The thing I like the most about dividend investing is the passive income it generates. If you have a wide range of assets, you can have a portfolio that pays you every month (just like my own portfolio).
Receiving regular passive income is a nice thing to have. But the key is to reinvest the dividends you receive. This is what will help you to kick start that nice compounding effect, that Albert Einstein just called as the eight wonder of the world.
When you just start dividend investing, you probably won’t have a lot of money to begin with. And that’s alright, everyone has to start somewhere. The key here is the saving and the continuous investment.
- Saving is the Best Kick-Starter of Wealth
- Achieving Financial Independence is Not About the Amount of Saving But the Saving Rate
- What is the Best Passive Investment Strategy?
- How to be a Good Farmer of Your Investments?
- Dividend Investing Basics
Of course little money means little dividend at the beginning. We are probably talking about a few dollars or euros here. But don’t get discouraged, because in the background you already have some help!
The Dividend Elves are Working for You!
The dividend elves are very hard working creatures. Even though you can’t see them, they are there from the first day you invest and never ask for a day off. In addition they are more productive year by year!
Let me demonstrate their values with an example! Let’s say you invest $10,000 per year. Assuming that your portfolio has a 2.5% yield, in the first year it will generate $250 dividend. (The historical average yield of the S&P 500 is around 4.4%, nevertheless considering the low interest rate environment, I believe it’s more reasonable to calculate with a lower number.)
So $250 per year, less than $21 per month. Big deal, right? Well, it might seem low, but $250 is 2.5% of your yearly investments. Or in other words, 2.5% of your 52 weeks of hard work and saving was given as a bonus. That’s a bit more than 1 full week!
So those dividend elves were already with you during a week. The amount you saved during that week has been doubled.
Now let’s see what will happen in the future! I’m calculating with 2% inflation, so our 10k saving will be 2% higher each year. The portfolio value (without dividends) is increasing 5% per year (inflation already considered) and the portfolio yield stays 2.5%. By this we get the below table:
As you can see, already in the 3rd year 4 weeks, or a full month has been boosted by our dividend elves. Your saving of that month has been doubled!
In year 8, that month becomes a quarter and in year 14 your elves are working half of the year. It takes a bit more than 21 years, but they eventually start to earn more than you save. And their productivity starts to grow exponentially! This is the magic of dividend investing, or more like dividend reinvesting.
Of course don’t take these numbers as given, but I believe the above would give you a good idea what you can expect.
My Personal Elves
My road towards financial independence has begun only last year. As you can see in my 2016 yearly overview, my portfolio has generated EUR 846.45 dividend income. Considering the amount I’ve invested during the year, it means that my elves were working nearly 2 weeks for me. And they can be sure I have more work for them to do this year! 🙂 You can always check the latest status of my portfolio by clicking the “Portfolio” button of the header.
How about you, dear readers? Have you already checked how many weeks your little dividend elves were working for you last week? Let me know in the comments!
Please subscribe to the weekly newsletter and never miss a new post!
Disclaimer: This post or any other information on the site is not intended to be and does not constitute financial advice or any other advice. I am solely sharing my idea, plan and progress on early retirement.