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Do you want to know how to increase your annual dividend income by over $200? My wife and I have a plan to grow our 12 month future dividend income by over $200 this year.
How are we planning to do this? By using our tax return dollars to invest in high quality dividend stocks.
A couple weeks ago, I wrote about a different option for investing our tax return money this year. Traditionally, my wife and I have gotten back around $5,000 in tax money – which has always been invested into our kids 529 college savings plans.
For over the past 5 years, we have used our tax return money to setup automatic monthly investments into these 529 plans to help fund our kids future college expenses. Now that we have a decent foundation for them, our thoughts have shifted this year to investing our tax return in dividend stocks.
Investing $5,000 in Dividend Stocks = $200+ Increase
Starting this year, we are going to invest our tax return (or $5,000 of it) into building the Money Sprout Index. We plan to invest in only the best dividend paying companies by following our 8 step process for selecting stocks.
A quick calculation tells us that by investing $5K into dividend stocks, our 12 month forward dividend income would increase by approximately $218.50.
To be clear, our dividend income for this calendar year would not increase by $218.50. Since we are already into the 2nd quarter of the year, our lump sum investment of $5,000 would not have the full 12 months to earn that amount.
In addition, the 12 month forward dividend income calculation uses our yield on cost (YOC) average, which is currently at 4.37%. The likelihood of earning over 4% on the total investment right away is very low. It will take a few dividend increases and reinvestment’s to move up to our YOC average.
The good news is that once that money is invested it will start working hard for us. The dividend income may be slow at first but over time it will pick up because of compounding interest.
Multiple Year Investments
We have decided that since we are investing this $5K into dividend stocks this year, we need to follow this pattern again for the next several years. Our goal is to build the Money Sprout Index into a cash producing machine.
Investing $5,000 per year for the next 5 years into top dividend paying stocks will result in an increase of $1,192.25 in annual income. That is more than what we earned in dividend income last year!
If we decided to continue this trend for 10 straight years instead, the result is an increase of $2,668.79 in annual dividend income!
While everyone reading this may not have an extra $5,000 sitting around to invest, neither do we. It just happens that we get a tax return back every year for around that same amount. We could adjust our tax withholding’s to keep more money in our pockets throughout the year. The end result would be the same.
Since we have always invested this money in the past, we are not really impacting our monthly budget. Just using the funds to invest in a different way that we believe will pay huge returns in the future.
By investing an additional five thousand dollars into the market, we will increase our future annual dividend income by over $200! I think that is well worth the sacrifice of not spending our tax return on a bunch of things we don’t need.
If you are getting a tax return, how do you plan to spend it?