A 5 Step Method To Achieve Financial Freedom Through Dividend Investing

Print Friendly, PDF & Email

Dividend investing has gotten a lot of press in retirement arenas.  In short, it’s focusing your investments on dividend generating assets, with the goal of creating a dividend stream sufficient to fund your retirement lifestyle.

Is Dividend Investing a viable option to achieve Financial Freedom? Today, @millionairemob2 tackles that question. Click To Tweet

Since I was traveling to my Mother-In-Law’s funeral last week, I’ve asked my friend at Millionaire Mob to explain his 5 Step Method To Achieve Financial Freedom Through Dividend Investing.  Why Millionaire Mob?  As a former investment banker, his website specializes in helping folks “better their financial future through passive income, dividend investing and travel hacking”.  Decide for yourself if dividend investing is a viable approach for your retirement investment strategy.

Take it away, MM!

Dividend Investing My Way to Retirement

Dividend investing is one of the best ways to capture wealth accumulation over time. The long-term benefits of dividend growth are largely due to the ability to maximize long-term returns through “Compounding – The Most Powerful Force In The Universe”.

I’ll highlight why I am following my five-step method to achieve financial freedom through dividend growth investing and why you should consider it too. My goal is to live off dividends by achieving a six-figure income and a million-dollar portfolio.

What is dividend investing?

Dividend investing is the process of investing in a criterion of dividend-paying stocks. The goal is to target stocks that increase their dividends over time. For the initial portfolio value building stage, you will reinvest all dividend income back into your portfolio of stocks either manually or through a dividend reinvestment plan.

The benefits of dividend investing include:

  • The ability to kill two birds with one stone: You receive dividend income AND save for retirement. Imagine receiving a hefty dividend check into perpetuity or you can sell down your portfolio to fund living expenses as a backup solution.

  • Unlimited residual value potential: As a contrast to index investing, dividend investing offers unlimited upside potential with your holdings. One stock that goes on a torrid pace of growth in the future can help you achieve your retirement goals. You don’t need all stocks to outperform, all the time. Index investing you are safe and sound. However, annual increases are not at your own discretion.

  • Compounding Growth: Dividend investing helps you address compound interest in the best form. By reinvesting every dividend check received, you buy even the slightest decreases in the stock price of your holdings. These small dips add up over-time and you position yourself for outstanding total return potential.

  • Financial flexibility: With dividend investing you single-handedly craft your own portfolio. That can’t be said with index investing. I love positioning myself to certain sectors that are more attractively priced than others. With index investing, you don’t have that discretion. You are wed to the overpriced technology stocks that make up the most well-known index (S&P 500).

  • Institutional investors love dividend paying stocks: Dividend stocks usually have a nice valuation floor since a number of institutional investors love the income plus capital appreciation component to dividend-paying stocks. They typically are viewed as the ‘smart money.’ If a high-quality dividend stock decreases in value, it is usually the institutional investors gobbling up more shares.

These core benefits are fundamental points in my philosophy and approach to dividend investing. It is really quite simple:

  1. Invest in quality.

  2. Take advantage of compound interest.

  3. Minimize downside while maximizing upside. This can be done by investing in undervalued dividend stocks.

  4. Diversify by building a core income-generating portfolio.

Let’s get into the plan of it all…

My approach to achieving financial freedom through dividend growth investing

I have a unique approach to dividend growth investing that I hope to follow along for the foreseeable future. I ran the specific numbers on my approach and I should be able to achieve financial freedom by following the plan. The plan includes the following assumptions:

  • Receive an annual dividend yield of 3% on your portfolio

  • Stock appreciation of 6% per year

The Five Step Method To Achieve Financial Freedom Through Dividend Investing

  1. Start out by contributing $200 per month to your dividend growth portfolio

  2. Increase your annual contributions by 25% each year

  3. Reinvest all dividend income back into the dividend growth portfolio

  4. Invest in high-quality stocks that enable you to achieve an annual 6% growth rate in your equity value

  5. Rinse and repeat steps 1-4

Below is a graphic from the Millionaire Mob Dividend Calculator which summarizes the impact:

In the first line, you can see the $200/month resulting in $2,400 of contributions in the first year.  If you maintain the 5 steps outlined above, your portfolio will hit the $1 Million threshold in Year 16.  As you continue to follow the plan, your nest egg grows to $3 Million by Year 20 as the power of compounding begins to significantly impact your portfolio.

If you’re uncomfortable with the 25% increase in annual contributions, or would rather start with a figure other than $200/month, you can rerun the calculator using my Dividend Calculator to project future portfolio outcomes with various input assumptions.

When developing your financial plan, evaluate whether you have debts that need to be extinguished first, and adjust your investment contributions accordingly. I like to eliminate debt that has an interest rate of 4.5% or higher. Overall, the long-term stock market returns are 6-9% annually, so my preference is to de-prioritize paying off lower cost debt and put my money to better use in dividend-paying stocks.

What Are The Downsides Of The Plan?

There have got to be some downsides to this! It sounds too good to be true.

Yes, there are certainly downside considerations to consider relative to other strategies. Here are some considerations regarding building a dividend portfolio to achieve retirement:

  • There are certainly tax considerations with dividend growth investing as the dividend income received is likely taxed at a higher rate than index investing. Caveat empire though! If I do retire early, my annual income will be much lower than what it is today thus reducing my effective tax rate and enhancing the after-tax dividend income.

  • You must increase your income to continue pace with the annual contribution increases. Increasing your income is paramount… For those young ones out there, stay focused on your career and find other income streams that can be reinvested early.  If you can’t maintain the 25% annual increase in your savings rate, your timeline to Financial Freedom will, obviously, be longer than the scenario presented here.

  • Picking stocks can be difficult. However, if you stick with strict criteria and limit transaction fees by paying zero-commission trading this can be easily mitigated. Check out our infographic on how to build a dividend portfolio. This should help with your initial portfolio construction.

Conclusion on Dividend Growth Investing

Dividend growth investing should never be the end all, be all solution to your retirement goals. I am very fond of a dividend growth investing solution due to the unique characteristics of income plus growth when investing. However, my dividend growth portfolio is additive to my current pre-tax retirement accounts. I continue to contribute the maximum allowed amount to my 401(k) and the maximum amount to my Backdoor Roth IRA.

I am deploying a dividend growth strategy in my after-tax accounts since I want to retire early. I don’t want to depend on tapping into my pre-tax retirement accounts early. I was fortunate enough to extinguish my debts besides my student loans, so I am focusing on increasing my income and reinvesting all income into my dividend portfolio.

Dividend growth investing is not for everyone. However, it is an awesome opportunity to build a portfolio from the ground up at an early age. With my 20-year plan, a 20-year-old can safely retire at the young age 40 solely by following my steps outlined above. Start early and execute the plan.

In the meantime, go out and enjoy yourself. Travel the world and live in the moment.

Are you ready to start your dividend investing journey? Let me know in the comments below. I’d love to hear from you and address any comments or concerns.

Author Bio: Millionaire Mob is where people come together to find the best travel deals and financial advice. We specialize in dividend growth investing, passive income, and travel hacking. Our advice has helped thousands to travel the world and achieve financial freedom. Follow me on TwitterFacebook or Instagram. Want to know our stock picks in real-time? Follow us on Stocktwits too!


  1. When you receive a $2 dividend on a $100 stock, it is essentially moving $2 from your right pocket to your left.
    Now you have a Stock worth $98 and a taxable event. Not exactly “compounding.” In addition, high dividend Stocks are dangerously undiversified. Why restrict myself to large Value?
    The desire for dividends is largely behavioral. High dividend Stocks can and do go down.

    1. I wouldn’t focus on high dividend yield stocks at all. I actually advice against it. The compound interest doesn’t come from the stock itself but rather your portfolio. With dividend growth investing you receive compound interest through a variety of ways:

      1) The growth in dividends over time from the company
      2) The reinvestment of every dividend check received. Stocks can dip in small increments over time. If you are reinvesting your income in these small dips, they all add up over time. If you have a basket of 20 dividend stocks, you are consistently receiving dividends and investing in stocks on small dips.

  2. The title of the article should have read “invest an average of $50,000 per year and you too will have a multi million dollar portfolio in 20 years”.
    Yes I know he said you can invest less but I just do not like to read article that use such extreme numbers to make their point. Also he could have thrown in a few of his favorite companies.
    Thanks for the article.

    1. Hey Rick – Appreciate the feedback. A couple of stocks that I like are:

      AFL – Aflac: Recent stock split, attractive valuation, understandable business model and an outstanding industry reputation.

      GIS – General Mills: Strong track record of dividend increases, understandable business model and products and a very attractive valuation. I can get a 4.6% dividend yield while waiting for the valuation to approach fair value.

      I actually share my portfolio updates on my site, so you can see what stocks I’m invested in.

  3. When I first began investing outside of my 401K, I read “The Future for Investors — Why the Tried and True beat the Bold and New”. I doubt many index fans have read it, and being published in 2005 might seem dated. Yet that is actually the point. A professor at Wharton, he had his students go back to the Dow stocks from 50 years back, even the ones now bankrupt. He found that if you both the individual stocks then and never sold, the gains of appreciation and dividends beat the current Dow. He repeated this study in different ways. People think that if you own a stock of a bankrupt company, you end up with zero, but you get the stock of those spinoffs or the ones that purchased it. The “losers” do better because they are underpriced.

    While I do some individual stock investing myself, I really can’t recommend it to others unless they have both the time to “invest” and the contrarian attitude.

    1. I sure did not get anything when Washington Mutual, the largest bank in America at that time went bankrupt in 2009. Also all those at Enron did not get anything either.

    2. I surely did not get any money or new shares of a company when Washington Mutual the largest bank in America went belly up in 2009 and those investors in Enron did not see a penny. I do not thing investors in Sears are going to see a big payday anytime soon.

  4. Interesting. I have always been curious about dividend investing but never jumped in. Any good guides you recommend (other than your website)… I have always been concerned about the tax implications too. As a high earner, I am always trying to minimize my income/dividend taxes.

    1. I’m a high earner too, but I like to think that if I retire off dividends that my sole source of income will be much lower and I will be tax efficient since taxes on dividends are much lower.

      Other guides are DividendGrowthInvestor.com, Simple Investing ebook, the book Intelligent Investor by Benjamin Graham and of course, Warren Buffett.

  5. i look at a lot of stocks and own a lot of stocks and here’s my takeaway. the better dividend growers usually yield closer to 2% and in 5-7 years the yield will have about doubled and your yield on cost basis is closer to 4%, but you have to wait for it. if i went out right now and got a bunch of 3+% yielders i fear the share price might be flat to decreasing. that’s just my food for thought. 200 grand contributed in year 20?

    good luck with the master plan. now i gotta go see what you own.

    1. Yeah, $200,000 contributed in year 20 is very aggressive. I agree. However, it shows the importance of increasing your income over time. That I why I provided the dividend calculator, so you can sensitive growth assumptions in your contributions, dividend yield, etc. Set a realistic plan that works for you. Thanks for stopping by!

  6. First of all, let me say I enjoyed “running the numbers” on your calculator. It’s a very helpful tool and easy to use. I found the results fascinating, even with less optimistic assumptions and much smaller annual contributions.

    For me (already retired but looking ahead 20 years), I’ve been wanting to put something into place that could give me additional income in my “old” old age. Already have index Realistically, my annual contributions would never top 10K, so I’d never collect tens of thousands from dividends. But so what? I don’t need a million-dollar dividend portfolio to help cover expenses. Even $300,000 or so would be helpful. Your calculator shows that number’s within reach.

    Thanks for taking the time to share this idea.

    1. Thanks Ann – that’s so great to hear! I’m glad you found it useful. It can be used in a variety of ways, not just for dividend investing. Appreciate you stopping by!

  7. 1/3 to 1/2 of returns comes from dividends. The balance comes from price appreciation.

    By focusing on dividends and dividend funds, you lose focus on 50-67% of stocks that do not pay a dividend but do/will appreciate.

    The Total US Stock index pays a dividend. So does Total International Stock index. But, they also have all the other stocks.

    Many try to avoid dividends due to the tax drag.

    Total Return (appreciation + interest + dividends) is the magic. If you focus on one, you cannot focus on the others. Be diversified, take the dividends, pay the tax and stick to total market approaches focusing on very low cost, tax efficiency and the correct mix of stocks and bonds.

    Thanks for the post

  8. I started buying stocks in 1988 with MCD JNJ MO BUD with their DRIP plans. 30 years later with 50+ different stocks later I have the returns your talking about 🙂

    Great Article and it works!

  9. Thanks for the post. I see the value in receiving regular dividends but there is always risk that those can stop in times of economic pressure.

    The bigger risk is the individual stock itself. You do note to invest in “high quality stocks that grow.” The high quality part is important. Investing for dividends and growth is not a Ron Popeil ‘Set it and forget it” thing. You need to keep tabs on the strength of the company behind the stock to ensure that your investment does not end up going south and losing more value than the dividend streams.

  10. Thanks for the awesome plan.
    Note how much of the money comes in the last 2-3 years. It does take money to make money. Still, there is no better time to start than now.
    When I write about dividends I usually get ridiculed for how naive I am. I’m told I don’t understand asset assessment, taxation, etc.
    Okay, that probably is all true. All I know is my dividend income each year is more than I spend every year. I won’t have to sell any assets or stress about selling after a market crash. I just cash checks. I will consider my naivety in detail as I stroll off to the pool and my critics’ stress over morning traffic.

  11. The Dividend Calculator spreadsheet wasn’t marked as readonly, so its had a number of breaking edits from anonymous users. You should reset it in version history and then mark it as read only.

    1. Apologies for that, MW. I saved a version on my drive for folks to use without having to save a copy, figured they could go to the MM link if they had an issue. I’ve restored it to it’s original version, thanks for pointing it out!

  12. Excellent post, I too subscribe to dividend investing, and I like to use Etrade and TD Ameritrade because it puts the control in my hands, not a brokers. Also, Dividend Investing is great for Dollar Cost Averaging, reinvesting those dividend payouts only brings your average cost down, I like to see that. Great Post!

  13. The main problem with dividend investing is that it isn’t necessarily secure. Dividends don’t necessarily keep up with inflation and can be easily cut altogether. Additionally, it’s possible that your capital can deteriorate despite the dividend yield being high.

  14. I started investing in stocks that pay dividends in 2011. I focus on companies with a moat, that have paid dividends for a longer period, and that increase their dividends each year. If a company cuts their dividend, I take all the emotion out and sell that stock and reinvest in another company that is trading lower that increases their dividends. It is quite amazing when you reinvest your dividends and continue to buy into growing companies how fast your annual dividends can increase. I now collect just over 17,000 in dividends annually. This number is up from 14,300 a year ago and about 10,000 a year before that. I diversify into about 45-50 different stocks.

  15. FYI, approximately 57 percent of the dividend aristiocats greatly reduced or eliminated their dividend payments in the year(s) following the 2008 crash.

    1. +Well, you shouldn’t have been invested in stocks that didn’t have a cushion on the payout ratio. I prefer low payout ratio dividend stocks. I’m not paying for yield. I’m paying for dividends plus growth. A payout ratio so favorable that it could even withstand a recession.

  16. If I take long term capital gains, I can make “synthetic dividends” from my portfolio anytime I want/need.

    I continue to state that dividends produce no increase in Wealth and have nothing to do with “compounding.”

    The desire for dividends is a behavioral issue, it confirms to the investor that “I made the right decision”, when you didn’t.

    1. Synthetic dividends, huh… So when you take your long-term capital gains, did you make the right decision? Is that ALWAYS the right decision?

      You own less than what you did yesterday. By owning attractively valued dividend stocsk, I’m always taking money off the table AND I still own the same % of a company. Combine that with buybacks and there’s times I’m internally compounding and my ownership is increasing.

  17. No matter how many times I look at a graph of compound interest I am amazed. The plan you laid out is perfectly doable. I only make 40k and I can probably afford to set aside $200 a month. And in 20 years I’ll be a dividend millionaire! I love it!

  18. Millionaire Mob, what’s your take on doing something as simple as changing my Vanguard Roth IRA investment into their Dividend ETF, reinvest dividends, and let that sit for 10 or so years just adding the yearly contribution max ($6500) to it every year. Seems like getting those dividends tax free in the Roth would be very powerful. Thanks for the guest post!

Comments are closed.