Can you earn $4000/year in dividends with only $25K invested?
Reading time: 4 minutes
How can you earn $4,000/year with only $25,000 invested? If the average dividend yield for blue-chip stocks is around 2%, a quick calculation would tell you that you need at least $200,000 in order to make $4,000/year in dividends, here's the quick math:
$200,000 x 2% = $4,000
Therefore, how can you earn $4,000/year with only $25,000 invested? Keep reading on how this is possible.
Two things are important
When it comes to dividend investing two things are important:
- the amount of time you stay invested, and
- dividend increases
When you combine both time and dividend increases the results can be phenomenal.
Dividend increases are outside of your control, but you can look at history as your guide, Take a look at these 5 companies:
You can see from the table above that these companies have been paying dividends for more than 49 years, and they have been increasing their dividends consecutively for over 48 years.
More money in your pocket
Each dividend increase puts more money into your pocket. Remember dividends are deposited as cash into your trading account, you can spend the money if you wish or re-invest it.
Time + Increasing Dividends
Now, let's see what happens when you combine time (in this example 25 years) and dividend increases. As you can see in the table below, a total of $24,999.76 was invested 25 years ago in 5 companies. Today those 5 companies are generating over $4,000 in dividends each year. This means every 5 years you would earn $20,000 in dividends.
Since these 5 companies have a history of increasing dividends, its very likely that next year that this portfolio would generate more than $4,062 in dividends, and more in future years.
16.2% Annual Return
In order to calculate the return on this initial investment you simply take the annual dividend income and divide it by the amount invested:
$4,062.40 / $24,999.76 = 16.2%
You read that correctly, that's an annual return of 16.2% just for holding on to those shares regardless of what happens to the stock price or the stock market. You cannot earn 16.2% return on your money today with bonds, term deposits, or in a savings account.
When is comes to dividend investing it pays to be patient. Remember time and dividend increases will put more money in your pocket. That's why its important to invest sooner than later. Your future self 25 years from now will thank you for the investing decisions you make today.
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