Dividend Snowball

dividend snowballWow, it’s already December! This year seems to be passing by in no time. Winter is officially here, although I can’t remember when the last time I saw some proper snow was. Still I invite you for a winter theme game (if you don’t wanna join, you can still watch from your warm room). I’m going to roll a snowball. A dividend snowball! I start with something small, but on its way down the mountain it’s gonna be bigger and bigger like no one wants to stand on its way! Check out how I’m planning to do it!

Let’s see what we need for a dividend snowball:

Step 1 – Take some snow (money) – very important!

Step 2 – Form it to a ball (buy dividend paying stock)

Step 3 – Roll and wait (well, wait)

Not that difficult, right? Oh, and pray for favorable weather (market conditions) on the way! J

First of all, let’s look around in my Dirty Thirty portfolio whether we have a suitable candidate to build this snowball from. I have nothing but dividend paying stocks, so seemingly we have plenty of snow. But there are many types of snow out there. You don’t want it to be too dry or it won’t stick, you don’t want it to be too wet or it won’t roll. And of course you want big enough steep or it will be a slow, long and super boring roll.

I want to select a stock that:

  • Has a high dividend
  • Has a share price that is cheaper than the dividend I receive
  • Offers a dividend reinvestment plan (DRIP) in order to save high trading fees
  • Pays dividend on a monthly basis so the ball rolls continuously

On a side note for those of you who are not familiar with it: dividend reinvestment plan is an option that some, but not all dividend paying companies offer. Under this scheme instead of receiving the dividends in cash, you receive additional shares of the company. In case the net dividend doesn’t cover the price of a share, that fraction will usually still be paid in cash. Such plan is especially beneficial if you want to increase your holdings in a company but you don’t have a large value holding. Brokers usually charge a fix minimum amount of fee for every transaction. If you would receive let’s say USD 50 dividend in cash and you wish to reinvest it in the company, a USD 10 transaction fee would represent a huge, 20% cost. Via DRIP you can eliminate such high fees.

Going back to my initial thought, there seems to be only one stock in my portfolio that meets all the above criteria: Prospect Capital (PSEC). PSEC is a business development company that offers a stunning 12+% yield. Of course a higher yield comes with a higher risk, but lending money to companies that need some cash seems to be an evergreen business for me. I think I found my perfect raw material for my snowball. So let’s see the theory and the math behind it!

Currently I have 100 shares of PSEC. The share price is around USD 8 and it pays a monthly dividend of USD 0.0833 per share. Considering that I pay 15% withholding tax on the dividend received, I receive around USD 7.08 per month.  This is not enough for even one share so I need to buy some more.

With around 13 extra shares the monthly net dividend would go above USD 8, but I’m not gonna buy shares for around USD 100 while the transaction fee would be EUR 15 (these shares are kept at my bank and were not transferred to my new broker). I would rather buy 150 extra shares for USD 1,200 (and still for a EUR 15 transaction fee), so the monthly net dividend would be USD 17.7, which would also mean a little extra buffer if the stock price increases further.

If I give this snowball a kick like this, that would mean 2 extra shares received per month considering the current share price and dividends. In theory this would keep on rolling over the year like this, and once a year when the snow falls again I would feed it with the same amount of additional supply.

Let’s see how this snowball would look like in the next 10 years. For the calculation I consider the share price and the dividend amount unchanged, which is of course unrealistic, but I can’t predict the future, so let’s cook from what we have!

Date  Number of Shares   Share Price  Dividend  Net Dividend  Extra Share Received  Snowball Value 
Dec-16                 250  $             8.00 0.0833                 17.70 2  $            2,000.00
Jan-17                 252  $             8.00 0.0833                 17.84 2  $            2,016.00
Feb-17                 254  $             8.00 0.0833                 17.98 2  $            2,032.00
Mar-17                 256  $             8.00 0.0833                 18.13 2  $            2,048.00
Apr-17                 258  $             8.00 0.0833                 18.27 2  $            2,064.00
May-17                 260  $             8.00 0.0833                 18.41 2  $            2,080.00
Jun-17                 262  $             8.00 0.0833                 18.55 2  $            2,096.00
Jul-17                 264  $             8.00 0.0833                 18.69 2  $            2,112.00
Aug-17                 266  $             8.00 0.0833                 18.83 2  $            2,128.00
Sep-17                 268  $             8.00 0.0833                 18.98 2  $            2,144.00
Oct-17                 270  $             8.00 0.0833                 19.12 2  $            2,160.00
Nov-17                 272  $             8.00 0.0833                 19.26 2  $            2,176.00
Dec-17                 424  $             8.00 0.0833                 30.02 3  $            3,392.00
Jan-18                 427  $             8.00 0.0833                 30.23 3  $            3,416.00
Feb-18                 430  $             8.00 0.0833                 30.45 3  $            3,440.00
Mar-18                 433  $             8.00 0.0833                 30.66 3  $            3,464.00
Apr-18                 436  $             8.00 0.0833                 30.87 3  $            3,488.00
May-18                 439  $             8.00 0.0833                 31.08 3  $            3,512.00
Jun-18                 442  $             8.00 0.0833                 31.30 3  $            3,536.00
Jul-18                 445  $             8.00 0.0833                 31.51 3  $            3,560.00
Aug-18                 448  $             8.00 0.0833                 31.72 3  $            3,584.00
Sep-18                 451  $             8.00 0.0833                 31.93 3  $            3,608.00
Oct-18                 454  $             8.00 0.0833                 32.15 4  $            3,632.00
Nov-18                 458  $             8.00 0.0833                 32.43 4  $            3,664.00
Dec-18                 612  $             8.00 0.0833                 43.33 5  $            4,896.00
Jan-19                 617  $             8.00 0.0833                 43.69 5  $            4,936.00
Feb-19                 622  $             8.00 0.0833                 44.04 5  $            4,976.00
Mar-19                 627  $             8.00 0.0833                 44.39 5  $            5,016.00
Apr-19                 632  $             8.00 0.0833                 44.75 5  $            5,056.00
May-19                 637  $             8.00 0.0833                 45.10 5  $            5,096.00
Jun-19                 642  $             8.00 0.0833                 45.46 5  $            5,136.00
Jul-19                 647  $             8.00 0.0833                 45.81 5  $            5,176.00
Aug-19                 652  $             8.00 0.0833                 46.16 5  $            5,216.00
Sep-19                 657  $             8.00 0.0833                 46.52 5  $            5,256.00
Oct-19                 662  $             8.00 0.0833                 46.87 5  $            5,296.00
Nov-19                 667  $             8.00 0.0833                 47.23 5  $            5,336.00
Dec-19                 822  $             8.00 0.0833                 58.20 7  $            6,576.00
Jan-20                 829  $             8.00 0.0833                 58.70 7  $            6,632.00
Feb-20                 836  $             8.00 0.0833                 59.19 7  $            6,688.00
Mar-20                 843  $             8.00 0.0833                 59.69 7  $            6,744.00
Apr-20                 850  $             8.00 0.0833                 60.18 7  $            6,800.00
May-20                 857  $             8.00 0.0833                 60.68 7  $            6,856.00
Jun-20                 864  $             8.00 0.0833                 61.18 7  $            6,912.00
Jul-20                 871  $             8.00 0.0833                 61.67 7  $            6,968.00
Aug-20                 878  $             8.00 0.0833                 62.17 7  $            7,024.00
Sep-20                 885  $             8.00 0.0833                 62.66 7  $            7,080.00
Oct-20                 892  $             8.00 0.0833                 63.16 7  $            7,136.00
Nov-20                 899  $             8.00 0.0833                 63.65 7  $            7,192.00
Dec-20             1,056  $             8.00 0.0833                 74.77 9  $            8,448.00
Jan-21             1,065  $             8.00 0.0833                 75.41 9  $            8,520.00
Feb-21             1,074  $             8.00 0.0833                 76.04 9  $            8,592.00
Mar-21             1,083  $             8.00 0.0833                 76.68 9  $            8,664.00
Apr-21             1,092  $             8.00 0.0833                 77.32 9  $            8,736.00
May-21             1,101  $             8.00 0.0833                 77.96 9  $            8,808.00
Jun-21             1,110  $             8.00 0.0833                 78.59 9  $            8,880.00
Jul-21             1,119  $             8.00 0.0833                 79.23 9  $            8,952.00
Aug-21             1,128  $             8.00 0.0833                 79.87 9  $            9,024.00
Sep-21             1,137  $             8.00 0.0833                 80.51 10  $            9,096.00
Oct-21             1,147  $             8.00 0.0833                 81.21 10  $            9,176.00
Nov-21             1,157  $             8.00 0.0833                 81.92 10  $            9,256.00
Dec-21             1,317  $             8.00 0.0833                 93.25 11  $         10,536.00
Jan-22             1,328  $             8.00 0.0833                 94.03 11  $         10,624.00
Feb-22             1,339  $             8.00 0.0833                 94.81 11  $         10,712.00
Mar-22             1,350  $             8.00 0.0833                 95.59 11  $         10,800.00
Apr-22             1,361  $             8.00 0.0833                 96.37 12  $         10,888.00
May-22             1,373  $             8.00 0.0833                 97.22 12  $         10,984.00
Jun-22             1,385  $             8.00 0.0833                 98.06 12  $         11,080.00
Jul-22             1,397  $             8.00 0.0833                 98.91 12  $         11,176.00
Aug-22             1,409  $             8.00 0.0833                 99.76 12  $         11,272.00
Sep-22             1,421  $             8.00 0.0833               100.61 12  $         11,368.00
Oct-22             1,433  $             8.00 0.0833               101.46 12  $         11,464.00
Nov-22             1,445  $             8.00 0.0833               102.31 12  $         11,560.00
Dec-22             1,607  $             8.00 0.0833               113.78 14  $         12,856.00
Jan-23             1,621  $             8.00 0.0833               114.77 14  $         12,968.00
Feb-23             1,635  $             8.00 0.0833               115.77 14  $         13,080.00
Mar-23             1,649  $             8.00 0.0833               116.76 14  $         13,192.00
Apr-23             1,663  $             8.00 0.0833               117.75 14  $         13,304.00
May-23             1,677  $             8.00 0.0833               118.74 14  $         13,416.00
Jun-23             1,691  $             8.00 0.0833               119.73 14  $         13,528.00
Jul-23             1,705  $             8.00 0.0833               120.72 15  $         13,640.00
Aug-23             1,720  $             8.00 0.0833               121.78 15  $         13,760.00
Sep-23             1,735  $             8.00 0.0833               122.85 15  $         13,880.00
Oct-23             1,750  $             8.00 0.0833               123.91 15  $         14,000.00
Nov-23             1,765  $             8.00 0.0833               124.97 15  $         14,120.00
Dec-23             1,930  $             8.00 0.0833               136.65 17  $         15,440.00
Jan-24             1,947  $             8.00 0.0833               137.86 17  $         15,576.00
Feb-24             1,964  $             8.00 0.0833               139.06 17  $         15,712.00
Mar-24             1,981  $             8.00 0.0833               140.26 17  $         15,848.00
Apr-24             1,998  $             8.00 0.0833               141.47 17  $         15,984.00
May-24             2,015  $             8.00 0.0833               142.67 17  $         16,120.00
Jun-24             2,032  $             8.00 0.0833               143.88 17  $         16,256.00
Jul-24             2,049  $             8.00 0.0833               145.08 18  $         16,392.00
Aug-24             2,067  $             8.00 0.0833               146.35 18  $         16,536.00
Sep-24             2,085  $             8.00 0.0833               147.63 18  $         16,680.00
Oct-24             2,103  $             8.00 0.0833               148.90 18  $         16,824.00
Nov-24             2,121  $             8.00 0.0833               150.18 18  $         16,968.00
Dec-24             2,289  $             8.00 0.0833               162.07 20  $         18,312.00
Jan-25             2,309  $             8.00 0.0833               163.49 20  $         18,472.00
Feb-25             2,329  $             8.00 0.0833               164.90 20  $         18,632.00
Mar-25             2,349  $             8.00 0.0833               166.32 20  $         18,792.00
Apr-25             2,369  $             8.00 0.0833               167.74 20  $         18,952.00
May-25             2,389  $             8.00 0.0833               169.15 21  $         19,112.00
Jun-25             2,410  $             8.00 0.0833               170.64 21  $         19,280.00
Jul-25             2,431  $             8.00 0.0833               172.13 21  $         19,448.00
Aug-25             2,452  $             8.00 0.0833               173.61 21  $         19,616.00
Sep-25             2,473  $             8.00 0.0833               175.10 21  $         19,784.00
Oct-25             2,494  $             8.00 0.0833               176.59 22  $         19,952.00
Nov-25             2,516  $             8.00 0.0833               178.15 22  $         20,128.00
Dec-25             2,688  $             8.00 0.0833               190.32 23  $         21,504.00
Jan-26             2,711  $             8.00 0.0833               191.95 23  $         21,688.00
Feb-26             2,734  $             8.00 0.0833               193.58 24  $         21,872.00
Mar-26             2,758  $             8.00 0.0833               195.28 24  $         22,064.00
Apr-26             2,782  $             8.00 0.0833               196.98 24  $         22,256.00
May-26             2,806  $             8.00 0.0833               198.68 24  $         22,448.00
Jun-26             2,830  $             8.00 0.0833               200.38 25  $         22,640.00
Jul-26             2,855  $             8.00 0.0833               202.15 25  $         22,840.00
Aug-26             2,880  $             8.00 0.0833               203.92 25  $         23,040.00
Sep-26             2,905  $             8.00 0.0833               205.69 25  $         23,240.00
Oct-26             2,930  $             8.00 0.0833               207.46 25  $         23,440.00
Nov-26             2,955  $             8.00 0.0833               209.23 26  $         23,640.00
Dec-26             3,131  $             8.00 0.0833               221.69 27  $         25,048.00

I hope you checked every cell of the above table 🙂 Long story short, based on this model, this snowball will worth USD 25k after 10 years and I will have nothing to do, just add 150 shares once a year. Sounds like a good deal for me.

Also let’s play with the thought what would happen if both the stock price and the dividends would increase or decrease +-5% annually over these 10 years. Putting the numbers into a chart, our snowball would look like this under the different scenarios:

dividend reinvestment compounding

Under the optimistic scenario the value of this investment would be increased from the initial USD 2,000 to more than USD 40,000. Look at that beautiful compounding effect on the blue line!

What is even more interesting to see is that even under the pessimistic scenario the value won’t decrease but increases up to USD 15k. Of course don’t forget that every year 150 extra shares are being bought, but our overall investment (excluding dividends received) was a bit over USD 11k, so it still means some profit.

Of course besides of these three scenarios there are endless options on both sides, like in a few years PSEC will take over the place of the World Bank, or the company will be wiped off during the next financial crisis and my dividend snowball will end up like the snowman I built last year:

Dividend drip

Sic transit gloria mundi

What do you think of my plan? Do you generally participate in dividend reinvestment plans or you prefer collecting cash as a dividend? Do you have some DRIP success stories or some failures that you always keep in mind as a lesson learned? Please feel free to share in the comment section!

 

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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.

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8 thoughts on “Dividend Snowball

  1. Divnomics

    Nice way of showing the power of compounding 🙂

    We don’t really use a dividend reinvestment plan, but do have 2 companies that pay out in stock dividend instead of cash dividend. All of the rest is payed in cash directly.

    Reply
  2. Mustard Seed Money

    I love DRIPs. My feeling is that if I bought a solid company I want to own more of it and basically DRIPs allow for a nice dollar cost averaging 🙂 I currently have all my dividend paying stocks in my Roth so I don’t have to pay taxes on it. But bottom line….yes I love DRIPs.

    Reply
    1. Roadrunner Post author

      Hi DIB, thanks for stopping by! Thank you for being critical, I’d actually like to get more critical comments for everyone’s (including my own) benefit.
      PSEC is definitely not the most solid dividend payer and cuts have happened in the past. But as a business development company it is required to pay out 90% of it’s income. We’ll see in February what will be the dividend amount during the next couple of months. A cut would mean a drop in the share price as well, so I’m hoping to still get at least 2 shares per month in the beginning. I’m planning to roll this snowball for many years and I’m sure there will be better and worse times. This method will deliver a nice averaging during both. The only problem would be if the company would get into a serious financial trouble which is definitely not the case now.
      Are you expecting a big cut from them?

      Reply
      1. DividendIncomeBuilder

        Hi Roadrunner,
        I don’t know the company so I am not equipped to say something about them in particular. It is just that a 12% yield seems almost too good to be true or sustainable. I hope for you that they will pay it for a long time. I myself only invest via ETFs, not individual companies.

        Reply
        1. Roadrunner Post author

          10+% yield was the standard for them in the last few years. It’s a business development company, so they’re also obliged to pay out most of their profit. It also means limited growth rate though. Let’s see what the future brings for them. Next dividend announcement will be in February.

          Reply

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