Sunday Afternoon Musings on DGI: “Your Timeline Should Dictate Your Yield and Dividend Growth Choice”

As Dividend Growth Investors, there are thousands of stocks to pick from in the investing universe, so how do we know which ones to research further for consideration?  

We can choose our investments by names we recognize, like Apple, Johnson & Johnson, or Target.  We can choose by a “best of” list like the Dividend Kings or Dividend Aristocrats.  We can also choose by company names we hear on social media or that our friends are picking, like Costco, Microsoft, Realty Income, QYLD, VIG, SCHD, etc.   We can go with high dividend growth or high current yield.   While any of these methods may work and I am sure you would find top quality companies and/ or funds with these methods, I am suggesting we choose them a different way.

I would recommend that when we pick investments to research and ultimately decide to purchase based on our timeline and income goals.

If our goal is creating passive income to live off, shouldn’t the income that the investment generates guide us in what choices we make?

While a company like Apple with a 0.51% yield or Costco with a 0.59% yield may be a great investment, the question we should ask is:  Does it fit our income goals and timeline?   These two investments would not meet the needs of most income investors unless your timeline is multigenerational at best.   But we see time and time again that people have these investments and consider themselves income investors.  I think we should reconsider.

I have two main goals for my dividend growth investments.  The first is to have a large enough dividend income stream in my taxable brokerage to live off of in the next 5 to 10 years.  The second is our retirement assets that we will be using for income starting about 20 years from now.  Given the differences in our timelines for each goal, shouldn’t we be investing differently for each?

That is what I wanted to find out so I took the time to calculate some hypothetical scenarios given different current yields and dividend growth percentages.  I ran the annual dividends that would be received for a one-time lump sum investment into 5 different yield/ dividend growth combinations to see which combination would yield the most annual income based on the timeline that I would want.

1% yield / 10% growth  (ex. AAPL, MSFT)

3% yield / 7% growth (ex. JNJ, MMM, VYM)

5% yield / 5% growth (ex. IBM)

7% yield / 3% growth (ex. ENB)

10% yield / 0% growth (ex. XYLD)

To compare the results, I looked to see how many years it would take each combination to provide $1000 and $2000 dollars a year in income on a one-time $10,000 investment.

Scenario Details:

$10,000 lump sum

Dividends reinvested

Results:

	Yield / Growth
Year / Annual Income	1% / 10%	3% / 7%	5% / 5%	7% / 3%	10% / 0%
1	$100	$300	$500	$700	$1,000
2	$111	$331	$553	$773	$1,100
3	$124	$366	$610	$851	$1,202
4	$138	$404	$672	$934	$1,304
5	$153	$446	$740	$1,022	$1,408
Cumulative Dividends Received after 5 years	$626	$1,847	$3,075	$4,280	$6,014
6	$170	$492	$814	$1,116	$1,511
7	$190	$542	$894	$1,215	$1,613
8	$211	$598	$980	$1,320	$1,715
9	$235	$659	$1,074	$1,430	$1,815
10	$262	$727	$1,175	$1,546	$1,913
Cumulative Dividends Received after 10 years	$1,694	$4,865	$8,012	$10,907	$14,581
11	$292	$801	$1,285	$1,668	$2,009
12	$326	$882	$1,403	$1,796	$2,102
13	$363	$972	$1,531	$1,930	$2,193
14	$405	$1,070	$1,669	$2,071	$2,280
15	$452	$1,178	$1,817	$2,217	$2,365
Cumulative Dividends Received after 15 years	$3,532	$9,768	$15,717	$20,589	$25,530
16	$504	$1,297	$1,977	$2,370	$2,446
17	$563	$1,427	$2,149	$2,529	$2,524
18	$628	$1,570	$2,334	$2,694	$2,598
19	$702	$1,727	$2,532	$2,866	$2,669
20	$784	$1,899	$2,745	$3,045	$2,737
Cumulative Dividends Received after 20 years	$6,713	$17,688	$27,454	$34,093	$38,504
21	$876	$2,088	$2,973	$3,230	$2,801
22	$979	$2,296	$3,217	$3,422	$2,862
23	$1,094	$2,523	$3,479	$3,621	$2,920
24	$1,224	$2,773	$3,760	$3,827	$2,975
25	$1,369	$3,046	$4,060	$4,040	$3,027
Cumulative Dividends Received after 25 years	$12,255	$30,414	$44,943	$52,233	$53,089
29	$2,153
30	$2,413	$4,859	$5,896	$5,216	$3,243
35	$4,290	$7,714	$8,425	$6,586	$3,400
40	$7,703	$12,185	$11,871	$8,172	$3,512
Cumulative Dividends Received after 40 years	$70,114	$134,287	$159,303	$143,595	$102,952

Observations / Takeaways:

The 10%/0% combination provides the $1000 income right away, the 7%/3% would take 5 years, 9 years for the 5%/5%, 14 years for the 3%/7%, and a whopping 23 years for the 1%/10% combination. The $2,000 income was attained in 11, 14, 17, 21, and 29 years for the combinations.

The difference in time required between the current yield of 10% and current yield of 1% was 23 years for $1,000 and 18 years for $2,000.  For many income investors, myself included, the 1% current yield is never going to make enough income.

One interesting takeaway is that the 10% current yield choice would actually underperform in providing income compared to the other choices starting in year 17.  This means that the dividend growth portion of the possible investment choice would start doing better than the higher starting yield at this point.  You would be better off income-wise if you took the lower current yield that had growth over the higher current yield.  For all the younger investors, this means that you probably should not be investing in the high income ETFs like XYLD, QYLD since your timeline is likely longer than 17 years.  You would be better off with dividend growth.

The most surprising statistic is for the long run (40 years) you would actually do the best with the 5% current yield growing at 5% than any of the other choices.

For my personal situation, for my 5-10 year goal, I would be better off focusing on the highest current yield and forgoing the lower yield / higher growth options.  For my 20 year goal, the higher yields would still be the best but a moderate 5%/5% option would allow my income to grow the best over longer times after that.

Although I had a feeling that the higher yield would be the better choice, it was nice to see these scenarios in writing and it may end up having me focus on increasing the yield on my investments to better match my goals.

Remember this is strictly talking about the income portion of the investment.  Total Return (income plus appreciation) is important to some as well, so you would have to consider your true goals in your investment.