Should I use Dividend Growth Investing? (Decisions, Decisions)

I am continuously working to adjust my investing style.  I wanted to have a post to investigate Dividend Growth Investing.

There are a number of very interesting blogs of dividend investors (ex:  Mr. Free at 33, Dividend Growth Investor). and there are other viewpoints (ex:  Financial Samurai)

Let’s explore….

For me to go after this approach, I would use Index Funds as I don’t have the time to pick and maintain a portfolio of individual funds.  Most of the bloggers pick their own stocks.

Let’s look back at the last 10 years.  There has been a bear market and we are in a bull market.  The Index funds used for this are the VFINX (Vanguard S&P 500) as a benchmark, VDAIX (Vanguard Dividend Appreciation Index), and VHDYX (Vanguard High Dividend Yield Index).  The below chart shows the dividends by year with an initial 10k investment.

A few observations:  The High Dividend Yield fund had the highest yearly dividend every year.  The Dividend Appreciation Fund had an upward trend in 2009-2010 where the other funds didn’t.  The Dividend Appreciation Fund also had the greatest dividend growth% during this 10 year time frame.

Can I retire early using a Dividend Growth Strategy?

I wanted to run an analysis to see what it would take to obtain enough passive income to survive and potentially retire early.    Let’s assume that number is $24,000/year of passive income.  Using an initial investment of $3,000, and an annual investment of 10k increased 2% each year, you can see the result below:

In South Carolina, 10k/year is a stretch (SC median salary is 44k).  This would be after tax, if you were retiring early, you would not touch your pre-tax savings.  The result shows that you would generate enough dividend income with the Dividend Appreciation Index Fund around 28 years.  I was not expecting this result – I thought it would be much sooner….

So…Decisions, Decisions, Decisions


Pros of Dividend Growth Investing:

  • Based on previous results, you would expect Dividends to grow over time to create passive income, and the total value of the stocks or funds would increase also.
  • Index funds could help to reduce the time to research and maintain a portfolio.


Cons of Dividend Growth Investing:

  • Using the Index Fund approach, the gains are based on the Index, not your particular approach.
  • The time to research, create, and maintain a stock portfolio vs. an Index.
  • The time (28 years in simulation) to reach a minimum survival income of $24k takes many years, almost to the point where it rules out an early retirement.  Obviously, there are many bloggers who have had success, so there are angles you could take.


I see Dividend Growth as a tool to create passive income as a part of a larger overall portfolio strategy of total returns.  Without wanting to devote a lot of time to researching, creating, and maintaining a portfolio, an Index approach makes sense for me.  It also appears Dividend Growth investing is best for someone who has a good amount of investments (not someone just starting out).

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