Reaching Early Retirement Through Dividend Growth Investing

Hello! Dividend investing is a very interesting topic. Today, I have an expert who has appeared on Forbes, Motley Fool, MSN Money, TheStreet, and more, and he is going to share tons of great information on this subject. You may remember him from his previous contribution How I Became A Successful Dividend Growth Investor. This…

Michelle Schroeder-Gardner

Written By:

Michelle Schroeder-Gardner

Last Updated: October 19, 2024

Disclosure: This post may contain affiliate links, meaning if you decide to make a purchase via my links, I may earn a commission at no additional cost to you. See my disclosure for more info.

Hello! Dividend investing is a very interesting topic. Today, I have an expert who has appeared on Forbes, Motley Fool, MSN Money, TheStreet, and more, and he is going to share tons of great information on this subject. You may remember him from his previous contribution How I Became A Successful Dividend Growth Investor. This is a guest contribution by Ben Reynolds.  Ben is the CEO of Sure Dividend.  Sure Dividend helps people build high quality dividend growth portfolios for the long run.

Early retirement is the financial state of being where you don’t have to work.  You only work if you want to.

Early retirement is reached when your passive income exceeds your expenses.  The average retirement age in the United States is 63.

Retiring at any age is an accomplishment, but I think you will agree with me when I say that the earlier you retire, the better.

There are 6 key factors that determine how long it will take for you to reach retirement:

  1. Your income (how much money you make)
  2. Your savings rate (the percentage of your income you save)
  3. Your expenses (how much money you spend)
  4. The size of your investment account (how much you already have saved)
  5. Your investment returns (how fast your investments are growing)
  6. The yield on your investment portfolio (how much your investments pay you)

Making Sense of Cents has phenomenal information on increasing your income and savings rate, and reducing your expenses.  These are all vital aspects of retiring early.

The size of your investment account now is based on your past decisions and for some people, being born into a wealthy family.  It is what it is; you can’t change it.

How you invest will determine your investment returns and the yield on your investment portfolio when you are (early) retired.

I believe that dividend growth investing is uniquely situated to offer individual investors a way to build a portfolio for rising passive income that will lead to early retirement (depending of course on your income and expenses).

Related: What Are Dividends & How Do They Work? A Beginner’s Guide

What Is Dividend Growth Investing

Dividend growth investing is what it sounds like.  The core idea of dividend growth investing is to invest in businesses via the stock market that are likely to pay growing dividends over time.

As an example, Johnson & Johnson’s (JNJ) dividend history over the last 20 years is shown below:

Source:  Johnson & Johnson Investor Relations page
Note:  The 2017 number shows dividend payments to date.  It will be higher than 2016 by the end of the year.

As you can see, Johnson & Johnson shareholders have seen their dividend income grow from $0.43 a share in 1997 to $3.15 a share in 2016.  This is a 7.3x increase.  More importantly, that 7.3x increase in income came without buying additional shares.

Dividend growth investing has a hidden benefit.  It focuses you on the business, and not on the stock price.  This means less (and hopefully no) panic selling during recessions.  In fact, many dividend investors take advantage of market declines by purchasing into great dividend growth stocks while they are trading at a discount.

The reason dividend growth investing matches up with building an early retirement portfolio so well is because it provides rising income over time.  This is a powerful feature that is not a characteristic of investing in bonds, gold, Bitcoin, or stocks that don’t pay dividends.

Reinvesting Dividends and Early Retirement

A portfolio that creates rising income over time is powerful.  You can ‘super charge’ growth by reinvesting dividends back into the portfolio.

When Johnson & Johnson pays its dividend, instead of taking it in cash, you can use that dividend to buy more shares of Johnson & Johnson.  You can see how this can greatly increase your passive income stream in the future in the example below.

Johnson & Johnson currently has a dividend yield of 2.6%.  The company has grown its dividend at 11% a year from 1997 through 2016.  Forecasting 11% a year growth ahead may lead to disappointment; there’s no guarantee Johnson & Johnson will continue such strong growth. 

Say the company grows its dividend at ‘just’ 7% a year going forward.  If you are reinvesting dividends, your income stream from Johnson and Johnson will grow at 9.6% a year.  Your income growth is simply the expected dividend per share growth rate plus the company’s current dividend yield (if dividends are reinvested).

With 9.6% a year compounding, your income from Johnson & Johnson will double about every 8 years.  I don’t know many other situations outside of dividend growth investing where you have a high likelihood of doubling your income in under a decade.

Strong income growth over time is why dividend growth investing can help you achieve early retirement.  It isn’t instantaneous, but it is achievable.

Where to Find Great Dividend Growth Stocks

Johnson & Johnson is a strong dividend growth stock…  But it’s not the only one.  There are other great businesses with long histories of increasing their dividend income every year.

My favorite place to find potential dividend growth stocks worthy of an early retirement portfolio is the Dividend Aristocrats Index. 

The Dividend Aristocrats are a group of 51 stocks in the S&P 500 with 25+ consecutive years of dividend increases.  A few examples of well-known Dividend Aristocrats are below:

  • Aflac (AFL)
  • 3M (MMM)
  • Coca-Cola (KO)
  • Wal-Mart (WMT)
  • Exxon Mobil (XOM)
  • Procter & Gamble (PG)
  • Johnson & Johnson (JNJ)

The Dividend Aristocrats index is made up of businesses with long histories of rising dividends.  A company simply cannot pay rising dividends for 25+ consecutive years without a strong and durable competitive advantage.

Why do competitive advantages matter? Warren Buffett himself says they are the key to investing.

“The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” – Warren Buffett

Not surprisingly, the Dividend Aristocrats Index has outperformed the S&P 500 over the last decade by 2.8 percentage points a year…  With lower volatility.

Source:  S&P Fact Sheet

To put this into perspective, $1.00 invested in the Dividend Aristocrats index 10 years ago would be worth $2.59 now, versus $2.00 for the S&P 500 (both numbers include dividends).  Moreover, your portfolio wouldn’t have had as severe price swings, because the Dividend Aristocrats index has lower volatility than the S&P 500.

Final Thoughts

There’s no question building a portfolio for early retirement can be complicated…  But it doesn’t have to be.

By investing in individual great businesses and holding them for their rising income potential (dividend growth investing), you can build a portfolio that is very likely to pay you rising income over time. 

And importantly, investing in individual stocks eliminates costly management fees from mutual funds and ETFs so your money is left to compound in your account, where it belongs.

The bottom line is that retirement requires a stream of income in excess of your expenses.  That income stream must also grow at least as fast (though preferably much faster) than inflation.  Otherwise, you lose purchasing power – and you won’t stay retired for long.

Dividend growth investing can create growing income streams that are likely to rise well in excess of inflation.  The unique characteristics of dividend growth investing are a compelling match for those seeking early retirement.

Are you interested in dividend investing? Why or why not?

Filed under:

Michelle Schroeder-Gardner

Author: Michelle Schroeder-Gardner

Hey! I’m Michelle Schroeder-Gardner and I am the founder of Making Sense of Cents. I’m passionate about all things personal finance, side hustles, making extra money, and online businesses. I have been featured in major publications such as Forbes, CNBC, Time, and Business Insider. Learn more here.

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  1. Veneta @ Becoming Life Smart

    Thanks for the info, Michelle! We’ve been working on early retirement for a few years now and are getting closer.

    We have some dividend investments through our retirement accounts but I’ve been thinking more about buying some dividend stocks through a non-retirement investment account.

    We have some cash sitting around that we are planning to use for buying a rental property but the housing market in our area is pretty hot right now so dividend stocks may be a better idea.

    Reply
    1. Ben Reynolds

      Hi Veneta, glad to hear you’ve started dividend investing. If you have any questions along the way feel free to reach out at ben@suredividend.com

      Reply
  2. DNN

    If I had the money and knowledge back in my 20’s to play the stock market and try my hand at creating such wealth, I might have made money or not. I didn’t have the know how but once heard in Florida back in the early 2000’s how a guy started out on eTrade with $1,000 and flipped it into $28k. I just didn’t have the money back then to try my hand. But today, I’m striving to build my retirement with affiliate marketing and doing something I love doing like yourself which is blogging and patiently waiting it out. 🙂

    Reply
  3. Bernz JP

    Thanks for this post. Dividend investing is very popular especially for retirees because of steady income, low -risk and the opportunity to re-invest the money. I remember before the market crash of 2008 that about 35% of my portfolio was invested in high-yielding dividend stocks. One of them was AIG which was the biggest insurance company at that time. It was really very encouraging to see every time a dividend was posted into my brokerage account. After the crash, dividends were either slashed down or suspended by many companies. I currently own a couple stocks that pay dividends but I invested in these companies, not because of their dividends. I’m more looking at their growth just like most of the stocks I own. Will most likely get back to focusing more on dividend investing and re-investing again in about seven years.

    Reply
  4. Chris

    This article largely explains why I’ve started investing for dividends. I like the steady income and the opportunity to see it grow and compound over time. One of the comments above stated that the poster preferred index investing. Vangaurd’s Total Stock Market Fund can itself be treated as a dividend growth investment. It pays dividends, and the dividends have generally grown over time (with the exception of the Great Recession). The yield is pretty low, however. I also like the tax treatment of qualified dividends.

    Reply
  5. Physician on FIRE

    The Dividend Aristocrats are chosen by looking in hindsight to choose successful companies that have continually increased dividends. Of course they beat the S&P 500. With the results of the last 25 years in hand, one could produce thousands of combinations of 51 stocks that would have outperformed the market.

    If only there was a way to predict which stocks will continue to increase dividends over the next 25 years. I’ll gladly invest in those and only those. But there’s no possible way to know, so I’ll stick with the index.

    In a taxable account, dividends only drive tax drag, at least once you cross over into the 25% federal income tax bracket and above. When I FIRE, I’ll be less concerned, but until then I’m content with my low-dividend mutual funds and no-dividend Berkshire Hathaway stock (https://www.physicianonfire.com/brkb/)

    Best,
    -PoF

    Reply
    1. Ben Reynolds

      That’s actually a common misconception about the Dividend Aristocrats Index. The index is created out of stocks with 25+ years of rising dividends in the S&P 500 at the beginning of the year. Constituents are added or removed annually. In the Great Recession, several Aristocrats cut their dividend and were removed from the index. The performance includes this – there isn’t hindsight bias involved.

      If we looked at only the returns of stocks with 25+ years of rising dividends today then that would have hindsight bias, of course.

      Reply
      1. Physician on FIRE

        Well, the turnover just makes the tax treatment even worse. And, of course, the index is not a fund you can purchase. The ETFs and funds you can buy do have fees, and they’re five to ten times higher than the S&P 500.

        Tax drag will depend on your income, but I would guess for me, it would be in the range of 1% per year. Taking 1% to 1.5% off the returns, the last 10 years don’t look so good, and the last 5 look worse.

        You can take away the disadvantage of the tax drag by investing in a retirement account, but then you lose the perceived benefit of the income from dividends.

        I’m not saying you personally shouldn’t invest in dividend aristocrats, but be sure to be aware of the effects of higher expense ratios and tax inefficiency of these funds in your portfolio.

        Best,
        -PoF

        Reply
    2. Miguel @ The Rich Miser

      The tax issues are certainly concerning, since my understanding is that dividends are taxable pretty much no matter what, even if you automatically reinvest them. Like you suggest, on a higher bracket, that can be pretty brutal.

      So I think one’s tax situation is a big consideration when deciding on whether to buy something like an S&P 500 fund or a Dividend Aristocrats fund, in a regular account. In a retirement account with preferable tax treatment, however, it may make sense to buy the Dividend Aristocrats.

      Reply
  6. Ben Reynolds

    Absolutely! If you have any questions about dividend investing feel free to email me at ben@suredividend.com

    Reply
  7. Ben Reynolds

    That makes sense. You cannot beat an index fund in terms of simplicity and time spent. In my experience, I’ve found that many people often spend a lot of time on selecting index funds. You can see my thoughts on dividend stocks versus index funds here: http://www.suredividend.com/index-vs-dividends

    And combining index funds with dividend stocks here: http://www.suredividend.com/index-dividend-combined

    Reply
  8. Alicia Mendsey

    I never tried this type of investing. Thanks for all the details. I will look into this. Have a great day!

    Reply
  9. Savannah

    Great read about dividends. Lately, I’ve been loving investing in ETFs comprised of the Dividend Aristocrats. I feel like their long, stable history of being able to afford to pay dividends makes them a great low-risk option for investing. I also invest in companies that don’t necessarily qualify to be a Dividend Aristocrat, but do have a consistent history of paying dividends, since most tech companies are just too new to meet the qualification of 25 year history of paying dividends.Love dividends!

    Reply
  10. Caroline Vencil

    Thank you for this post! I’ve been thinking about retirement and this is a great help!! 🙂

    Reply
  11. Ten Factorial Rocks

    Dave, Your dilemma is understandable and one that I struggled with as well. As Ben writes, there are benefits to both depending upon your interests, and this article is a good primer into the world of dividend investing. For a detailed analysis comparing both indexing and dividend investing strategies, this series may be helpful: http://tenfactorialrocks.com/investing-series/

    Reply