 |
| 1% is BIG |
Div
Tip #15 described how a 1% increase in the compound growth rate of a
dividend cash stream reduced the time needed for that stream to double in
size. This post expands on that Div Tip.
The first column in the table below shows portfolios
throwing off dividend streams with Compound Annual Growth Rates (CAGR)
ranging from 4% to 20%.
Column two applies the Rule
of 72 to highlight the number of years required for that dividend
stream to double in size assuming the initial rate continues unabated.
The first couple columns are well understood. Columns three and four contain the important
information.
|
CAGR
|
Years to Double
|
Years Doubling Time is Reduced
|
% Decrease in Doubling Years
|
|
4
|
18.0
|
|
|
|
5
|
14.4
|
3.6
|
20%
|
|
6
|
12.0
|
2.4
|
17%
|
|
7
|
10.3
|
1.7
|
14%
|
|
8
|
9.0
|
1.3
|
13%
|
|
9
|
8.0
|
1.0
|
11%
|
|
10
|
7.2
|
0.8
|
10%
|
|
11
|
6.5
|
0.7
|
9%
|
|
12
|
6.0
|
0.5
|
8%
|
|
13
|
5.5
|
0.5
|
8%
|
|
14
|
5.1
|
0.4
|
7%
|
|
15
|
4.8
|
0.3
|
7%
|
|
16
|
4.5
|
0.3
|
6%
|
|
17
|
4.2
|
0.3
|
6%
|
|
18
|
4.0
|
0.2
|
6%
|
|
19
|
3.8
|
0.2
|
5%
|
|
20
|
3.6
|
0.2
|
5%
|
The third column shows how many years are shaved off the
time to double when growing the CAGR 1%.
For example, taking a dividend cash flow stream compounding at 4% and
moving that compounding rate to 5% knocks 3.6 years off the time to
double. Those 3.6 years represent a 20%
reduction in the time needed to double your initial dividend stream courtesy of
a 1% increase in the rate at which the stream compounds. A 20 to 1 payback. Outstanding.
As noted in Div Tip #15, growing the compounding rate from
8% to 9% results in a more modest 11% reduction in the time needed to double a dividend
income stream. Of course, moving further
down the chart demonstrates that the amount doubling time is reduced declines
to point at which the time to double decreases only 5%. However, a 5% reduction in doubling time for
a 1% increase in CAGR is still solid.
Who wouldn’t pay $1 to get $5?
It’s easy to see why small things that improve the rate at
which a dividend stream is compounding make a big difference and are important
to a Dividend Farmer. The next post highlights several ways to
improve the CAGR of a dividend paying portfolio reducing the time to double
that income stream.
Thoughts expressed here are
those of the author, who is not a financial professional. These opinions
should not be considered investment advice. They are presented for
discussion and entertainment purposes. For specific investment advice or
assistance, please contact a registered investment advisor, licensed broker, or
other financial professional.
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