undervalued stocks, selling them as they reach fair value, and finding new undervalued assets to reinvest the profits. This can get tiring as you are constantly researching new companies. Rather buy great companies that have the ability to compound your wealth over time. Make one buy decision. But let it be a good one.
3. Mistakes Will Happen
You will have catastrophe’s in your portfolio. Look at loss I made on Accrol Papers. A big loss. The important thing is to not dwell on losses. Yes do a case study on them and understand what went wrong and how to avoid similar problems in the future. But don’t let it drain your energy. Don’t think you have to make all the money back in a month or two. Be able to move on and think rationally about the next investment. This should also point to the importance of position sizing. Don’t let one bad decision decimate your entire portfolio.
4. Don’t Risk Something That You Have For Something You Don’t Need
Massively underspend your income. Avoid Debt. Think what you do when you run into debt; you give to another power over your liberty. If you cannot pay on time, you will be ashamed to see your creditor; you will be in fear when you speak to him; you will make poor pitiful sneaking excuses, and by degrees come to lose your veracity, and sink into base downright lying. [Source: Benjamin Franklin]
5. Avoid Envy and Jealousy; zero upside and infinite downside
The idea of caring that someone is making money faster than you are is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on the trolley? [Source: Munger; Psychology]