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The Ultimate Dividend Snowball! - YouTube
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[0]
welcome back to the longacres finance
[1]
channel you've probably heard of a
[3]
dividend snowball before i made a few
[5]
videos in the past showcasing some
[6]
pretty sweet real cases of dividend
[8]
snowballs i covered home depot lowe's
[10]
united healthcare tiero price and the
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popular monthly dividend reit realty
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income
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but today i want to talk about the
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ultimate dividend snowball
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not looking at the past but rather into
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the future
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and to be more specific i want to see if
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there are optimal dividend parameters to
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target that can maximize the benefits of
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a dividend snowball i considered various
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ranges of price appreciation dividend
[30]
yield and dividend growth these three
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factors are relatively within your
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control when you choose stocks to invest
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in or design a dividend portfolio and i
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want to reinforce the term relatively
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within your control
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because of course you can target a
[42]
specific dividend yield when you start
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investing but maintaining this target
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dividend yield over time can be
[46]
challenging the same goes for dividend
[48]
growth you can target stocks that have
[50]
historically grown their dividends at a
[52]
specific pace but there are no
[53]
guarantees that historical dividend
[55]
growth rates will continue in the future
[56]
for the sake of this example i will
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assume that we were able to achieve the
[59]
desired level of yield dividend growth
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and capital appreciation for a specific
[63]
period of time and it's really the time
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factor that plays the biggest role in
[66]
the dividend snowball if we look out
[68]
further into the future the results
[70]
become significantly better and
[71]
different to come up with the potential
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scenarios i wanted to look at five
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unique starting dividend yields ranging
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from one percent to five percent and
[78]
naturally as the dividend yield
[80]
increases we can expect to have a
[81]
smaller annual dividend growth rate and
[83]
slower share price appreciation
[85]
this of course is taken in average terms
[87]
of how dividend stocks have performed
[88]
historically so for the 5 dividend yield
[91]
portfolio i will assume a 3 dividend
[93]
growth rate and a 2.25 rate of capital
[96]
appreciation for the share price for the
[98]
4 dividend portfolio i will assume a six
[100]
percent dividend growth rate and a four
[102]
and a half percent rate of capital
[103]
appreciation for the three percent
[105]
dividend portfolio i will assume a nine
[106]
percent dividend growth rate and a six
[108]
point seven five percent rate of capital
[110]
appreciation
[111]
for the two percent dividend portfolio i
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will assume a twelve percent of in a
[114]
growth rate and a nine percent rate of
[116]
capital appreciation and for the one
[118]
percent dividend portfolio i will assume
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a fifteen percent evident growth rate
[121]
and an eleven point two five percent
[123]
rate of capital appreciation the rate of
[125]
capital appreciation for each scenario
[127]
was said to be equal to 75 percent of
[128]
the dividend growth rate to normalize
[130]
the results this way the parameters for
[132]
each scenario change by the same
[133]
relative amount there are multiple
[135]
benefits of a dividend snowball to grow
[137]
the market value of your invested
[139]
capital to generate a growing passive
[141]
income stream and to one day supplement
[143]
your regular active income or at least a
[144]
portion of it each of the five scenarios
[147]
will have a different path towards these
[148]
three objectives so let's take a look at
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the numbers and see which path is
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optimal for you based on your timeline
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i'll start with a relatively short
[155]
window of time five years and we will
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move out further five years at a time
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all scenarios assume that six thousand
[160]
dollars were invested annually into each
[162]
portfolio this is the current maximum
[164]
roth ira contribution amount for
[166]
individuals younger than 50 years old
[168]
using this annual contribution amount
[169]
and a roth ira portfolio we can
[171]
eliminate the burden of taxation on the
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final results so after five years the
[175]
one percent dividend portfolio with the
[177]
fastest dividend growth rate and capital
[178]
appreciation would have the highest
[180]
market value that market value would be
[182]
about seven and a half thousand dollars
[184]
without dividend reinvestment and about
[186]
thirty eight and a half thousand with
[187]
reinvestment the margin of difference
[189]
between the one percent dividend yield
[191]
portfolio and the remaining higher yield
[192]
portfolios is not significant the market
[195]
value for each higher dividend yield
[196]
portfolio would be lower by a few
[198]
hundred dollars as we move up in
[199]
dividend yield with the five percent
[201]
dividend yield portfolio having the
[202]
smallest market value of about thirty
[204]
one thousand dollars without dividend
[205]
reinvestment
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or about thirty four and a half thousand
[208]
with dividend reinvestment it's
[210]
important to notice that dividend ring
[211]
investment plays a much more significant
[213]
role in the higher yielding portfolios
[215]
the five percent dividend yield
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portfolio gains a 10.67 boost in market
[219]
value from dividend reinvestment while
[221]
the one percent dividend yield portfolio
[222]
only gained a 2.14 boost in market value
[225]
in terms of total dividends received the
[227]
five percent dividend yield portfolio is
[229]
a clear winner over this period of time
[231]
the portfolio would produce four point
[232]
seven thousand dollars of dividends
[234]
without reinvestment and about five
[235]
thousand with free investment as we move
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down in dividend yield the amount of
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dividend received falls by about one
[240]
thousand dollars with each percentage
[242]
drop in the dividend yield also the
[243]
amount of dividends paid in the final
[245]
year is quite different with the five
[247]
percent portfolio producing 1 787
[250]
in year five versus only 438 dollars
[253]
generated by the 1 portfolio clearly
[255]
over a short period of time such as 5
[257]
years there is not much benefit from
[258]
seeking a faster dividend growth rate or
[260]
faster capital appreciation especially
[262]
if your objective is to build a high
[264]
passive income stream let's move out to
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a 10-year period to see if the results
[267]
change
[268]
after 10 years the highest market value
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is once again generated by the one
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percent portfolio with the final market
[273]
value being a little over a hundred
[274]
thousand dollars and dividend
[276]
reinvestment accounting for a 5.9
[277]
percent boost to overall market value
[279]
the 2 portfolio has a market value about
[281]
ten thousand dollars lower than the one
[283]
percent portfolio or about six thousand
[285]
less with dividend reinvestment the
[286]
benefit of dividend reinvestment almost
[288]
doubled as we move out from a one
[289]
percent dividend yield to a two percent
[291]
dividend yield the three percent
[293]
portfolio market value is also about ten
[294]
thousand lower than two percent
[296]
portfolio and about six thousand lower
[298]
with dividend investment this pattern
[300]
continues as we move up the dividend
[301]
yield ladder with the five percent
[303]
portfolio having a market value of about
[304]
sixty six and a half thousand dollars
[306]
without dividend reinvestment and about
[308]
eighty four and a half thousand with
[309]
dividend reinvestment so after ten years
[311]
you'd have about twenty to forty
[313]
thousand dollars more in market value
[314]
with the one percent dividend yield
[315]
portfolio versus a five percent of an
[317]
yield portfolio depending on whether or
[319]
not you opted to reinvest evidence the
[321]
largest benefit from dividend
[323]
reinvestment is still achieved by the
[324]
five percent portfolio with the 27.39
[327]
boost to market value the level of
[329]
dividend income appears to be
[330]
distributed very similarly to the five
[332]
year investment period the five percent
[334]
portfolio would have generated about
[335]
eighteen and a half thousand dollars in
[336]
dividends without reinvestment and about
[338]
21.7 000 with reinvestment as we move
[341]
down the dividend yield ladder the total
[343]
dividends produced declined by about 2
[345]
000 without dividend reinvestment and
[346]
about 3 000 with reinvestment total
[349]
dividends received in the final year
[350]
year 10 are also quite different the one
[352]
percent portfolio would generate one
[354]
thousand four hundred and forty nine
[355]
dollars in dividends in year ten while
[357]
the five percent portfolio would
[358]
generate four thousand five hundred and
[359]
twenty dollars so the dividend income is
[361]
a little bit more than three times
[362]
larger between the five percent
[364]
portfolio and the one percent portfolio
[366]
but if we take a look at the four
[367]
percent portfolio the total dividends
[369]
paid in year ten are four thousand one
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hundred and seven dollars which is not
[372]
that much lower than the five percent
[373]
portfolio
[374]
in fact in the five-year time period the
[376]
difference between the dividends
[377]
received in year five between the four
[379]
and five percent portfolios was about 18
[381]
in year 10 however this gap declines to
[383]
just about 10
[385]
so what we can tell from this is that
[386]
faster dividend growth is bridging some
[388]
of the gap created in the amount of
[389]
dividends paid in the final year of our
[391]
time period but the benefit of dividend
[393]
reinvestment is still significantly
[394]
higher for higher yielding portfolios if
[397]
you have a 10-year timeline and your
[398]
objective is to maximize your dividend
[400]
income it still makes sense to target a
[401]
higher dividend yield let's move out to
[403]
15 years now and see what happens after
[406]
15 years the gap in market value
[407]
increases with the one percent portfolio
[409]
exceeding two hundred thousand dollars
[411]
both with and without dividend
[412]
reinvestment while the five percent
[414]
portfolio would have a market value of
[415]
about 105 000 without dividend
[417]
reinvestment or 157 000 with free
[420]
investment looking at the total amount
[422]
of dividends received our two highest
[424]
dividend yield portfolios are beginning
[425]
to converge the five percent portfolio
[427]
would generate about forty three
[428]
thousand dollars in dividends without
[430]
dividend reinvestment and about fifty
[432]
six thousand dollars with reinvestment
[434]
the four percent portfolio would
[435]
generate about forty one thousand
[436]
dollars in dividends without dividend
[438]
reinvestment and about fifty two
[439]
thousand dollars with reinvestment the
[441]
gap is still wide between the three and
[443]
four percent portfolio with about four
[445]
to eight thousand dollars less in
[446]
dividends depending on dividend
[447]
reinvestment the gap between the two and
[449]
three percent portfolios is even larger
[451]
at about seven to ten thousand and the
[453]
gap between the one and two percent
[454]
portfolios is about 11 to 14 000.
[457]
so even after 15 years small dividend
[460]
yields even with very fast dividend
[461]
growth cannot catch up to higher
[462]
dividend yield investments
[464]
looking at the amount of dividends
[465]
generated near 15 does shed light on a
[468]
few patterns that are continuing to
[469]
develop the gap between the one and five
[471]
percent portfolios has shrunk from more
[473]
than three times larger to about two
[474]
point three times larger this means the
[476]
one percent portfolio is catching up to
[478]
the five percent portfolio but it is
[479]
taking a very long time the gap between
[481]
the four percent and five percent
[483]
portfolios however is now very small at
[485]
just a little more than one percent if
[487]
you have a 15-year period to invest a
[489]
high dividend yield is still the optimal
[490]
path to maximize dividend income but the
[493]
margin between the four and five percent
[494]
portfolio is not significant and could
[496]
lead to about 12 percent more capital
[498]
with a slightly lower dividend yield
[500]
let's move out to 20 years now and see
[501]
how these scenarios change the market
[503]
value is once again the highest for the
[504]
lowest dividend yield portfolio and this
[506]
pattern will continue for a very long
[508]
time since faster capital appreciation
[510]
is the main driver here after 20 years
[512]
the difference in market value between
[513]
the one percent and 5 portfolios is
[515]
about 77
[517]
so it hasn't quite doubled yet but the
[519]
lower yielding portfolio would grow
[520]
about three quarters higher in total
[521]
value for dividend investment
[523]
in terms of total dividends received the
[525]
four percent portfolio surpasses the
[527]
five percent portfolio when dividends
[528]
are not reinvested by about two thousand
[530]
dollars with dividend reinvestment the
[532]
five percent portfolio remains the best
[534]
with about one point five thousand
[535]
dollars of additional dividend income
[537]
over the four percent portfolio looking
[539]
at the amount of dividends received in
[540]
the final year year twenty something
[542]
interesting happens here the four
[544]
percent portfolio is the best with
[545]
sixteen thousand four hundred and sixty
[547]
eight dollars paid in year twenty but
[549]
the three percent portfolio has also
[550]
surpassed the five percent portfolio
[552]
with sixteen thousand three hundred and
[554]
fourteen dollars paid in year twenty the
[556]
five percent portfolio would produce
[557]
only fifteen thousand two hundred and
[558]
thirty two dollars so the gap isn't even
[560]
that close anymore in fact the three
[562]
percent portfolio has not only surpassed
[564]
the five percent portfolio it is also
[566]
very close to catching up with the four
[567]
percent portfolio the two percent
[569]
portfolio has also experienced
[570]
significant growth with fourteen
[572]
thousand and twenty two dollars in
[573]
dividends paid in year twenty the gap
[575]
between the 2 and 5 portfolios in terms
[578]
of dividends paid in the final year has
[580]
decreased significantly between 15 and
[582]
20 years from about 39 to about eight
[584]
and a half percent this tells me that if
[586]
i have a 20-year time horizon perhaps
[588]
the highest dividend yield isn't the
[590]
optimal path to take the three and four
[592]
percent portfolios would generate better
[593]
dividend streams after 20 years driven
[595]
by faster dividend growth rates and the
[597]
higher capital appreciation will lead to
[599]
about 18 to 30 percent higher market
[601]
value over the 5 portfolio the one
[603]
percent portfolio would generate the
[604]
highest market value hitting about four
[606]
hundred and seventy thousand dollars
[607]
with dividend reinvestment compared to
[609]
just two hundred and sixty four thousand
[611]
for the five percent portfolio
[613]
but in terms of total dividends received
[614]
and dividends paid in the final year it
[616]
is still lagging significantly producing
[618]
just nearly half the dividend income in
[620]
year 20 compared to the 4 portfolio
[622]
jumping ahead to 25 years the same
[624]
patterns continue to develop market
[626]
value is still the strongest for the
[627]
lower yielding portfolios with faster
[629]
capital appreciation the level of
[631]
dividends generated moved closer to the
[632]
middle with the three and four percent
[634]
portfolios producing the most dividends
[636]
dividends produced in the final year are
[638]
now led by the three percent portfolio
[639]
that has surpassed the four percent
[640]
portfolio and the two percent portfolio
[643]
has now moved ahead of the five percent
[644]
portfolio and generates about five
[646]
thousand dollars in additional dividends
[647]
in your 25. so if your time horizon is
[650]
25 years targeting a dividend yield
[652]
closer to 3 may be the optimal path to
[654]
take jumping another 5 years out to a
[656]
30-year time period the 1 to 3
[658]
portfolios have now grown to over one
[660]
million dollars with dividend
[661]
reinvestment the four percent portfolio
[663]
is close at nine hundred and eighteen
[664]
thousand with the five percent portfolio
[666]
left in the dust with a market value of
[668]
six hundred and seventy thousand
[670]
without dividend reinvestment the five
[671]
percent portfolio now has generated the
[673]
smallest amount of dividends with
[675]
dividend reinvestment it is still ahead
[676]
of the one percent portfolio but fails
[678]
to beat the two three and four percent
[680]
portfolios the optimal dividend income
[682]
path now slides somewhere in between the
[683]
two and three percent portfolio
[685]
something else to note here is that each
[687]
time we move out another five years into
[688]
the future the dividend income for the
[690]
final year has just about doubled the
[692]
three percent portfolio paid about
[693]
thirty three thousand dollars in
[695]
dividends in year twenty five and in
[696]
year thirty it paid about sixty six
[698]
thousand dollars so by just extending
[700]
your timeline an additional five years
[702]
can lead to a drastic improvement in
[703]
final results
[704]
jumping another five years out to a
[706]
35-year timeline now the one percent
[708]
portfolio market value nearly doubles
[710]
from 1.7 million to 3.4 million with
[712]
dividend reinvestment in fact the two
[714]
and three percent portfolios would now
[716]
both have market values above two
[717]
million dollars with the four and five
[719]
percent portfolio surpassing one million
[721]
dollars the three percent portfolio
[723]
would still have generated the most
[724]
dividend income with reinvestment now
[726]
surpassing a million dollars of
[727]
dividends the two percent portfolio
[729]
would generate the most dividends in
[730]
your 35 just north of 145 000 of
[733]
tax-free dividend income
[735]
another interesting thing that happens
[736]
after your 35 is that the dividends
[738]
produced in year 35 for the one percent
[740]
portfolio are higher than the 5
[742]
portfolio and the four percent portfolio
[744]
so after 35 years high dividend growth
[746]
has finally paid off although sustaining
[748]
high dividend growth for 35 years is not
[750]
an easy feat to achieve and just in case
[752]
there are any 20 year olds out there
[754]
let's look at a 40-year time horizon
[756]
after 40 years the 1 portfolio market
[758]
value doubles again to about 6.8 million
[760]
the 2 portfolio would be worth about 5.7
[763]
million the 3 portfolio would be worth
[765]
about 4.1 million the 4 portfolio would
[768]
be worth about 2.7 million and the 5
[771]
portfolio would be worth about 1.6
[772]
million quite a large difference between
[774]
the five percent and one percent
[776]
portfolios with dividend reinvestment
[778]
all five scenarios would now have
[779]
generated more than one million dollars
[780]
in dividends over this 40-year period
[783]
the two and three percent portfolios
[784]
would both even surpass two million
[785]
dollars and generate a dividend income
[787]
the two percent portfolio is the clear
[789]
winner in terms of dividends producing
[791]
the highest dividend income with or
[792]
without dividend reinvestment and also
[794]
generating the highest dividend income
[796]
in year 40 of 328 thousand dollars which
[799]
is significantly higher than the three
[800]
percent portfolio that would generate
[802]
two hundred and seventy nine thousand
[803]
dollars and the one percent portfolio
[805]
that would generate two hundred forty
[806]
nine thousand dollars the four percent
[808]
portfolio would generate 188 thousand
[810]
dollars and the five percent portfolio
[812]
would generate only 108 000
[814]
so perhaps if you are looking at a very
[816]
long time horizon chasing yield is not
[818]
the optimal path to take over such a
[820]
long period of time targeting a one to
[821]
three percent dividend yield with high
[823]
dividend growth can lead to
[824]
significantly better results each of
[826]
these examples was conducted under fixed
[828]
conditions and it would be virtually
[829]
impossible to follow such strategy your
[831]
dividend snowball journey will likely
[833]
move between different ranges of
[834]
dividend yield and dividend growth but i
[836]
want to wish you the best of luck on
[837]
your journey and remember patience and
[839]
consistency are the keys to success with
[841]
dividend investing if you enjoyed the
[843]
video please give it a like and
[844]
subscribe to the channel for more
[845]
content thank you for watching and see
[847]
you next time
[849]
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