Ah-ha!  An epiphany over my head came yesterday, a little after 7:00pm.  A few days ago, I showed Bert that I added a column to my portfolio spreadsheet that showed this year of 2014’s dividend growth rate for each stock.  One other column that I have in my spreadsheet, as well, is not just the weighting each stock has in my portfolio, but also the weight each stock has of income in my portfolio.  After adding in the dividend growth rate to my portfolio on each stock, I decided to weight each growth rate by mistakenly the weight it had in my portfolio via market value.  When talking with Bert yesterday, I realized I made that mistake and changed it to apply to the weight of income it had in my portfolio.  I began to think of what this tool meant, how it can be used and the actual impact it has on the path to financial freedom! 

The WHACK on Dividend Growth Rates

WHACK!  It had hit me.  My weighted average dividend growth rate on my individual stock account came to 7.05% and I could apply that to my projected individual account portfolio’s income to set an “expectation” for next year.  Before I dive into more figures – some may say – well that’s not reasonable given it’s only 1 year of dividend growth rate and is not a good prediction of what is to come.  I would love to argue that.  I am using a very representative sample, as I own 29 different individual stocks in my individual/taxable brokerage account, which reduces the variability quite a bit.  Additionally, this hasn’t been the “best” year for dividend growth in my eyes, as the majority of dividend income producing stocks didn’t have quite the bump as they traditionally have had in the past and announced increases less than the 3 and 5 year averages (think, LMT, T, MCD, PM, PG, AFL, etc).  So even though a company may average a 10% dividend growth rate over three years, the 10% increase can either be a steady 10% increase annually or an irregular growth schedule that results in a 10% increase (Year 1: 15%, Year 2: 10%, Year 3: 5%).  Using the one year growth rate removes the irregular increase schedule from the equation and instead focuses on the growth rate that is the most representative of the company’s current financial position.  I agree on one note, though, that recent performance is not a good indicator of future performance, but I believe we invest into dividend income stocks for a reason – because they all traditionally in the past have increased their dividends year after year (hence all of the names listed in the above parentheses haha).  Another may say that you don’t know what can happen within specific industries – which I can come back with – I have every industry in there – minerals, oil, gas, utilities, consumer cyclical, consumer non-cyclical, banks, insurance, food, lawn care, technology, entertainment, etc.  – covering all industries and in case one doesn’t perform well, there traditionally is another that does.

Why Review the Dividend Growth Rate

Why does this metric on your overall portfolio matter?  Currently, my dividend yield on my individual account is 3.89%.  My dividend growth rate on my individual account is 7.05%.  Think about this in two ways – to begin, I have $3,237.55 in my individual account (I will talk about retirement accounts later) of projected income.  Due to the power of dividend reinvesting, this will reinvest at an average dividend yield of 3.89%.  Additionally, my $3,237.55 will grow at an expected average dividend growth rate of 7.05%.  You can add the two together and show that income could essentially grow by 10.94% without doing anything… as an expectation (though obviously companies are not required to pay or grow dividends, but again that is not why we buy them – hence our dividend stock screener).  To put math to this equation: I have $3,237.55 projected in 2015 to be reinvested at 3.89% or to add $126.02 in income from DRIP.  Additionally, I am setting an expected 7.05% growth to my $3,237.55 or to add $228.34 to my dividend income from the dividend growth rate.  In total = $354.36 will be added next year if I choose to do absolutely nothing, as a reasonable expectation due to combination of DRIPing and dividend growth rate.  This is P H E N O M E N A L and I could barely keep still from doing this analysis last night!

What does this metric tell you?  My combined amount is 10.94% from the dividend yield and dividend growth rate.  I also can see my dividend growth on each stock in my spreadsheet I maintain.  What this tells me first, as what Dividend Mantra had a post about, is if I have a low yielding stock, say sub 2.50% – that it better be coupled with a dividend growth rate of much higher than 7.05% (Say IBM), which on the flip side – if I have a stock that yields over 5% – I can expect to see something below 7.05% dividend growth rate (Say ATT).  This also allows you to look at the weight of your portfolio to see if something doesn’t seem right, i.e. – you own a low yielding low dividend growth stock or you own only a small amount in a solid yield high dividend growth stock (which may prompt you to allocate more funds here).  Further, it also allows you to look at the combination of two when performing a dividend stock purchase, which is why we always bring up dividend growth in our purchases we make.  If I am buying a stock that yields 2%, I should hope to get somewhere around a 9% dividend growth rate if I want to maintain my average total of 10.94%.  A good example is when I purchased IBM – the yield was approximately 2.7% to which the recent dividend growth rate is 15.79% or a combined 18.49% – well above my 10.94% total.  Now, IBM may not be able to grow the dividend at its rapid pace of approximately 16%, but I can reasonable expect that to not fall below 8% going forward.  Make sense?

The Numbers Behind It All

To put the math and why I have taken MDP‘s challenge of going for $6,500 in dividend income based on his last comment on my crushing $5K article and actually upping that to $6,750 in dividend income for 2015, we can begin with the individual account, as we already discussed – my re-investment of income into my average yield + my dividend growth rate adds $354.36 to my individual dividend income for 2015.  My retirement accounts, on the other hand, first have a projected income of $1,769.52 and the average yield is 3.78%.  These dividends will be reinvested and produce/add an additional $66.89 in income for 2015.  Now, here comes the funny part – my weighted average dividend growth rate on my retirement portfolio is 28.85%.  This is wild, I know, I had one that had an over 40%+ dividend growth year over year (not traditional and I cannot expect that to continue) and a few in the low 20s and upper teens.  When applying the 28.85% growth rate to $1,769.52 = $510.44 in dividend income.  Combined, then with yield and dividend growth = $577.33 My current projected total dividend income across both portfolios = $5,007.  When I add in the two additions of $354 and $577 = $931 + $5,007 = $5,938.  In my 2015 goals geared up — I said I wanted to aim for $5,750 in my projected dividend income by the end of 2015.  Well, even if my dividend growth rate on my retirement account doesn’t hit the alarming 28.85%; I can still reasonably expect growth and though it may not get me to $5,938 at the end of the day, even slicing off $200 of that has me reaching the goal in a pretty easy fashion.

Conclusion on Dividend Growth 

In concluding remarks – this has been a phenomenal analysis and addition to my spreadsheet.  I have never looked at this metric overall on the portfolio before and typically, in our dividend income summaries, we dive into each individual stock and what impact the growth has on our portfolios, but not necessary the bigger picture and what dividend growth investing really has on our future income.  I am amazed by what I can already expect from the portfolio for 2015 and beyond.  This shows me that buying stocks earlier in your life and consistently throughout each year – the monstrous impact it has on your future wealth and passive/portfolio income, especially on most of our journeys to financial freedom.  What this means to me, for example, is that I can reasonably expect my dividend income on my individual account to grow by 10-11% every year with me not having to do much, expect monitor the investments.  How often do you get a double-digit raise at your employer?  Crickets?  Exactly.  This is why I am taking the challenge, already revising my initial dividend income goal to say – $6,750, here I come and I am coming in hot for you next year!  If I achieve 75% of that projected/expected $931 – this still adds $700 to my already $5K in projected income, and I would have to chip in another projected $1,000 in income from purchases – which is not outside of my limits.  What’s exciting – is what 2016 then would have in store using these types of metrics!  I will be comparing quarter after quarter and year after year these dividend growth rates to see the movement and how variable they can be.

What are your thoughts with this?   Have you ever even looked at it from this light?  Will you consider adding this to your portfolio spreadsheet you maintain?  Other flaws?  Please comment, poke holes and build discussion – I am looking forward to it!  Thank you everyone, for everything in our path to financial freedom, is has been wonderful so far.  Also — Happy Holidays from The Dividend Diplomats!

-Lanny