The Dividend Growth Investor blog has an interesting post about long-term dividend investing. His rule of thumb is that a dollar saved in your twenties will provide a dollar a year in your sixties:
I found that the average time it took a $1,000 investment to produce $1,000 in dividend income for a full year was 35 years. In other words if you contributed $1,000 towards your retirement by investing in a broadly diversified stock index fund when you are 23 in 2008, you would expect to achieve $1,000 in dividend income on average by the age of 58.
The chart below shows that the longest period to achieve the desired dividend income was 45 years, for those who started in 1928. The shortest it took to achieve $1,000 in dividend income from a $1,000 investment was only 27 years for those who started in 1941.
On a less positive note, the writer points out that US dividend investors have had to wait longer every year for their dollar return payout, due to decreasing dividend yields.
Regular readers will know I’m a big fan of dividend investing for UK investors; check out my High Yield Portfolio series. A portfolio skewed towards higher dividend-paying companies rather than the index used by the writer above should reduce the time you have to wait for the ‘£1 in/£1 a year out’ point to be reached, too, although don’t tell any Noble prize winning economists…
So, would the 20s/60s rule hold up in the UK? Intuitively, I suspect so, since UK companies pay a higher and more consistent proportion of their income out as dividends than any other major market in the world. However I haven’t done the maths to prove it. An interesting project for the future…
2 Comments
Monevator,
Thanks for featuring my article on your blog. I expect dividend yields to increase over the next decades so the time it takes for you to earn $1000 in income from $1000 will decrease.
I don’t know how this rule stacks up for UK equities though. I would imagine that since the long-term returns for UK and US stocks have been identical over the past 150 years this rule of thumb would be the same.
You know what’s really odd? In the two examples shown, the person starting in 1928 should have waited until 1941. Then they would have been done in 1968 instead of 1973.