March 2011 Dividend Income Update

I don’t know about you, but I believe the cost of energy and other essential services are only moving in one direction.  For example, we’re paying over $100 per month in Enbridge gas bills right now.  What will the cost of natural gas be in another 30 years? What will our hydro cost in another 30 years? Triple the price? Property taxes are only going up. Our insurance premiums have only one direction to go as well. Oh yes, not to mention, we need to eat and we haven’t even driven in our car anywhere yet.

The cost of goods and services are not going to decline over time. With the talk of inflation on the horizon, rising energy and living expenses are fairly predictable down the road in my opinion. That’s why I’m investing in dividend-paying stocks now.  I predict these companies are going to provide me with the extra ammunition I’ll need to combat our financial needs of the future.

Take our holdings in Enbridge for example. We own this company because they pay a dividend; they reward us for being a shareholder. They are Canada’s largest gas distribution utility who serve almost 2 million customers who need gas (like us to live). Enbridge (ENB) has been in operations for over 160 years and for the last 58 years, they’ve paid shareholders. Their annualized dividend has grown from $0.0075 to $1.96 per share, an average of 10% per year. They currently pay a dividend of $0.49 per quarter. With just over 100 shares to our names that’s about $200 per year in dividend income ($0.49 * 4 quarters * 100 shares). Using Enbridge as just one dividend-paying example, I’ll use some conservative data. If you:

• Bought 100 shares of ENB today,
• At $60 per share,
• Assuming the stock price would grow at 3% (kept pace with inflation),
• Assuming the dividend would grow at 5% (much less than above),
• Assuming the dividend yield would stay around 3% (just lower than today), AND
• You sat around and did nothing for 30 years…

…that $6,000 investment would balloon to about $50,000.

While the value of your Enbridge investment grew more than 8 times over that period, more importantly your share ownership would grow more than 3 times: your original 100 shares would be 327 shares if you reinvested all dividends paid.   Note:  Current dividend income without any reinvestments from 100 Enbridge shares @ ~ $60 per share is $196.00 per year ($0.49 dividend per share * 4 quarters * 100 shares).

But what if I used Enbridge’s data: annualized average dividend growth of 10% per year?

The value of your investment would be 41 times larger over that period and your share ownership would be over 1,300 shares.   In fact, what is more mind-boggling, your share value today of $6,000 would skyrocket to almost $250,000 in 30 years with all dividends reinvested!!!!!!!!!

Computational Notes:
i) The total value with dividend reinvestment equals the final stock price multiplied by the sum of the initial number of shares plus all dividend reinvestment shares. The number of shares is the initial number of shares plus all the shares purchased with reinvested dividends.
ii) The dividends paid with dividend reinvestment is the sum of yearly dividends paid on the initial number of shares and the reinvested dividends shares.

 Will our dividend-investing strategy work?

It should because dividends don’t lie. Companies like Enbridge who can afford to pay shareholders are typically established companies that aren’t going anywhere. Enbridge hasn’t gone anywhere for 160 years. Year to date, Enbridge and a dozen other dividend-paying companies have paid us about $1,000 in income and we’re projecting to earn about $4,400 in total for the entire 2011 calendar year. This certainly isn’t get rich stuff, but it’s our start.  Our plan is to use dividend-paying companies to supplement other tactics that make up our retirement plan because of the safety and income security they provide.  Like you we have RRSPs but they are most compromised of indexed products.  Our other angle of attack is to buy and hold good to great companies since they pay us to own them. After some further education on this topic in recent years I figure I might as well buy these types of companies. I’m consuming their services after all.  Now, I’ve learned I can get a tax advantaged kick-back.  When our Enbridge gas bill hits $200 per month in 5 years and maybe even $300 per month in another 10-20 years, I might just use my Enbridge dividend income to pay the thing off 🙂

Have you started to include dividend income as part of your retirement plan?  Why or why not?

Share your thoughts!

11 Responses to "March 2011 Dividend Income Update"

  1. @Anonymous – Thanks for your comment. The calculator I used calculated the total number of shares (327) from the initial number of shares (100) plus all the shares purchased with reinvested dividends. It also included 5% compounded growth. Potentially where the error lies, is a) in my example and b) in how the calculator tabulates things.

    a) I stated ENB is paying $0.49/quarter, which is true, but that was not the yield I used in my calculation.

    If I replace 3% with 3.2% (actual Enbridge yield today) I get the following:

    After 30 years with 5% dividend growth = 353 shares.

    After 30 years with 10% dividend growth = 1630 shares.

    Kinda amazing that 0.2% extra yield over 30 years can generate more than 300 shares of stock 🙂

    b) Potentially where this calculator is misleading, it calculates dividends paid with dividend reinvestment as the sum of yearly dividends paid, not quarterly as described in my example. I have amended my post for this to be more clear. Yearly dividends paid would certainly "slow" the dividend compounding machine. That is never good 🙂

    Thanks very much for your comment, I appreciate the details which will be used to update my post.

  2. Your dividend payments after 30 years would be much higher that you describe. In your first example with 5% dividend growth, you calculate the payout as $0.49/q*4q*327 shares =~$640/yr. The mistake you made is that $.49/q is today's payout, not the future payout. With 5% compounded growth for 30 years the payout would be in the range of $2.10/q so those initial 100 shares @ $60/share with 30 years of DRIP are now paying out over $2700/yr or in other words an annual payout of ~45% of your initial $6000 investment.
    At 30 years of 10% dividend growth the numbers get a little silly (but we can dream can't we!). With 10% dividend growth for 30 years the annual payout will be ~185% of the original $6000 investment (over $11k/year).
    That should fund the odd cruise in our retirement years – even after factoring in inflation…

  3. @paul – I disagree with Mr. Pape: just because dividends haven't been increasing all over the place doesn't mean you should avoid dividend-paying stocks. While it would be nice if SLF, BMO, CM and others I own would increase their dividends, I'm holding these guys all the same because I'm getting paid to do so, in some cases, tax-free money.

  4. @paul – I read the same article I think:

    Basically what I inferred from the article is this:

    If companies pay less tax, investors will get a lower tax credit for their dividends because dividends are paid from after-tax earnings.

    My understanding is the same, the tax saved by the business is paid for by higher taxes (less tax credit) by shareholders (stocks you and I own).

    Not that this is the only reason, but for me it's making more and more sense to hold my Canadian dividend-paying stocks in my TFSA. I wrote about my strategy a few posts ago:

    Thanks for stopping by Paul!

  5. @DIY Investor – good to know; you use dividend investing for some of your clients needs. I just love the idea, down the road for me, of taking the dividends in cash but hopefully never touching any principle/selling any stock.

    I'm striving for an overall yield from my dividend-paying stocks of about 4%. My RRSP is yielding about 3%, my tax-free savings account about 4% and my unregistered portfolio, just over 4%.

  6. @Andrew the Millionaire Teacher – thanks!

    I think Enbridge is a great company but KO is even better. Dividends for well over 100 years; wow! Gotta love being an owner of that stock 🙂

  7. Great article. I wholly believe the dividend-growth strategy works, and am going to bet the next 12 years of my life on that belief…living frugally and maximizing my dividend-growth investments. I think if you follow a plan and stick with it, you really can't go wrong. Always do your due diligence and always monitor your positions!

  8. There was an article about dividends in the Toronto Star just yesterday from Gordon Pape. I had wondered if anyone saw that.

    He mentioned that the tax cuts given to business over the last years and the ones to come in 2012 directly affects the tax on dividends for shareholders. The tax saved by the business is paid for by higher taxes on shareholders. Secondly he mentions that many dividends have been cut or held steady in the last year making it less attractive to purchase dividend stocks.

    Could anyone with more insight to this then me please comment or explain this?

  9. I do use dividend investing for my retired clients. They can take up to 4% a year of their nest egg adjusted for inflation. Our plan for weathering market downturns requires that the portfolio throw off at least 60% of their income needs in dividends and interest to avoid a reverse dollar cost averaging situation. This means the overall yield of their portfolio needs to be at least 2.4%.
    An increasing dividend and/or share price is a gift in this situation.

  10. Good post Mark:

    It looks like a great business. I was recently reading that Coca Cola has paid a dividend since 1896. How amazing is that?

    I'd like to live to 100, live off my dividends after the age of 55, while working part-time, if I choose to work. OK, maybe the age part is pretty ambitious, but the dividends…less so.

    I like the way you and Passive Income track your dividends. It inspires others, I'm sure. keep up the great work!


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