I've got all the money I'll ever need if I die by 4 o'clock (Henny Youngman)

Thursday, 13 November 2014

Estimating Portfolio Dividend Growth

Well, back in the blogging saddle.  Not a lot of motivation lately to post, have just been perusing the musings of others. 

That said, I am interested to know how/if people try to forecast future dividends, which is something I do. By way of background, while I am no math genius, I do have a Commerce/Business degree and have spent much of my life as a corporate/securities lawyer, and later running the Compliance team of the investment arm of a major Canadian bank.

The point of this elongated preamble is that I have put together a rudimentary formula for approximating future dividend returns, but not sure if I have completely missed the boat? Don’t think so, but I am sure you will let me know in a kindly (??) manner if I have.   
To be clear, this is not about forecasting growth of an individual stock.  Rather, it is about estimating actual dividend dollar growth of a portfolio premised on certain assumptions.

Okay, so to start out here are the assumptions (and no, this is not my actual portfolio!):

-20 stocks, each comprising 5% of the total holdings;
-previous year received $10,000 in dividends;
-yield of each company is 3%;
-each stock increases dividend 7% annually;
-all dividends are reinvested equally in the 20 holdings; and
-on January 1st, $5,000 new money invested equally in the 20 stocks ($250 per stock)

Don’t think I have missed anything. Now before anyone goes into cardiac arrest, keep in mind the above is a theoretical, and not an actual, portfolio, and so yes, I understand it will not be replicated by an actual portfolio.  However, it is for modelling purposes only, so you can exhale.

Based on the above, it seems to me that at the end of year, I should expect to realize the following dividend increase:

1) 7% increase in last year’s dividends of $10,000 = $700;
2) 3% of $700 of new dividends reinvested = $21
3) 3% of $5,000 new money invested  = $150

At the end of the year, I would expect to have an approximate $871 increase in dividends ($700 + $21 + $150).

In year 2, the expected dividend increase would be:

1) 7% increase in last year’s dividends of $10,871 = $761;
2) 3% of $761 of new dividends reinvested = $23
3) 3% of $5,000 new money invested  = $150

At the end of the year, I would expect to have an approximate $934 increase in dividends ($761 + $23 + $150).

And so it goes. I think?

I do realize that the reinvested dividends would be reinvested at various points in the year, and not on January 1st.  However, to some extent this will be accounted for by the fact that I will also be receiving dividend increases from the previous year, so after year one this should be largely be accounted for. In any event should not have a material impact on the increase.

Again, for you purists, I am not looking for a precise algorithm to discuss at my next Mensa meeting, but simply a way to formulate a ball-park estimate of likely dividend increases going forward. I will of course know the amount of my starting assets, and I can use historical averages for dividend increases and yields (imperfect yes, but sufficient for my purposes).  

Am I wildly missing something here? Be gentle – karma’s a bitch… 

NON-SEQUITUR (or " What the hell does this have to do with dividend investing?")...

“Humility is a strange thing, the minute you think you've got it, you've lost it.”

E.D. Hulse, Bashford Methodist Messenger, Feb. 1967