The Simply Investing Dividend Podcast

EP56: How to Earn $35K in Annual Dividends

November 01, 2023 Kanwal Sarai Season 2 Episode 56
The Simply Investing Dividend Podcast
EP56: How to Earn $35K in Annual Dividends
Show Notes Transcript Chapter Markers

In this episode, learn how you can earn $35K annually in dividends, and you don't need $1M to start.

Also covered in this episode:
- What is a dividend and dividend yield?
- The importance of dividend increases
- Re-investing dividends
- Earning $35K/year in dividends

Link to dividend forecasting sheet:

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Speaker 1:

In this episode I'm going to show you how you could earn $35,000 a year in dividends and know you don't need a million dollars to start with. Hi, my name is Kanwal Sarai and welcome to the Simply Investing Dividend Podcast. In this episode, we're going to cover four topics. First, we're going to look at what is the dividend and the dividend yield, then we'll talk about dividend increases, then we're going to talk about reinvesting dividends and why it's so important, and then we'll get to our section where I'll show you exactly how you could earn $35,000 a year in dividends and what it takes. Let's begin with our first topic what is a dividend and dividend yield? So what is a dividend? A dividend is basically the company sharing its profits with you, the shareholder. So dividends are just another fancy name for the profits that are being shared with the owners of the company, which are the shareholders. So let's say the company is paying a dividend of $1 per share and you own a thousand shares. You will receive $1,000 every year for as long as you own those shares and as long as the company continues to pay the dividend. Now the stock price can go up and down, it doesn't matter. As long as you own the shares. The dividends are based on the number of shares you own and in this example, you would receive $1,000 every year. Now you can spend that money if you wish, or you can reinvest it. So let's take a look at what is dividend yield? It's simply the annual dividend divided by the share price or the purchase price, and that's going to give us the dividend yield. So let's take a look at this example. Let's say the annual dividend for this company is $1 per share and the share price today happens to be $20 a share. So if you were to buy these shares today, we do 1 divided by 20. We express that as a percentage, you can see that it's 5%. So what does the 5% really mean? What does that tell you? So let's take a look. Let's say you had $20,000 to invest in this company, and that's what you did. So 5% of $20,000 is $1,000. Another way to look at it is the same $20,000 invested in this company and the share price is $20 a share, you're going to be able to buy a thousand shares and, like we said before, the dividend is $1 per share. So let's multiply that by a thousand shares and you see that we end up with the exact same number, which is $1,000 in dividends each year for as long as you own those shares and as long as the company continues to pay the dividend. So basically, in this example, the dividend yield the 5% is the return on your investment while you hold on to those shares. Share prices go up and down all the time, but in this example, your dividend yield is going to be 5%, regardless of what happens to the stock price, as long as you hold on to those shares and as long as the company continues to pay the dividend. Now let's take a look at topic number two dividend increases. So here's the big secret. It's not really a secret, but maybe for some people this will be new information High quality companies. These are well managed companies that are financially healthy, that have low debt, that have a low payout ratio, and we're going to look at some of those requirements towards the end of this episode, but for now, keep in mind that high quality, well managed companies have a history of increasing dividends every single year. So what does a dividend increase mean to you? Does it really matter? And the answer is yes. So what does it mean to you? It means that every time the company increases its dividend. That's more money in your pocket. Like I said before, you can spend the dividends if you wish or you can reinvest them. The dividends are deposited directly into your trading account as cash. So, again, you can spend them or you can reinvest them. So anytime a company increases the dividend and you have not bought any more shares, you still own the same number of shares, but the company increases the dividend. That means more money in your pocket. Let's take a look at a real life example with Johnson and Johnson. So here we're going to look back at the last 15 years, since 2008 till current, as of this recording, 2023. So back in 2008, johnson and Johnson was paying a annual dividend of $1.80. And today, as of this recording, the company is paying a dividend of $4.76. So what does that really mean? So let's take a look at an example. Let's say you owned a thousand shares in this company Back in 2008,. You would have received $1,800 in dividends annually. Then the dividend went up. The next year went up again. In fact, the dividend has gone up every single year. Today you would be receiving in 2023. Over the course of 12 months, you would receive, in this year, $4,760 in dividends. So that is very impressive. That is a 164% increase in dividends in just 15 years. So the dividend income, your dividend income, has more than doubled, and you didn't have to buy more shares or sell them or track them you. All you had to do was buy them in 2008 and just hold on to them. So now let's go a little bit further back. Let's take a look at the last 40 years. So now we're going to stick with our example of Johnson Johnson. So here it is. You can see the last 40 years. You can see the stock prices displayed in blue or purple, and stock prices go up and down all the time. And if we look carefully at the graph, you can see that Johnson Johnson, over the last 40 years, has had some dips. You can see the stock price dropping by $5 a share, $10 a share. In some cases we're looking at almost $20 a share drop in the stock price. But what's happening to the dividend? So you can see that represented by the orange line, and does the line ever go down? Nope, it keeps going up, year after year after year after year. So how can a company like Johnson Johnson continue to increase paying dividends to the shareholders when its own stock price is dropping, and the reason is that the dividends are not paid from the stock price. The dividends are paid from the earnings, the earnings per share. So as long as the company is profitable over the long term and as long as they continue to make money, then they can afford to continue to pay the shareholders a dividend. So regardless of the stock price. So even when the stock price tanks, we see that the dividend in this case has gone up, and in the last 40 years it has gone up every single year. In fact, johnson Johnson has a very impressive record of 60 years of consecutive dividend increases. This is incredible. So I'm going to say it again Johnson Johnson has had 60 years of consecutive dividend increases. In the last 60 years, they have never once reduced or eliminated their dividend. And remember what I said before every time a dividend goes up, that's more money in your pocket. So now let me give you four more examples. We just don't want to stick with Johnson Johnson. Let's take a look at four more examples. Procter Gamble has had 66 years of consecutive dividend increases. Coca-cola 60 years of consecutive dividend increases. Stanley Black Decker 55 years of consecutive dividend increases. And finally, our other example is Walmart has had 49 years of consecutive dividend increases. Think about how many recessions we've had in the last 40, 50, 60 years, how many market crashes we've had in the last 50 years. But companies like these have continued to increase their dividend to the shareholders year after year after year. Now this is just a small example. There's a little over 20 to 30 companies that have been growing in the US alone that have been growing their dividend consecutively for more than 35 years. So now let's move on to our next topic Reinvesting dividends. Now, the biggest thing here is that reinvesting is key. That is so important to your future holdings, to the growth of your portfolio. So now let's go back to Johnson Johnson's example. Now this is the same graph, a table, I showed you before, so you can see the last 15 years, johnson Johnson, the dividend has gone up every single year, and we're going to stick with our example of a thousand shares. So let's say you own a thousand shares, you bought a thousand shares back in 2008 in Johnson Johnson and you just held on to those shares Since then. You would have earned close to $50,000 in dividends. You can see the total, accurate number there is $49,930, which is effectively about $50,000 in dividends. Now you could have taken that $50,000 in dividends and bought a car, put a down payment on a home vacation or clothing or any number of things that you could have bought with that $50,000. What I'm going to suggest to you, and what I just said before, is reinvesting those dividends is key to growing your dividend portfolio. So what I would suggest is, over those last 15 years, you would have taken those dividends, those $50,000 in dividends, and reinvested them back into other dividend stocks and then taken those dividends and reinvested them back into other dividend stocks and those stocks would have grown their dividend every single year, thereby compounding your dividend income. So whenever we start with dividend investing, the dividends in the beginning are very small and then over time it compounds and you start generating more and more dividend income. I'm going to show you an example of that coming up in the next few slides. So reinvesting is key and I hope that this graph is going to emphasize that point. So here we're looking at somebody who's invested in the SNMP 500. So the top 500 companies in the US invested $10,000 in 1960. Today that would be worth over $640,000. And you can see that in the graph right. But that may seem impressive, but in this example they have not reinvested the dividends. They've taken the dividends out as cash and spent the money. Now imagine if you took those dividends since 1960 and reinvested them back into More stocks. Today that would be worth over four million dollars. So that is a huge return on your investment. So I don't know about you, but I'd rather have four million dollars than 641 thousand dollars. So this graph emphasizes the power of Reinvesting dividends and compounding, because you're reinvesting it into stocks that are paying dividends. You're taking those dividends and reinvesting those back into other stocks that are paying dividends as well, so it's a bit of a snowball effect and you start to generate more and more dividend income. So what we're gonna do now, before we go to the last section, is we're going to combine both the reinvesting aspect of Dividend investing and taking advantage of dividend increases, like the examples I've shown you in today's episode. So what happens when we put those two together? And We'll see that the returns are extraordinary. Now I started this episode by telling you that I'm gonna show you how you could earn $35,000 a year in dividends, and you don't need a million dollars to do it with. So let's jump right into our Final and fourth section in this episode. So quick reminder Dividend yield is the dividend, the annual dividend, divided by the share price or the purchase price of when you buy the stocks. So in this example, the dividend is $1, the share price is 20 1 over 20. We express that as a percentage is 5%. Let's take a look at some examples, real-life examples of companies today and let's see what is the dividend yield that they're offering today. So you can see up on the screen. Proctor and gamble, as of this recording, has a dividend yield of 2.5%, coca-cola 3.2%, black and Decker 3.8%, walmart 1.4 and Toronto Dominion Bank, td Bank, is Offering a yield of 5.0 3%. Now you might be thinking well, why wouldn't I take all of my money and just put it in TD Bank? Because I'd rather make 5% annual return as opposed to investing in Walmart where I'm only going to make 1.4%. Well, the key here is also diversification, and so that's a topic for another episode. So we're not going to get into diversification for now. But if we take a look at all of the dividend companies today in the US and in Canada and we take the average dividend yield, we can see that approximately the average dividend yield is about 3.5%. Now I'm going to go back to the title of this episode. We're going to show you how to earn $35,000 a year in dividends. So now you might be thinking well, if you do the math, 3.5% of a million dollars is $35,000. So now you're thinking, well, I need a million dollars. And Remember, I said, I'm going to show you how you can do it without starting with a million dollars. But for now, let's stick with this example in the next slide and then I'm going to show you how to make a million dollars and then I'm going to show you how to do it with less money. But if you were looking this year, in the present moment, in this year, in the next 12 months, you wanted to earn $35,000 a year in dividends, then yes, you would probably need a million dollars. Because we take the 3.5% of a million dollars, you can see it's $35,000. And here I have a Google spreadsheet that I use With my students and clients for forecasting their dividend growth and Forecasting how much their portfolio will be worth. So what I did here is I put in a starting balance of a million dollars and you can see in the fourth column there Dividends earned annually. In that column you can see that it's $35,000 a year in dividends. Now there's a couple of variables the dividend yield like I said, I'm going to stick with 3.5% Stock growth and dividend growth, that we're going to combine that and assume, very conservatively, 4.5%. So I'm going to put the link in the description below. You can download this Google sheet you can put in your own numbers. The only thing you need to change are the values that are in green, so we can change the stock price or dividend growth to maybe six, seven, eight percent if you wanted to, but for now let's stick with 4.5%. And in the column number two, where it says additional investments each year, we're gonna keep it simple. We're gonna say zero. We're gonna say somebody who's got a million dollars today and they're not gonna invest a penny more in their dividend stocks this year, in the 12 months they would earn 35,000 a year. And then you can see that over 20 years the portfolio will be worth over $4.5 million, actually $4.6 million, and the annual dividend income would be over $150,000 a year in dividends. Now, a lot of you, including myself, we don't have a million dollars sitting in cash. So then how do we get to our mark of where we wanted to earn $35,000 a year in dividends. Okay, so let's take a step back and we're going to think about how much money do we need to start investing with to get to our goal of $35,000. So if you are in your 30s or 40s and you're a working professional your partner is also working most of my clients that I've talked to and students if you add up all of your investments that you have in a 401k or an IRA or an Roth or in Canada would be an RSP or a TFSA if all those total amounts is $175,000, then let's start with that. Now. Some of you may have more than that maybe $200,000, $300,000, $400,000 in those accounts combined, but let's start with $175,000 in those accounts and if you're younger, you're probably going to be closer to the $100,000 range. Again, this is somebody who's already in their 30s and 40s, has been working for over a decade and a half, maybe two decades, and you've saved over the years. And again, most of my students and clients will also invest regularly. Now you may only invest $50 a month, maybe $100 a month, maybe $200 a month. In this example. We're going to assume this individual again in their 30s, maybe 40s, mid 40s, early 50s, is now setting aside $500 a month for their future retirement and future investments. So now let's go back to our Google Sheet and put these two numbers in our forecasting spreadsheet. So we're going to start with $175,000. We're going to invest an additional $6,000 a year, which is $500 a month, and you can see that in the first year you would earn $6,335 in dividends. Now, if we fast forward to year 19, year 20, now you can see that you are now making over $36,000 a year in dividends. So we can get to our goal of $35,000 annually in dividends without having to start with $1 million. A million dollars is virtually. It's very difficult for anyone to accumulate very quickly a million dollars in cash, but $175,000 you could start with. Again, it's not someone who's 18 years old, but someone who's already in their 30s, 40s, even early 50s, and have been working for a long time and saving and investing for a long time. So then $175,000 you could start with and then you can see that over time, you could achieve your goal of over $35,000 per year in dividends. You can see that in this example, the ending balance, including dividends, the portfolio will be worth over $1.1 million. Now it's going to go faster if you have more money to invest. If you've got $200,000, $300,000 to invest, then you'll reach that goal a lot quicker. If you're able to invest more each year than the $6,000 I've shown on the screen, then you're going to get to your goal a lot quicker. The three things that you're going to need here to be successful as a dividend investor is time, money and knowledge. Time the longer you have to invest, the more time you have to compound those dividends and reinvest them. So, which is why I always suggest that if you're going to start dividend investing, start sooner than later, and generally, when you're young, you have lots of time, not as much money, but start early, and then you don't need a lot of money, like we showed you in this example, to get to your ultimate goal. The second thing you need is money. The more money you have, the more stocks you can buy. The more stocks you have, the more dividends you will collect. The third thing is knowledge. So here you have to know what to invest in, what not to invest in, and went to sell, went to buy. Now, it's not complicated, it's not rocket science. I've been teaching this for over 15 years, so does this mean that you should go ahead and I'm putting the same slide up that I showed you before the example of Procter Gamble, coca-cola, black Decker, walmart, td Bank. Does that mean that you should go out today after watching this video and invest your money in these companies right away? No, and the answer is no. There's a couple of things we need to check before you invest. Remember I said knowledge, time, money and knowledge, and so what I provide is knowledge to you, the listener, on how to invest successfully. We are now over 55 episodes. In Every episode is educational and we teach you how to become successful dividend investors and how to invest safely and reliably. We don't want to put your hard earned money at risk, so we don't want to do day trading, get rich quick schemes try to double your money in two weeks. No, we want to invest safely and reliably and we want to generate a consistent stream of dividend income, and that's why our priority is the dividend instead of the stock price. So how do we do this? How do we invest safely and reliably? We invest in quality dividend stocks when they are priced low, so we don't want to invest just in any stock at any price. It has to be a quality stock has to be priced low. So how do you know, when you're looking at a stock, any stock anywhere in the world? How do you know, when you're looking at it, that it's a quality stock and it's priced low? So for that I've created what I call the 12 rules of simply investing. This is your checklist. You want to make sure, before you invest in any company, that it passes all 12 rules. If there's even one failure, skip it. Move on to something else. You can see the rules up on the screen. For those of you that are listening to the audio version, I'm going to go through the list very quickly for the 12 rules. Rule number one do you understand how the company is making money? If you don't skip it? Rule number two 20 years from now, will people still need its product and services? Rule number three does the company have a low cost competitive advantage? Rule number four is it recession proof? Rule number five is it profitable? Rule number six does it grow its dividend? Rule number seven can it afford to pay the dividend? Rule number eight is the debt less than 70%? Rule number nine avoid companies with recent dividend cuts. Rule number 10, does the company buy back its own shares. Rule number 11, is the stock priced low, and that's in three parts. So we look at the P-E ratio. We want to make sure it's low. We look at the current dividend yield compared to the company's average 20 year dividend yield and then we look at the P-B ratio, the price to book ratio. If all three conditions are met, then the company will pass rule number 11. Rule number 12, keep your emotions out of investing. So for those of you that are interested, I cover these 12 rules in detail in the Simply Investing course. The course itself is made up of 10 modules. They're video modules, it's a self-paced course. I teach you the investing basics, the 12 rules of Simply Investing, in detail, with real life examples. In module three, I show you how to apply the 12 rules and we give you a Google sheet you can put all the numbers in. It will highlight which rules a company passes and which rules a company fails. Module number four show you how to use the Simply Investing platform. Module five placing your first stock order. This is absolutely necessary, especially for beginners. I take you step by step on how to place your first stock order. Then we talk about building and tracking your portfolio. Then we look at when to sell, then we look at reducing your fees and risk, especially when it comes to mutual funds, index funds and ETFs. Module number nine I'm going to give you an action plan to get started immediately. And module 10, I will answer your most frequently asked questions. And, for those of you that are interested, we also have a Simply Investing platform, which we took two to three years to build. The platform automatically tracks over 6,000 companies in the US and in Canada and applies the 12 of these rules to those companies every single day, and then you can see immediately which companies to consider for investing and which ones to avoid. You may want to write down the coupon code SAVE10, save10. It's going to save you 10% off of our course and the Simply Investing platform. So if you enjoyed this video, please hit the subscribe button. Hit the like button as well. We have a new episode out every week and for more information, take a look at our website, simplyinvestingcom. Thanks for watching.

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