We are already a week into 2020!
2019 may seem like old news , but let’s take a look back how it actually went.
Every year the last quarter is traditionally a big one for many dividend investors, and I’m no exception.
In the 4th quarter of 2019, I was able to collect £902 in the form of dividends. This was substantially more than the £623 I received in the same period last year. This equates to a high double digit growth rate of 45%. The drivers behind this growth were additional capital investment, dividend increases and dividend reinvestment.
A total of 14 companies paid me a dividend this month. The largest amount came from Imperial Brands, which amounted to £350. The smallest amount came from Visa at £1 When it comes to dividend investing, every little sum counts.
Looking at the year as a whole, the companies I own paid me dividends totalling £3,685! I received £891 in the first quarter, £538 in the second quarter, £756 in the third quarter and £623 in the fourth quarter as mentioned above.
Earning £3,685 a year is equivalent to earning £307 a month, £70 a week or £10 a day.
And this £3,685 figure is only set to grow next year. Just like my total 2018 dividend income figure has been larger than my 2017 figure and my 2017 figure has been large than my 2016 figure, I expect 2019 to produce more dividends than 2018.
Just take a look at my annual dividend figures since 2015:
- 2015 – Dividend Income Received £ 35
- 2016 – Dividend Income Received £ 858
- 2017 – Dividend Income Received £ 1,501
- 2018 – Dividend Income Received £ 2,432
- 2019 – Dividend Income Received £ 3,685
Looking at the year ahead, my portfolio is expected to generate £3,926 over the next year.
And I fully anticipate to beat that number come this time next year. Just like a year ago where my portfolio was projecting a forward dividend income of £3,084, the projection this year does not account for dividend growth, dividend reinvestment and further capital infusion. These three factors are the fuel that propel my rocket ship forward. I fully believe that dividends are a great way to build wealth over time.
There are some investors who believe that dividends don’t matter. That a few additional percentage points of return doesn’t make a lot of difference.
If you’re a speculator who’s aiming for a 200 percent gain on a hot stock tip, then who cares about a measly 2, 3 or 4 percent dividend? Dividends (which are distributions of a company’s earnings issued to shareholders) are rounding errors – right?
Well, if you can consistently – that is, over an investment lifetime – generate enormous capital gains regardless of market condition, then congratulations, you’re in the top 0.00001% of all investors anywhere and anytime, and dividends matter less.
But if you’re an average investor – which us individuals are more likely than not – dividends are central to our returns. Over the past ten to fifteen years, in many markets, dividends have been the only thing separating one from making money, or losing it.
For example, in terms of capital appreciation, UK equities have gone no where for the past 20 years. But with compounded dividends, the return was close to 6% percent per year. That’s not a great return – but it’s a whole lot better than moving sideways.
The U.S. is the only major market where you would have made more through simple capital appreciation than compounded dividends over the past 10 years. For everywhere else, dividends have made all the difference.
Dividends also have the power to magnify returns through reinvestment over time. If instead of taking a dividend and spending it, one had to simply reinvested that dividend, than the following year the original investment and the reinvested dividends will earn dividends.
Dividend reinvestment compounds money over time. Repeated reinvestment will ensure a larger and larger dividends every year. It’s like a snowball rolling downhill, growing bigger in size as it picks up more snow on the way.
Let’s say you have £10,000 worth of a stock that pays a 5 % dividend annually.
At the end of the first year, you are paid £500. But instead of taking this dividend out of your account and spending it, you reinvests the entire £500 on the same terms.
At the end of the second year, you’ll receive a dividend of £525 (5% on £10,000 + 5% on £500).
See how your dividend grows from one year to the next.
Again you reinvest the full £575. At the end of the third year, you will receive a dividends worth £551.2.
Your total capital has now grown to £11,576.25.
You have money working for you.
The amount you receive every year is increasing due to the magical effect of compounding.
And this is all without dividend growth. In reality, most companies grow their dividends over time. Factoring in dividend growth together with dividend reinvest will make your wealth skyrocket over time.
Take the above example again. And this time let us factor in dividend growth.
In the first year, you get £500 worth of dividends. Again, you reinvest this on the same terms as above. Your capital is now £10,500;
In the second year, the company increases their dividend by 10%. Now instead off getting £525 in the year, you get £577.5
Again you reinvest the full £577 to give you a total capital of £11,077.
The company once again grows its dividend by 10%.
At the end of the third year, you will receive a dividends worth £670.
Your total capital has now grown to £11,747.
You have made a return of 17% in three years from dividends alone! And the longer your runway, the higher your returns go!
This is the power of dividend reinvestment. This is the power of dividend growth. This the power of dividends.
The above is what is happening to my portfolio right now. I am using my dividends to buy more money. The companies I invest in are growing their dividends year on year. And to add to this, I am investing new capital into the portfolio to turbo charge my dividend growth. I can’t wait to see where this trifecta of wealth leads my portfolio over the coming decades.
2020 is certainly shaping up to being an exciting year. I aim to continue with my plan of spending less than I earn and investing the difference. I will continue to invest in dividend growth companies. I will continue to add passive streams of income. All this will lead to me being closer to my goal of Financial Independence.