How To Estimate Dividend Income

Aug. 12, 2018 5:27 PM ET

Robert Allan Schwartz

Dividend investing, dividend growth investing
(3,390 followers)
Summary

How much dividend income will I have?

When will I have it?

What does it cost?

Many investors want to know when they will be able to retire. One idea is that when your
dividend income reaches the level of your salary, then you can retire – your portfolio pays your
salary.

I've created a spreadsheet that estimates how much dividend income you will receive. You can
download a copy of the Google Docs spreadsheet or the Excel spreadsheet as they are identical.

When you see the words "share", "price per share", "dividend per share", etc. I want you to think
of the "average" share in your portfolio. Just as the average family in the US has 2.7 children but
no one family has 2.7 children, the "average" share can be determined quite simply, it simplifies
the math in the spreadsheet, and it permits us to discuss dividends and dividend growth without
needing to specify individual companies, funds, ETF's, etc.

The "price per share" of the "average" share is the weighted average of all of the shares in your
portfolio. For example, if you own:

20 shares of company X whose price per share is $10.00,

30 shares of company Y whose price per share is $15.00, and

10 shares of company Z whose price per share is $50.00, then

the "price" of the "average" "share" is:

((20 * $10.00) + (30 * $15.00) + (10 * $50.00)) / (20 + 30 + 10)

=
($200.00 + $450.00 + $500.00) / (60)

($1150) / (60)

$19.67

60 of the "average" shares have a total price of $1150, so the "price" of the "average" "share" is
meaningful and useful.

You can do the same calculation for the "dividend per share", and for the annual changes.

In the spreadsheet, "year" and "quarter" mean "starting from when you begin investing", which
could be today, i.e. it is not calendar or fiscal year and quarter.

There are 7 independent variables:

1] The starting number of shares, which could be 0 if you are just beginning to invest.

2] The starting price per share, as of today.

3] The annual change in price per share. This is your "best guess" of how fast share prices will
increase over time. It represents the compound annual growth rate ((CAGR)) of the share
price.

4] The starting dividend per share, as of today.

5] The annual change in dividend per share. This is your "best guess" of how fast dividends will
increase over time. It represents the CAGR of the dividend.

It is not necessary for each of your investments to grow by this amount; this amount represents
the overall portfolio dividend growth; some companies' dividends will grow slower than this
rate, and some will grow faster; this is the "average".

6] The amount of cash you will invest per quarter (above and beyond reinvesting all dividends).
Some companies have an "optional cash purchase" ((OCP)), but even if they don't, you can
invest this amount on your own.

7] The annual change in the amount of cash you will invest per quarter. Some investors plan to
raise this amount by the same percentage as their salary goes up.
The price per share goes up every quarter by 25% of the annual increase. Higher share prices
means fewer shares are purchased every quarter, which means it takes more time to achieve the
same goal.

You have control over some of these variables but not others:

4] You can control the starting dividend per share, by choosing to own companies that pay a
lower or a higher yield.

5] You can control the annual change in dividend per share, by choosing to own companies that
raise their dividend by a smaller or larger percentage.

6] You can control the amount of cash you will invest per quarter.

7] You can control the annual change in the amount of cash you will invest per quarter.

The consequences of every change to one of these 7 independent variables are immediately
reflected in every cell of the spreadsheet.

The Process

Enter a number for each of the 7 independent variables. For example, suppose you enter:

1] starting number of shares is 0.

2] starting price per share is $10.00.

3] annual change in price per share is 10%. This is consistent with the long-term average "return"
of the market.

4] starting dividend per share is $0.50. This represents a current yield of 5%.

5] annual change in dividend per share is 5%. This represents a dividend CAGR of 5%.

6] starting new cash to invest per quarter is $100.

7] annual change in new cash to invest per quarter is 3%.

Decide how much annual dividend income you will need to retire. Suppose you choose
$30,000/year. Search for the first year in which you will receive that amount (or more). Using
the above numbers, $30,000 falls in the first quarter of year 30 (see row 182).

This is not a "predictor"; it is an "estimator".

As Chuck Carnevale says of his FAST Graphs, it is "a tool to think with".

The Result

I noticed something interesting about the example above. If you add up every dollar of new cash
that you invested per quarter, over 29 years plus 1 quarter, it is $17,975.41. You never invested
more than $235.66 in any one quarter; you never invested more than $915.17 in any one year;
yet you now receive 167% of your total investment, each and every year, without ever selling a
single share.

Taxes

This article does not discuss taxes, because every investor's tax situation is different. If you
invest in a tax-sheltered account (e.g. IRA, Roth IRA), there are no taxes on current dividends.

The Miller-Howard YOI Calculator

An extremely useful tool is the Miller-Howard YOI (Yield On Investment) Calculator, available
for free here. You can use it to compare two investments with different dividend yields and
different dividend growth rates.

It can surprise you that an investment with a higher dividend yield and a lower dividend growth
rate can pay you more dividends over time than an investment with a lower dividend yield and a
higher dividend growth rate.

Conclusion

Dividend growth investing (DGI) is not a way to "get rich quickly", but it is a way to produce a
safe, reliable, dependable, rising stream of cash to help pay for your retirement, without ever
selling a single share.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any
positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business
relationship with any company whose stock is mentioned in this article.