Imagine you generate a growing source of income every single month.

The best part? You don’t need to do anything.

You can think of it as a Dividend Income Machine. I’ll teach you everything you need to know.

Each company you own is a part of your Dividend Income Machine.

They all work together to keep the machine running and delivering consistent payouts.

All you have to do is watch your wealth grow as the machine does its work.

If you need a review of dividend investing and its benefits, read our Dividend Investing 101 article.

Let’s teach you what you need to know about this machine and how to build one.

Compounding fuels the machine

A Dividend Income Machine runs on the power of compounding.

Imagine putting money into the machine and getting back a little more than you invested every single time.

If you keep reinvesting what you earn, your machine will eventually produce a lot of income.

This is the power of compounding. 

It’s like a snowball that keeps going faster and faster.

A compounding example

This example will make everything clear.

Let’s say you:

• Invest $10,000 in a Portfolio with a dividend yield of 5%
• You add $7,000 to your Portfolio each year
• You reinvest your dividends

After 32 years, can you guess how much dividends you will receive every single year?

This under the assumption that your Portfolio returned 7% per year and dividends increased by 6% per year.

The correct answer is $78,384.85.

And your Portfolio would be worth more than $2 million!

That’s the power of compounding put to work.

Customise your machine

Every company within your Portfolio can be seen as a ‘part’.

With these parts you can create the machine you want.

Here are a few things to think about:  

Do you want your machine to focus on growth in the future, or higher yields now?

• It doesn’t have to be one or the other.
• You can have a mix of dividend growth and high-yield companies

How soon do you need to use the cash?

• The longer you reinvest your dividends, the more dividends you’ll receive
• This may influence which dividend stocks you buy

Do you want a steady income?

• Most companies pay dividends quarterly.

• There are 3 typical quarterly patterns for dividend payments:

  • January, April, July, and October

  • February, May, August, and November

  • March, June, September, and December

If you pick one from each group, you can get a dividend check each month!

Finding good parts

A good Dividend Income Machine will:

• Generate regular income
• Grow the income over time
• Run for a long time without a lot of maintenance

Remember that the “parts” in our machine are dividend-paying companies. 

A good machine should be built out of good parts.

This means you want to invest in:

• Companies that can survive for a long time
• While growing attractively

Companies that will survive

We want to receive income for a long time, so we need companies that will be around for a long time.

Here are some things that help ensure your companies will survive:

• Low debt
• A payout ratio that isn’t too high
• A long history of dividend payments
• Dividends that don’t grow faster than earnings

Companies that will grow

Growing dividends fuel the machine, and inflation will reduce the purchasing power of your income over time.

Making sure your companies will continue to grow is also important.

Some things we like to see are:

• A history of attractive growth in revenue and earnings
• A relatively high starting dividend yield
• A history of attractive dividend growth
• A preference for companies in an attractive market or with secular tailwinds

We can put all of these together in an example screen.

Screening for interesting companies

How to screen for good dividend companies:

• Debt/equity < 50%
• Payout ratio < 60%
• Dividend yield > 1.5% (equal to the current yield of the S&P 500)
• Dividend growth > 8%
• Revenue growth > 4% (above inflation)

Feel free to adjust these, or add your own.

This is just a starting place, but here are some of the companies this screen would produce:

Source: Finchat

On Finchat you can screen for these criteria yourself.

A Final Example

An interesting company that matches the criteria outlined above? Snap-on.

Snap-on makes money by producing and selling high-quality tools to professionals like automotive and aircraft mechanics, construction workers, and maintenance professionals.

They operate by franchising their brand to independent mobile tool dealers.

• Profit Margin: 19.8%
• Forward PE: 14.1x
• Dividend Yield: 2.7%
• Payout Ratio: 37.8%

Source: Finchat

Conclusion

You want to create a Dividend Income Machine.

This means your dividend payouts will increase every single year.

Dividend investing has a lot of advantages:

• Regular cash flow
• Inflation protection
• Lower volatility
• Income without selling assets

By reinvesting your dividends, and regularly adding to your account, you accelerate the magic of compounding for yourself.

That’s it for today

That’s it for today.

🙏 Compounding Dividends is a new project. We would LOVE to get your feedback on this. Like this post, reply to this email or leave a comment on this post to help us take Compounding Dividends to the next level 🙏

In case you missed it:

• The 3 Safest Monthly Dividend Stocks Now
• All Dividend Aristocrats (2024 update)
• The Power of Dividends

Used sources

• Interactive Brokers: Portfolio data and executing all transactions
• Finchat: Financial data

Disclaimer

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