Dividends Will Reward the Patient Investor

The patient investor can accumulate wealth by reinvesting dividends. By letting an initial investment grow for a period of years through dividend reinvestment, at some point in the future you will be able to withdraw a fixed amount of money from the portfolio year after year without ever running out of money. But patience is the key.

For example, how long does it take a dividend-paying portfolio to build enough value to provide $5,000 per year in dividends year after year without draining the portfolio? The two relevant variables are the amount that you invest and the dividend yield. The more dollars you invest in the portfolio the more dividends you will receive. And the higher the dividend yield the more dividends you will receive and the quicker they will add up.

The next table and accompanying chart show the number of years it takes to receive $5,000 per year in dividends for a given initial investment and yield. Once you start to receive the $5,000, you with be able to withdrawal $5,000 per year forever. The computations assume that the dividend yield remains constant year after year and you reinvest all your dividends up to the year in which you start to withdraw money.

The analysis is conducted for three initial investment amounts and eight dividend yields.

Number of Years to Receive $5,000 Per Year
Yield	Initial Investment
Yield	$50,000	$100,000	$200,000
1.0%	233	163	94
1.25%	169	113	57
1.50%	129	82	36
2.0%	83	48	13
2.5%	58	30	1
3.0%	42	19	1
4.0%	25	7	1
5.0%	16	1	1

A $50,000 investment is not large enough to generate the $5,000 in a timely manner. It takes 16 years at a hefty 5% yield to generate $5,000 each year. Lower yields take many more years to generate $5,000 per year in dividends.

Even the $100,000 investment is slow to accumulate dividends unless the dividend yield exceeds 3%. The $200,000 investment is large enough to give you $5,000 each year at 13 years for a yield as low as 2%.

These data tell us that it takes a lot of money to generate a meaningful cash flow from dividends. If you had $500,000 and a 1% yield, you could generate $5,000 each year starting with the first year. But for smaller initial investments many years are required.

These results are conservative because they assume that the dividend yield remains constant. But often dividends increase with time so the yield would increase. Therefore, it would take less time to reach a target dividend amount than stated here.