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Building Our Dividend Snowball

{ 42 comments }

dividend snowballMost readers are probably familiar with the “debt snowball” method of paying off debt. Financial guru Dave Ramsey is an advocate of the system and you probably seen it at some point if you’re trying to pay off debts. Here is a quick recap.

  • List all your debt starting with smallest to largest.
  • Make the minimum payment on all the debt.
  • Make as much extra payment as you can on the smallest debt.
  • Once the smallest debt is paid off, then go to the next one.

As you pay off the smaller debts, you will have more money available because you will have fewer debtors to pay. In theory, as you reach the larger debt, the extra money available will grow; hence, the name because it is similar to a snowball gathering up snow as it rolls downhill. This isn’t the smartest method to pay off debt, but it works for many people because of the psychology behind it. You feel good when you eliminate one bill and it keeps you going.

Dividend Snowball

So what do you do, once you’ve paid off all your consumer debt? Obviously, you don’t want to spend all that extra money on consumer goods. That will just start another cycle of spending and borrowing. Wouldn’t it great to have a payment coming into your account instead of the other way around?

That’s where we are right now. We don’t have any consumer debt. We contribute the maximum amount to our 401k and Roth IRA every year. We could spend the rest on eating out and clothes, but we choose to invest in our dividend portfolio instead. Would the snowball method work in the same way when building income? Let’s see we can adapt the debt snowball method to build our dividend snowball.

  • List all your regular bills starting with smallest to largest
  • See how much dividend you get per month on average or start building a dividend portfolio if you don’t have one.
  • Cross off the bills your dividend is paying off
  • Keep adding new money and reinvest dividend income

Building your dividend snowball will be a slow process, but it should eventually be able to pay all your regular bills. Let’s see how we did last month for example.

Dividend income: average monthly in 2015 = $840

Budget

  • Life insurance: $24
  • Pet: $25
  • Gym: $25
  • Electricity: $60
  • Transportation: $75
  • Eating out: $100
  • Home, auto, and umbrella insurance: $148
  • Groceries: $400
  • Cash allowance: $400
  • Preschool: $450
  • Housing: $2,230

Hey, we are doing pretty well. Our dividend is already paying for all the smaller bills. The next item on the list is the grocery category and that’s a pretty big bill. Actually, we’re only $17 short from crossing that off the list. (I’m ignoring tax in this post…)

The good thing about our dividend snowball is that it should keep growing every year because it is specifically set up to do that. How?

  1. Reinvested dividend– I reinvest our dividend income.
  2. Dividend growth– I invest in companies that have a good track record of increasing their dividend.
  3. New investment– We don’t have as much extra money as we used to when I was working fulltime, but occasionally, we’d be able to invest.

So what do you think about the dividend snowball method? I’ve been looking at it at a higher level because I reinvest the dividend, but it’s encouraging to cross the bills off the list.

If you’re just starting your dividend portfolio, I highly recommend Jason’s blog – Dividend Mantra. His main focus is dividend investing and his articles are very easy to read. See his portfolio here.

Image credit:  by kamshots

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Joe started Retire by 40 in 2010 to figure out how to retire early. He spent 16 years working in computer design and enjoyed the technical work immensely. However, the job became too stressful and Joe retired from his engineering career to become a stay-at-home dad/blogger at 38. Today, he blogs about financial independence, early retirement, investing, and living a frugal lifestyle.

Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.

Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.

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{ 42 comments… add one }
  • Azat April 1, 2016, 2:26 pm

    Which website do you suggest to start buying shares to build dividend portfolio?

    • retirebyforty April 1, 2016, 4:19 pm

      I think any discount online broker would work. I use Firstrade and I like them. Low fee and no frills.

  • Under The Money Tree August 10, 2015, 2:14 am

    I’d suggest that you use a 12 month rolling average of your dividends payments received in order to get a true picture of the income. This is particularly relevant here in Europe where many companies only pay dividends quarterly or bi-annually!

    • retirebyforty August 10, 2015, 11:06 am

      I’ll do that. Our Q4 payout is usually much bigger.

  • Michael Hall August 9, 2015, 12:07 am

    Joe, I love your idea of a dividend snowball as a way to continually cross out monthly expenses. It definitely helps to keep things in perspective.

    I tend to invest more in growth stocks when it comes to equities, but it made me curious to figure out my own monthly dividend average. Looks like I’m only half of the way where you’re at (mine is $468/month over the past year).

    More importantly, you made me to think about how I should balance out my overall investment portfolio as I get older as I currently have most of my cashflow coming from crowdfunded real estate investments. How often do you re-balance everything?

    • retirebyforty August 10, 2015, 11:05 am

      Thanks! I used to be 100% in growth stock, but I’ve became more conservative after I left work. Dividend stocks are a bit more stable. I don’t rebalance that often because I add new money to the low area. That works pretty well. I’ll need to rebalance when we have a big crash or something like that, but otherwise not very often.

  • Financial Samurai August 6, 2015, 9:27 am

    I haven’t gotten on the stock dividend bandwagon yet, b/c my experience has told me to press for growth stocks during a bull market to get the largest return on principal possible. Once the economy slows down and settles, along with higher rates, I’ll balance out to dividends.

    • retirebyforty August 6, 2015, 9:52 am

      I defer to your experience, of course. Maybe I’ll set aside a portion of our portfolio for growth stocks for the next bull market. My problem is I don’t time the sale very well. I ride a stock up and then down. Dividend investing is much easier for me because it’s just buy and hold.

  • nicoleandmaggie August 6, 2015, 7:35 am

    That is cute!

    We’re in for the long-term so dividend investing is not an active part of our portfolio on purpose. (We get about 4K in dividends/year, mostly DRIPped, so we don’t notice them until we have to pay taxes on them.)

  • EL August 6, 2015, 5:50 am

    I’ve been doing this game for over 5 years now, Its steadily growing, and covering more expenses. I just need to add more to investments to catch up to you Joe. Good luck and I cant wait to read when you will cross off housing of the list.

    • retirebyforty August 6, 2015, 9:50 am

      That’s great! Just keep at it. I’m sure you made a lot of progress at the beginning and now investing is automated.

  • Paul N August 5, 2015, 12:07 pm

    Hi Joe,

    Do you account for “after Tax” dividend money to pay those bills or pre tax money? When we actually put the money in play that’s a consideration if you lose up to 15% to taxes?

    • retirebyforty August 6, 2015, 9:43 am

      I didn’t go into tax in this article so it’s just pre tax for now. 15% is not good, but eventually we should pay less because our earned income will be much smaller when Mrs. RB40 retires. Most early retirees won’t have much earned income so they won’t have to pay much tax on dividend.

  • Duncan August 5, 2015, 11:55 am

    I listen to Dave daily and love this theory, he’s much more into mutual funds, but I really love this approach as a DGI.

  • RA50 August 5, 2015, 10:50 am

    Joe,

    I like the concept, I would need to do it starting from the smallest to the largest expense, but I check now and our average dividend pay 82% of our rent.

    Wouaaaa I am very happy about that.

    Cheers,
    RA50

    • Leigh August 5, 2015, 1:04 pm

      In my such list, I’ve ordered them in order of necessity rather than from smallest to largest. My ordering at the moment is: passport replacement, condo insurance, property taxes, HOA dues, toiletries, cell phone, driver’s license, vehicle tab renewal, bras, car insurance, car maintenance, fuel, umbrella insurance, bare minimum for recreation, a new cell phone, entertainment/social, gifts, hair cuts, eyebrows, spa, discretionary clothing, discretionary recreation, electronics replacement, taxis/parking meters/tolls, travel, new car, bronze health insurance. I don’t count my mortgage anywhere in that list because I plan to have it paid off before I retire.

      • retirebyforty August 6, 2015, 9:44 am

        That’s a great way to do it. That’s a lot of stuff on your list, nice break down. 🙂

  • Jason @ Dividend Mantra August 5, 2015, 10:48 am

    Joe,

    Speaking my language. 🙂

    I compare my total dividend income against total personal expenses monthly, and you can see that rising percentage over time. It’s very exciting. Reminds me of the “wall chart” from Your Money or Your Life.

    Keep it up over there. I’m confident you’ll one day be able to cross all those expenses off.

    Best regards.

    • retirebyforty August 6, 2015, 9:49 am

      I do that too. It’s just much easier that way. 🙂

  • Bryan @ Just One More Year August 5, 2015, 9:54 am

    I think you are really on to something here with the dividend snowball. I have considered this from the perspective of our total expense OR the replacement cost of a car, but never from listing all of them from lowest to highest. Brilliant!

    This is an excellent way to show progress on knocking off the day to day living expenses with passive income and encouraging myself to gain more momentum. It also will give me instant feedback on how much more our portfolio income needs to expand when, or if our expenses begin to inflate.

    • retirebyforty August 6, 2015, 9:49 am

      It’s great to see your progress especially at the beginning when you need some encouragement. Those small bills will be easy to cross off. The big bills will take a long time, though.

  • Pretired Nick August 5, 2015, 9:49 am

    This is exactly how I do it. Just knocking them off one at a time. Not unlike my old “Dividend Mapping” concept: http://pretired.org/pretirement-how-to/dividend-mapping/

    • retirebyforty August 6, 2015, 9:48 am

      Great write up. Having a company paying for their own categorical expense is a great idea.

  • Justin @ Root of Good August 5, 2015, 7:59 am

    That’s an awesome way of looking at it, Joe. When working, I thought along the same lines, although at a smaller level. Like last month’s $1,000 new investment will generate $20 or $25 in dividends forever. And that amount will rise over time.

    Pretty amazing stuff, and looking at what dividends can buy you in practical terms is a good way to stay motivated to invest.

  • Leigh August 5, 2015, 7:49 am

    Yup, I have a bill list that 4% of my investment would cover! I’ve gotten through the big basics like HOA dues and property taxes now, which is pretty reassuring. I can also cover replacing my passport, condo insurance, toiletries, my cell phone bill, and replacing my driver’s license.

    (As part of our arrangement of my boyfriend not paying rent or contributing to the costs of my car, I don’t pay for groceries, internet, electricity, going out to eat together, some travel, or parking when we go somewhere.)

    • retirebyforty August 5, 2015, 11:50 am

      Wow, that’s fantastic! I should split up my housing bill that way too. It will be a bit easier to cross off. 🙂

  • Tawcan August 5, 2015, 7:21 am

    Dividend re-investing is very powerful when it comes to growing your dividend snowball. Basically you’re taking advantage of the power of compound interest.

    • retirebyforty August 5, 2015, 11:49 am

      Exactly! Couple dividend reinvesting with dividend growth and you’re sure to beat inflation. It’s a slow and steady way to build a nice income stream.

  • Ali @ Anything You Want August 5, 2015, 7:14 am

    I’ve never heard of the dividend snowball method but it sounds interesting. I have a few dividend stocks but mostly invest for the long term so all of my dividends are set to re-invest. I like the idea of being able to pay for daily expenses with my investment earnings though!

    • retirebyforty August 5, 2015, 11:48 am

      We reinvest our dividend too, but it’s still fun to see the bills we could cross off. 🙂

  • Mrs. Budgets @MrandMrsBudgets August 5, 2015, 6:52 am

    I like this thinking and it would really help to keep me motivated. I have some money invested in dividend paying stocks, but this is an area I want to grow. I love Jason’s blog for investment ideas.

    • retirebyforty August 5, 2015, 11:48 am

      I love Jason’s blog too. I don’t have to do a lot of research so Jason’s blog really helps narrow down the candidates. Keep at it!

  • Steve Miller August 5, 2015, 6:16 am

    Hey Joe,
    This is an interesting concept, I had never thought of looking at my dividend income as a snowball. It got me thinking so I went and figured out my monthly dividend average, it is $2,125, which is pretty good, it covers most of the small bills. The fund that produces the most dividends for me is the Fidelity Contra Fund (FCNTX).
    All the best.

    • retirebyforty August 5, 2015, 11:46 am

      Oh wow, great job with your dividend income. Enjoy your retirement!

  • Jon August 5, 2015, 4:45 am

    Creating a bill list and crossing them off based on your earned dividends is a great idea to help keep you motivated. I know for me in the beginning, it was tough to keep at it, mainly because of the slow process and the fact that dividends come quarterly. When paying off debt, I can see the amount decrease every month, but with dividends I had to wait longer to see the effects.

    • retirebyforty August 5, 2015, 11:45 am

      You’re right. The timeline is much longer with dividend. It will take many years to build up a sizable stream. It probably works better with smaller bills. The big bills will take many years to cross off.

  • Nelson August 5, 2015, 1:35 am

    I’d be wary of buying companies like oil exploration and production (E&P) companies like Chevron and Exxon for their dividends. I don’t think we’re going to see oil prices above $70 for a while.

    • retirebyforty August 5, 2015, 11:43 am

      Thanks for your input. I need to do more research on this. I feel that over the long term oil price can only rise, but I don’t want to see dividend cut either.

      • Nelson August 5, 2015, 10:08 pm

        I used to believe that prices could only rise too. Here’s my research on why oil supply has completely shifted: http://goo.gl/BP6hMH

  • Retire29 August 5, 2015, 1:34 am

    The exponential growth factor of dividend growth investing is what makes it such an addictive sport. I like to pull a fourth lever of building that snowball; writing covered calls against my positions. The capital from the written calls is deployed into even more dividends.

    I also like applying the dividend income against expense categories–it’s a direct reminder that expense reduction holds just as much sway in financial independence as income creation.

    Eric

    • retirebyforty August 5, 2015, 11:39 am

      Great! I haven’t used much covered calls yet. I did some research and decided against it for some reason. Perhaps I need to revisit it again.
      You’re right about keeping the expense in check. You’re more likely to keep your lifestyle stable if you pay attention to how much you’re spending.

      • Craig August 5, 2015, 1:49 pm

        Joe,
        Another strategy with the exact same risk profile is selling cash secured puts. You should probably look at it a second time and I’d recommend you look at the buy/write index BXM or PUT and some of the academic studies from these strategies. Very compelling results.

        http://www.cboe.com/micro/bxm/

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