Monday, 31 December 2012

Estimating Future Dividend Income


A long hard look at a few numbers lead me to conclude that I would need $80,000 in dividends per year when I turn 55 in 2034. This income will be in addition to my DB pension. The hard part is determining how much I need to invest in dividend growth stocks to reach my objective.

Future dividend income heavily relies on the dividend growth rate. A change of 1% in the average dividend growth rate can make a huge difference over a 20 or 30 year time span.

To put words into numbers, I ran a simulation for 3 different dividend growth rates the Kraft Food Group might have over the next few decades (a while back, I ran the same type of simulation for NSC). 

Inputs into my simulation:

- 100 shares @ $45.60 ($4559.95)
- $2.00 dividend in 2013 (4.39% initial yield)
- All dividends are re-invested
- Fractional shares are permitted
- The stock price increases at the same rate as the average dividend growth rate

The numbers in 22 years:

Div Growth Rate
4%
5%
6%
# Shares
230
227
223
Dividends/year
$1,050
$1,264
$1,519

There’s only a few hundred dollars between each of the annual dividends, but look at the difference in terms of percentages.

($1264 - $1050) / $1050 = 20%

            ($1519 - $1264) / $1264 = 20%

The numbers in 30 years:

Div Growth Rate
4%
5%
6%
# Shares
317
310
304
Dividends/year
$1,975
$2552
$3290

            ($2552 - $1975) / $1975 = 29%

            ($3290 - $2552) / $2552 = 29%

I myself would be satisfied with an average dividend growth rate of 5% over the next 20 to 30 years. This would give me a total long-term return of 9.39% (4.39% + 5%) as well as a great yearly dividend.

I run such simulations for all the stocks I own. Based on my current portfolio, I estimate yearly dividends at $43,000 by the time I’m 55. I try and pick reasonable dividend growth rates, but a crystal ball I do not have.

How do you estimate future dividend income?



8 comments:

  1. I tend to make projections on my portfolio as a whole and not individual stocks. Projecting individual stocks more than a few years into the future is a slippery slope, especially if it has high DGR. I just don't think it's realistic for high DGR companies. I see you're using conservative numbers here which makes sense. There are just too many unknowns to make predictions far into the future.

    I have a few spreadsheets I was playing around with to see where my investment income might end up when I start receiving a pension. I don't bother trying to figure out portfolio worth, but instead focus on the income. For my projections I use my current passive income, 2.0% Dividend growth (this factors out inflation, I want to know in today's dollars and be conservative to account for mishaps), 3.5% yield on reinvestments and new capital.

    If I can invest $500/month for the next 15 years I'll be looking good when my pension kicks in. Of course I could end up switching jobs and there are 1,000 other things that could change or go wrong!

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    1. Thanks for sharing your method CI - and Happy New Year. In addition to my current portfolio, I've estimated that an investment of $12,000 per year for the next 21 years is required to reach $80,000 in dividends per year. When I was playing with spreadsheets, I gave a lot of thought to inflation, deflation, average dividend growth rates and long-term CAGR. We cannot accurately forcast the numbers; however, I find comfort in knowing we'll be better off than the "98%" with negative savings rates and an abundance of depreciating crap.

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  2. There's way too many variables that go in to projecting even 1 year out let alone a decade or two. I usually assume about 2% after inflation in DG. I think it'll end up being higher than that over the long-term but it's better to err on the side of caution when trying to project that far into the future. If it turns out that it's higher, then maybe I can shave some time off my FI date or be able to get a little more income to allow for some more travel.

    When I first started my path towards FI, I did like you where I tried accounting for everything which makes the calculations more of a pain. It's much easier to use just one annual % change value.

    Best of luck in 2013!

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    Replies
    1. Thanks for the feedback. I'll give the "one annual % change" a try and see what I come up with. As you mentionned, the goal is to grow income at a faster rate than inflation. I know some older folks who's retirement income has not kept up with inflation over the last 10 years. Without getting into details, it's not something anyone wants to experience.

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  3. My view is that although future projections are inherently inaccurate to some degree, using them can be a worthwhile (and admittedly time consuming) exercise. That being said, you don't have to be married to them, just visit them from time to time!
    Like most things, everyone has a different view on what projections should be used. I blogged earlier today about how compared to many other dividend investors I pay more attention to total return (and thus not as focused on dividend increases). Works for me. Same goes for projections. I think a key for all investors is to find their comfort zone (not someone else's), and yet remain open to be educated moving forward.

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    1. Yup, there's more than one way to skin a cat. When I have time, I'll try different methods and see where they take me. I'll have a look at your post shortly.

      I noticed a post from Dividend Growth Machine that describes how he does it.

      http://dgmachine.blogspot.ca/2013/01/dividend-income-projection.html

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    2. Thanks for the mention -- I read your post earlier but forgot to come back and comment after I posted my projection. Similar to Compounding Income, I prefer to estimate future dividend income for my portfolio rather than for individual companies. Regardless of how one does it, there will be a lot of uncertainty in the projection. I try to be conservative with some of my assumptions, but I remain cognizant of the fact that I don't have a crystal ball. That said, I do think such projections can be useful for measuring progress over time and determining whether an investing strategy might need any tweaking to achieve long-term goals. It's definitely fun to play around with the numbers, though!

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    3. Hey DGM. It's hard to picture what awaits us in 20 or 30 years. But like you said, it's nice to play with the numbers and dream!

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