Dividend 5

Do You Want To Build A Snowman?

Although not a new concept, I like to think of my dividend growth stock portfolio as a snowball.

If you can imagine standing at the top of a really steep hill, building your snowball from scratch starts with getting your hands on some snow. And the snow, in the case of a dividend growth investor, is capital.

The Snowball Analogy

The snowball analogy is pretty cool, because the power of compounding eventually takes hold. You take a handful of snow, roll it into a ball, and then start to roll that ball downhill. Over time, it eventually becomes bigger and bigger as it accumulates more and more snow. The hope is to eventually turn that once-small snowball into a self-propelling machine. You’ll push that snowball along for many years yourself, adding fresh snow as you go. But eventually the snowball rolls all by itself.

Once that thing is rolling downhill all by itself, you’ll be alleviated of a lot of work. And that’s where you want to eventually be!

The Power Of Compounding

You can see this work with real numbers.

Investing just $1,000 at an 8% return, compounded monthly, turns into $24,273.39 after 40 years. So you take an initial $1,000, which doesn’t seem like much snow. But roll it down a hill steep and long enough, and you end up with something sizable. $1,000 won’t deliver much dividend income all by itself, but almost $25,000 will produce ~1,000 per year in dividend income, assuming a 4% yield.

That’s your initial investment returned to you every single year.

You can see what happens when you add even relatively small amounts of snow and give that snowball a long enough ramp to roll.

The power of compounding is real. 

Build A Giant Snowball Reasonably

The goal is to build the snowball as big as reasonably possible, while still enjoying yourself along the way. Dedicating your life to only building the biggest snowball you can will likely not lead to the most vibrant life possible, but at the same time the snowball itself will provide a lot of benefits unto itself, as the larger the snowball, the more passive dividend income you’ll likely generate. And the more passive income you can generate, the more time you have to spend time on things that matter to you. A delicate balance, but a lot of legwork early goes a long way.

But one fantastic aspect of all this snowball building is the fact that, one large enough, it obviously starts to pick up snow all by itself. Building a snowball from scratch involves a lot of work on your part from the get go. You rummage around and scrape up as much white stuff as you possibly can. You pack this snow into a wonderful circle and you plop it onto the ground. You start to roll it down the hill, and pick up more snow as you go. Doesn’t seem like a lot of fun at first.

See, just like a real snowball, over time your portfolio will start to build all by itself. And dividend growth is the secret behind the magic and over time, it becomes a lot more fun!

The Snowball Eventually Rolls Itself Downhill Via Dividend Growth

The dividend growth process proves that over time your snowball will eventually gain momentum, rolling itself down the hill with more force than you could provide. That’s really the power of dividend growth. It’s amazing how much a snowball can grow even without someone pushing.

Looking into the future, the power of dividend growth is amplified. I anticipate to earn $2,000 per year in dividend income in less than five years, essentially getting me closer to  financial independence.  You can see how this builds on itself year after year, increasing the spread between income and expenses and thereby the margin of safety in early retirement.

This is really why dividend growth investing can be so wonderful, and how a snowball can start to roll downhill all by itself. The key is to get a really long ramp, start early, and regularly add snow for a while. It’s hard at first to add snow month after month, pushing it along. It’s cold outside and pushing doesn’t sound like very much fun. Maybe you’d rather be inside drinking some hot cocoa. And I can’t blame you.

But if you take the time to put a solid portfolio together with equity in wonderful businesses that regularly and reliably pay and raise dividends, eventually you’ll be sipping hot cocoa under a warm blanket while that thing rolls downhill all by itself. You’ll likely be financially independent at this point, and you’ll be able to do whatever you want in life. You’ll be able to spend more time with loved ones, travel abroad, golf, read, or go on a long road trip. Whatever. But you won’t have to push anymore!

Work Hard or Work Smart?

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4 thoughts on “Do You Want To Build A Snowman?

  1. Ok, I thought it would be more of a percentage, sense diviends are not tax as capitol gains. But tax as regular pay.

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