How dividend income grows
Dividend income can grow in three ways at once. You buy more shares with new contributions. Companies raise their payouts, and many established dividend payers raise them 5–7% a year. And with DRIP turned on, each dividend buys more shares, which pay their own dividends next year.
Yield on cost compares the final year's dividends to the total amount you invested. A stock yielding 3.5% today can yield 8% or more on your original cost after 15 or 20 years of dividend growth.
Things this model simplifies
- It uses one average yield and growth rate for the whole portfolio. Real companies cut dividends in recessions.
- Dividends and contributions are applied once a year, which slightly understates growth compared with quarterly payouts.
- Taxes are a flat rate on dividends. In an IRA or 401(k), set the tax to 0%.