How Our Dividend Income Increases Every Year on It’s Own

We may earn money or products from the companies mentioned in this post.

Why do I prefer investing most of our savings into dividend stocks? One of the reasons is for the income they generate each year. For example, we will earn around $2,500 this year in dividends, which is pretty awesome.

But the real reason that our family invests in dividend stocks is the income growth potential. You see, the majority of stocks that we own will raise their dividends every 12 months. This means we get a raise every year … basically for just doing nothing!

I would like to point out that while we are confident that most of the companies we invest in will consistently raise their dividend every year … we also realize this is not reality. Past performance is no guarantee of the future.

With that being said, we still feel very confident in our dividend income stream growing each and every year on it’s own … with very little work from us.

How Our Dividend Income Grows by 6% Annually … All On It’s Own

I recently calculated that our dividend income portfolio will grow by 6.12% over the next 12 months … just on it’s own. If we stepped away from investing today and came back 12 months from now … there is a really good chance our income would have grown by 6%.

So if we earn $2,500 in dividend income this year … we can expect to earn about $2,650 next year without investing a single new dollar.

All of this increase is a result of annual company dividend increases.

Here are a few details on how we calculated this number –

  • currently own 33 stocks … all of which have raised dividends over the past 12 months
  • we used a weighted average to calculate our 6.12% growth rate
  • a company with no increase over the past year will have a 0% weight
  • 1 year dividend growth rate used for the calculation
  • as companies announce increases … the average will be recalculated

If you are interested in learning more about the exact calculation, please add a comment and I will get in touch with you.

Why Do We Care About Dividend Growth Average?

So why to we care so much about calculating our average dividend growth rate for the entire portfolio? Because I feel it is important to know how much our portfolio can grow on it’s own. And if that growth can beat inflation.

Our goal is to eventually use our dividend income stream to pay a portion of our expenses when we hit financial independence. We want to know if our dividend growth will be sustainable … basically we want it to grow a little faster than a safe withdrawal rate of 4%.

While this number will constantly be changing, we feel that a 6% DGR will provide enough growth to help pay for part of our expenses in retirement.

Screen for Top Dividend Paying Stocks

How do we feel so confident in our 6% DGR numbers? Because we carefully screen all of the stocks we plan to invest in. Each company we own must meet certain criteria before they are considered. In addition, we have rules for when to HOLD or even SELL dividend stocks that we own.

Here are a few things we screen for when it comes to finding top dividend stocks –

  • Dividend Yield >= 2.0%
  • Payout Ratio <= 60%
  • P/E Ratio <= 20
  • 5 Year DGR >= 6%

For more detailed information on our stock screening criteria, please check out – Selecting the Best Dividend Stocks.

Hold on Dividend Freeze

Not only do we have a plan for selecting great dividend stocks to buy … we have a set of rules for when to sit tight and HOLD a stock or in a few minor cases of when to SELL (see below for rules on selling).

When we buy dividend stocks … we assume that the company will continue raising their dividend annually … hopefully by 6% or more. But there are times when that just doesn’t happen.

There are times when a company may freeze their dividends … which basically means they maintain the current payout for more than 12+ months. For example, from February 2016 to May 2017 (6 quarters) … we did not get a raise from Caterpillar (CAT). Instead of selling … we held our shares but didn’t add any new ones.

Then in August 2017, we received our first raise in over a year from the company.

Over the past 10 years … we have had very few dividend freezes (CAT, NSC, and INTC) and every time we have held onto our shares instead of selling. And we have not added any new shares during this time.

We are willing to be patient with these companies and will let them try and work things out with their dividend … instead of overreacting to short term issues.

Sell Immediately on Dividend Cut

Just like it is critical to have a plan to buy and hold dividend stocks … you must also have a plan of when to sell. Our philosophy is to sell ONLY when a company announces a dividend cut.

Since we are spending so much time and effort researching stocks to buy … we can sleep at night knowing our dividend income stream is strong. So we are not really worried about falling stock prices and short term market fluctuations.

As long as those dividends keep coming in and are not cut … we will hold our shares.

However, once a company announces a dividend cut … we immediately sell all our shares.

This strategy has worked great over the past 10 years of building our portfolio. There have been only 2 occasions that we have sold positions in our income portfolio – BHP Billiton (BHP) and ConocoPhillips (COP) both in April 2016. Both of these sells were a result of dividend cuts.

Note – We did sell our shares in a few other companies (DPS, K, KHC, and VFC) when we didn’t want to transfer partial shares from LOYAL3. Looking back, that was probably a mistake but the positions were very small in each.

Diversify Your Portfolio

One last item I would like to add about building an income stream of dividend stocks that grows by 6+% per year.

You must diversify your portfolio. For example, back in 2016 … if we held a large portion of our portfolio in shares of COP, then our income stream would have dropped significantly. However, by diversifying across 30+ companies … those dividend cuts were minor blips hardly even noticed.

For more information on the stages of diversifying your dividend income portfolio, please read – How Many Stocks Should I Own as a Dividend Investor?

Have you ever thought about how much your dividend income portfolio will grow annually if you stopped investing any new money today?

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