How Long Does it Take for Dividend Income to Grow Exponentially?
I’ve been earning income for over 30 years, and maintaining copious financial records for close to two decades.
As a result, I’ve accumulated a lot of information on my finances.
Most of the time, that information sits in a filing cabinet or on my computer’s hard drive.
But every once in a while I actually use it.
As we get closer to financial independence and early retirement, I’ve spent more time thinking about passive income. Since this blog has literally generated less than a penny per hour in earnings, passive income for the ROMT family consists primarily of interest on our savings and dividends on our investments.
When I started working full-time in the early 1990s, I tried to invest as much as I could afford to, putting a portion into dividend stocks. While I earn more today than I did back then, my expenses are also higher. That said, I’m still able to set aside more money for investments now than I did back then.
Recently, I’ve been thinking a lot about how to generate more dividend income for early retirement. So I decided to review my old tax returns to see how much dividend income I’ve earned every year.
The results were interesting.
Despite my willingness to invest money in stocks from the beginning of my career, the amount of income I generated from dividends was modest for a very long time.
For the first several years, I didn’t earn enough from dividends to fund even 1% of our anticipated early retirement lifestyle. It then took the better part of a decade to get to funding 2% of our needs via dividends.
Growth was relatively steady from that point on. But even after the highest-earning year of my career in 2011, dividends generated enough money to fund less than 7% of our lifestyle.
After earning, saving, and investing for more than two decades, however, our dividend income started to accelerate.
At the beginning of 2014, dividends covered only 8% of our expenses. Five years later, we earn enough from dividends to fund 18% of our lifestyle.
While we have more disposable income to invest now than we did in the past, that’s not the only reason we’ve doubled our dividend income over the past five years.
The strong stock market since the financial crisis certainly helps.
And I think the power of “compounding dividends” has also started to pay off.
A portion of our investments are in Dividend Reinvestment Plans (DRIPs). In these plans, we purchase more shares of stock with each dividend we receive. Each quarter the dividend we receive increases a little bit, since we own a little more stock than we did before.
When companies also increase their dividend rate, the compounding can become even more dramatic over time.
It has taken decades to build the portfolio of dividend stocks we own.
But that portfolio has generated more income over the last five years than it did over its first 22 years.
Even though the value of our brokerage account is only about 60% larger now than it was in 2014.
Over the past two years, I’ve earned 25% of my lifetime dividends.
It take a long time to reach a critical mass. But our financial results demonstrate that slow and steady can win the race. If you keep at it long enough, you can generate robust dividend income for early retirement.
Good luck as you pursue your financial goals. And try not to get discouraged when you don’t reach them immediately. I’ve taken decades to become an overnight success!
How much passive income do you get from dividends?