How to build wealth with dividend growth stocks

Building wealth and achieving financial independence with dividend growth investing is a function of discipline, patience, persistence and perseverance.

In order to reach your goals, you need to identify them first. In the dividend investing world, this means generating a sufficient amount of annual dividends to cover expenses.

The next step involves breaking this goal into small, manageable and repeatable steps. Having a process to get to your goals in a timely manner is what separates the dreamers from the doers.

The last part is the best part - sticking to your process through thick or thin, as you gain small incremental gains until the goals and objectives are achieved. Enjoying the journey, and watching yourself improve over time is an even better outcome (on top of the money and the freedom and options it provides)

If I were to put it into a formula, getting to the dividend crossover point is a function of:

1. Savings rate ( This is the ratio of how much you are saving from your total income)
2. Returns ( Dividend Yield + Dividend Growth + Change in Valuation)
3. Time ( How long you compound for - time in the markets truly beats timing over time)


I crunched some numbers for historical outcomes with dividend growth investing. I used two dividend funds as a proxy for a diversified dividend growth portfolio.

I believe one can assemble a good portfolio on their own, as most dividend growth companies are established and well known. In todays worlds of zero commission investing, one can assemble their own ETF/fund to manage what goes in, at what price, at what weight and how to deal with the turnover. That being said, the biggest advantage of funds is that you are not realy going to spend much time selecting businesses and you can automate purchases over time. You may like this old post on the old blog on pros and cons of funds.

But because historical data is expensive, and computing power and backtesting is expensive as well (plus I am a one person show), I am going to use the results of these two funds as a proxy for returns/results of sticking to a dividend growth strategy.

The two funds I am using have:

1. Relatively low expense ratios
2. They have been around for almost two decades
3. They are large and unlikely to be closed
4. They are diversified and relatively low turnover
5. They come from a reputable fund company

These are the Vanguard Dividend Appreciation ETF (VIG) and the Vanguard High Dividend Yield ETF (VYM).

I obtained monthly historical data from Yahoo Finance for both ETFs since their launch in 2006. The data piece I utilized is called “adjusted close” - this close is adjusting the share price for the dividends received over time as well as stock splits. It is a good proxy for “total return”. I could have obtained monthly plain data and quarterly dividends to calculate effectively what the adjusted data presents. But I decided to take a short-cut and use the data that already accounts for total returns ( dividends + capital gains).

I went ahead and made the following two scenarios for each fund.