The following is a special report from Dave Van Knapp.
Dave Van Knapp
In case you’re not familiar, my public Dividend Growth Portfolio is a real-life demonstration of investing for growing income from stocks. The concept of using stocks for rising income is fundamentally different from investing in fixed-income assets like bonds.
The portfolio has been in operation since 2008. I reinvest the dividends each month, so – on top of the dividend increases declared by the companies I own – the dividend stream has also been compounding for more than 15 years.
In January 2024, I moved coverage of the portfolio to our premium investing service called Dividends & Income Select. The service is designed for investors interested in building growing income streams through dividend-paying stocks. At the end of this special report, I will show you how you can access the service, for free, for two weeks. During that time, you can access my portfolio and see every single stock I own.
Dividend-growth investing comes in many flavors, but in its basic version, it focuses on building a stock portfolio whose main purpose is to generate a growing stream of dividend income.
That stream can become so sizable over time that you can live off it in retirement. I’ll show you how this works in real life, using real numbers from my own Dividend Growth Portfolio…
2024 Review of My Dividend Growth Portfolio
My Dividend Growth Portfolio wrapped up 2024 with good gains in dividends received, yield on cost, and total value. Highlights include:
Yield on cost grew to 16.2%. That is a new record high, well beyond my original goal of 10%, which was exceeded a few years ago. Yield on cost, in a successful dividend-growth portfolio, goes up every year, because it is a proxy for the dollar amount of dividends themselves. Note the contrast to bonds, which pay the same rate on your original investment every year.
Annual dividend run-rate grew 12.9%. As we begin 2025, the DGP’s annual dividend run-rate is $7592, compared to $6726 a year ago. The run-rate is also a new high.
Dividends collected grew 8.6% to $6961. This is also a new record high, although the 8.6% year-over-year growth was less than expected, which I will talk about later. The DGP has never experienced an annual dividend cut, with its increase streak now at 16 consecutive years.
Total dividends received from the portfolio have surpassed the initial cost of the portfolio. In other words, dividends from the portfolio have now paid for the portfolio. This milestone was actually achieved in 2022, but I bring it up again to illustrate how the increasing speed of dividend growth will shorten the time it takes to do it again.
Total 2024 return was less than the S&P 500. My portfolio’s value grew 13.6% in 2024 with dividends reinvested, vs. the gain of 24.9% for SPY (the largest ETF that tracks the S&P 500), per ETF Replay. Despite trailing the index, the portfolio’s year-end total value is also at a record high.
Now, let’s review 2024’s highlights and important activities.
Yield on Cost Hit Record 16.2%
The DGP has two financial goals in its Business Plan.
The primary goal is to build a reliable, steadily increasing stream of dividends over many years that can eventually be used as income for retirement.
Obviously, this goal is about cash flow, not wealth. I target an optimal income stream, which is not necessarily the largest possible. I willingly exchange some potential income dollars for other important goals, such as dividend safety and reliability, as well as lower price volatility.
Yield on cost measures how much income the portfolio is slated to produce over the next 12 months, calculated as a percentage of the original amount invested. The formula is easy.
Dividend Run-rate ÷ Original Amount Invested = Yield on Cost
$7592 ÷ $46,783 = 16.2%
The run-rate is the current rate at which the portfolio is generating dividends, based on the most recent information available about dividends expected to be paid over the next 12 months.
Yield on cost is significant: It shows that the portfolio is sending me cash dividends at a rate of 16.2% per year of my original investment.
That is the kind of income performance that was the original inspiration for the portfolio. There was certainly no guarantee at the beginning that an income return like that would ever be achieved.
Annual Dividend Run-Rate Grew 12.9%
The diagram above shows how dividend-growth investing creates an income-compounding machine. The machine has four “gears.”
- Dividend increases. Companies raise dividends directly, by corporate action. You have no control over dividend increases, and the market plays no role either.
- Dividend reinvestments. These are entirely up to you. You control whether to reinvest the dividends, what stocks or funds to put the money into, whether to split purchases among several companies, and so on.
- Portfolio adjustments. Again, these are entirely up to you. For example, you may decide to sell or trim a holding and move the money into something else. You have total control over where to invest the money from trims and sales.
- Compounding. Compounding is a mathematical marvel. It applies to your whole portfolio constantly. You do not “do it” directly, but the other gears set compounding in motion.
Compounding means making money on money already earned. In a nutshell, the earnings from an investment generate additional earnings over time. This creates a snowball effect, where your income stream grows faster and faster as time goes on.
In the DGP, the dividend run-rate grew from $6726 at the end of 2023 to $7592 at the end of 2024. That’s 12.9% growth.
2024’s Collected Dividends Grew 8.6% Over 2023’s Total
Here is the dividend growth in the DGP over the last five years.
In 2024, I collected $6961, which was an 8.6% increase over 2023. In dollars, the increase was $554 compared to the year before.
The increase percentage and dollar amount were a little less than I had expected at the beginning of the year. I believe that is mostly attributable to more companies declaring slightly smaller increases in 2024 than in prior years.
Did 2024’s receipts surpass last year’s final run-rate? Yes. That run-rate at the end of 2023 was $6726, while I actually received $6961 in 2024 – 3.5% more.
Over the long term, the annual percentage variations blend into a consistent growth story. That story is illustrated by my favorite chart about the DGP.
This is my favorite chart, because it illustrates so well how dividend-growth investing works.
- Every year’s dividend total is larger than the year before.
- The compound annual growth rate of dividend increases for the life of the portfolio has been 10.5% per year. (I leave 2008 out of this calculation, because it was a partial year.)
I have this portfolio loaded into Simply Safe Dividends, and its Portfolio Tracker provides the following interesting insight.
This illustrates how the organic dividend growth rates have slowed for the stocks in my portfolio. “Organic” here means the raises that the companies declare, not the other gears in the business model.
Let me point out that the computation is not exactly correct, because some of the holdings in the DGP have shifted as I reinvested dividends and occasionally trimmed and replaced a few stocks. Nevertheless, the numbers are directionally correct in showing an overall slowdown in the organic DGR of the DGP’s stocks over the past decade.
You may be wondering how, if the portfolio’s organic DGR has been in the 5-6% range, its portfolio-wide DGR could be 10.5%, as depicted in the prior chart. We have already covered that answer: Dividend increases are only one gear in the DG machine. The other gears have more than made up for the slowdown in dividend increases.
Total Dividends Exceed the Portfolio’s Original Cost
Over its lifetime, the DGP has sent me more cash dividends than the cash that I spent to start the portfolio in 2008.
The original cost of the portfolio was $46,783. The dividends I have received from it have totaled $61,546 through the end of 2024.
The bar on the left shows the original amount invested ($46,783). The bar in the middle, which is a year-by-year stack of annual dividends, goes from inception to 2022, because that is when the dividends collected surpassed the original investment. The time covered shows the first 14.6 years of the portfolio’s life (6/2008-12/2022). During that time, I received $48,178 in dividends.
It will take less than half that time to duplicate the original amount again. The stack on the right suggests how much faster the incoming dividends will match the original investment again. It shows only two years: 2023 ($6407, blue layer) and 2024 ($6961, orange layer), totaling $13,368. That is about 29% of the original investment in just two years. I am confident that it will take less than half the time (under 7 years) for incoming dividends to match the original investment again.
Dividend Increases and Reinvestments in 2023
This table shows how dividend increases (by themselves) helped the DGP’s run-rate to go up 2022-24.
2024’s smaller percentage impact on the dividend run-rate than in 2023 seems to be another example of smaller average increases from the stocks that I own. In real life, year-to-year variations are to be expected, as the portfolio’s companies make their own decisions about dividend increases.
Despite the shrinking percentages, the additional dollar amounts have continued to grow each year. That is because each year’s percentage gain has been applied to a larger base.
The next table shows the outcome of my dividend reinvestments.
I reinvest dividends monthly into stocks that I select. (I do not drip the dividends.) As you can see, the dollar and percentage impact on the total dividend stream has grown each year.
Difference Between Dividend Run-Rate and Dividends Collected
In this report, I have sometimes referred to dividend run-rate and sometimes to dividends collected. Let’s be sure we understand the distinction.
Dividends collected is a backwards-looking number. Dividends collected is like the score of a football game: It shows what has already happened.
Let me repeat here a table that I used earlier. This shows dividends actually collected each year.
The dividends collected metric reflects historical fact. It does not predict what will happen going forward, although as they say, “history rhymes.”
In contrast, the dividend run-rate is a forward-looking metric. It describes the annual rate at which dividends are coming in. If you assume that exact run-rate is going to hold, it can be seen as a projection of how many dollars in dividends will be collected over the next 12 months.
The projection would be accurate if absolutely nothing changes – if no dividends are increased (or cut), no new shares are added, and so on. However, we know that companies will increase their dividends, and I will reinvest the dividends to purchase more shares.
So the run-rate changes repeatedly. For a portfolio constructed and managed like the DGP, the rate goes up every year.
Here is the five-year record of the dividend run-rate for my portfolio. This shows how the run-rate has increased year-to-year over the past five years.
Note that if you compare the two tables, you can see that each year, the actual dividends collected exceeded the dividend run-rate projection from the end of the prior year. That, of course, is because the gears of the dividend-growth machine kept turning after each year-end run-rate was recorded.
For example, in 2024, I collected $6961 vs. the projection at the end of 2023 of $6726: 3.5% more. Something like that happens every year. To the best of my recollection, the current run-rate has always understated the actual dividends collected in the following 12 months.
Total Performance Trailed S&P 500 in 2024
I mentioned at the beginning that the DGP has two objectives. The first and primary objective is to generate growing income, as we have been discussing.
The secondary goal is to deliver total returns that are competitive with the general stock market as measured by the S&P 500 with dividends reinvested.
I use the SPDR S&P 500 ETF Trust (SPY) for the comparison. SPY is the largest of several ETFs that track the S&P 500. I calculate its total returns with dividends reinvested back into itself, because I reinvest my DGP’s dividends back into itself.
Here are the results through 2024.
As you can see, total returns were quite similar until Covid in 2020. In 2022, after falling behind after Covid, the DGP caught back up to SPY’s total returns. Since then, however, the dominance of FAANG and Magnificent 7 stocks has pulled the S&P 500 back ahead of my dividend-growth portfolio.
In 2024, the DGP’s total return (with dividends reinvested) went up 13.6%, which is historically good total-return performance, but well behind SPY’s total return of 24.9%. Interestingly, there was a period during the middle of 2024 when a “rotation” from growth to value stocks closed the gap almost completely, but that then re-reversed by the end of the year.
The story may flip again in 2025, or SPY’s big run, powered by its Top 10 stocks, may continue.
The long-term record of the DGP – 9.3% annual return – is satisfactory to me. Partly that is because of the psychological benefit that I get from the DGP’s continually-rising dividend stream.
At the end of 2024, the DGP’s total value was $204,895, a return of +338% on its initial value of $46,783 in 2208. All results in the DGP have been achieved without any new outside money added since the portfolio kicked off in 2008.
In terms of dividend income, of course, there is no contest between DGP and SPY. The DGP’s yield is usually twice as much as SPY’s or even more. Right now, the DGP’s current yield is 3.7%, compared to SPY’s yield of 1.2%.
Looking Ahead to 2025
Here is the DGP’s profile as we begin 2025.
Here is what I anticipate in 2025.
Dividend income: The portfolio’s dividend income will top $7700 for the first time in 2025, and its run-rate will surpass 17% yield on cost.
Picking reinvestments: I will keep an eye on the portfolio’s smallest positions –as I have for several years – and decide whether to jettison any more, while building up the others. I will also focus on existing high-quality positions that are less than 6% of the portfolio and consider adding to them, if some are available at really attractive yields and valuations.
In addition, I will look for 1-2 high-quality new positions to improve the portfolio’s overall quality.
Portfolio review: I will give the portfolio a thorough review to see if any of the stocks have fallen out of high-quality status, slowed their dividend increases too much, or have otherwise become undesirable.
Final thoughts. My optimism about this form of investing remains high. A recent “Big Board” project I put together over at Dividends & Income Select has helped me focus even more than before on high-quality dividend-growth stocks. I think that over the long haul, their total return will close the gap – at least somewhat – with the S&P 500’s large-cap growth stocks, which currently dominate the entire index’s returns.
How to Access My Dividend Growth Portfolio For FREE
In our Dividends & Income Select service, you can see not only what is in my Dividend Growth Portfolio, but also how I manage it, including the dividend reinvestments.
Creating and managing such a portfolio is not hard. You do not even have to follow the market. Dividends are independent from the market, because they are declared and paid by the companies themselves and credited directly to your account. Reinvesting them is easy, provided you know what to buy.
I would like to invite you to a two-week free trial of Dividends & Income Select. Use this link to get to our product-description page. There you will find a complete presentation of the service and a sign-up button for the free trial.
When you see the full description of our service, you will find that it includes much more than my portfolio:
- Two more real portfolios (not play-money models) run by Mike Nadel. Mike’s portfolios are (1) a new from-scratch Income Builder Portfolio, and (2) his grandkids’ college fund, Growth and Income Portfolio.
- Dividend Growth Ideas, including graded lists of highly-rated stocks from me, and deep-dive reviews of high-yield stocks from Jason Fieber.
- Real option trades for instant income executed and described by Greg Patrick.
The free trial lasts for two weeks, and if you cancel at any time during the trial, you will never be charged anything. The free trial is 100% risk-free.If you don’t like what you see, just cancel.
Again, use this link to gain complete access to Dividends & Income Select for free, for two weeks, with no obligation.
-Dave Van Knapp