As outlined in my dividend retirement plan, my ultimate goal is to reach financial independence. This would be achieved at the so called dividend crossover point, which is the point at which dividend income exceeds expenses. Achieving this long-term goal however takes time, patience and persistence in sticking to and executing your plan. It helps to break down the long-term goal into a plan with achievable and actionable steps.
For example, if you goal is to retire in 10 years, the sub-steps could include achieving a 10% coverage of your target income in year 1, 20% in year 2 etc. It is also important to readjust your plan accordingly, and be realistic about the external environment. For example, if hitting your target requires you to invest in dividend paying stocks yielding 4%, when the quality income stocks pay only 3% on average, you need to account for that. On the contrary, if you manage to receive a large lump-sum to invest (bonus or inheritance), and you are now 15% closer to achieving your goal instead of 10%, you need to readjust your goals for next year.
One of the goals for my income portfolio is achieving a 6% annual organic dividend growth. This growth ignores the effect on dividend income of reinvestment and addition of new funds. I usually look at the portfolio composition at the end of the prior year, and calculate the estimated dividend income for the new year. I then compare the estimated income for current year, to the estimated income for new year and check to see if I have achieved my goal. I believe that a 6% goal in average dividend growth is achievable, as it is only about 0.50% more than the long-term average dividend growth in the Dow Jones Industrials Average index. This is an important metric, because once I retire, I would need to have my dividend income safely increase above the rate of inflation, in order to keep its purchasing power over time. In 2012, my dividend income grew by 7.10%. Of course, my total income increased faster than that because I reinvest dividends and also add new funds to my portfolio.
My income goal is to reach a 60% dividend income replacement ratio. This means that my dividend income would cover roughly 60% of my expenses in 2013. In 2012, the percentage was roughly 50%. I do not speak in numbers in order to avoid extra unnecessary confusion. If my target monthly income was $10,000, this would cause discussion that this is too much, and is not realistic. The discussion would go in the direction that I need to spend less. If my target monthly income was $1,000, then the discussion would go in a way that this income is not sufficient for someone to live on. After all, these are my numbers, so the numbers that would work for you are much different.
The interesting thing about dividends is that they are not typically paid evenly every month, which is OK This is why, when I discussed in an earlier article my dividend crossover point, my income seemed to exceed 60% of expenses in several months of the year. However, these are typically the months of November, August, May and February, when my Master Limited Partnerships pay their generous distributions.
In summary, my goals for 2013 are part of a long-term roadmap that would help me to reach out my long-term goal of retiring using dividend stocks. These goals will be achieved by owning qualirty dividend stocks which grow distributions by at least 6%/annually. The next two steps include reinvesting dividends selectively and adding new funds in attractively priced quality income stocks.