The transition from the classroom to the workforce has been a difficult one for the average Millennial. Faced with diminishing job prospects, higher costs of living and record student debt, financial freedom has seemed like an impossible goal.
While Millennials are saving for retirement at an earlier age than their parents, they are less savvy when it comes to investment. Stashing money away instead of investing it is a huge opportunity cost that will diminish their long-term results.
Long-term investing through dividends is one of the most reliable methods for building wealth. While anyone can benefit from dividends, Millennials have age on their side, and can theoretically generate much higher returns than those who begin later in life. The more years you can devote to growing your dividend portfolio, the wealthier you will become by the time you retire.
Not sure which dividend stock is right for you? Check out our Dividend Screener, where you can sort the best companies along various criteria, including dividend growth, DARS™ Rating and sub-sectors.
How Dividend Stocks Can Help Millennials
Dividend stocks provide a wealth of opportunity for young investors. For starters, they greatly enhance your stock-picking criteria by allowing you to focus on high-quality companies (after all, stocks that pay steady dividends have stronger fundamentals than their counterparts). The dividend yield usually sets the floor for the stock’s price, which provides a greater sense of certainty about the future of your portfolio.
Established dividend plays, like the kind you find on our 25-year dividend-increasing stocks list, also happen to be some of the world’s strongest companies. This is no coincidence. Building a long-term portfolio around consistent, high-yielding companies is one of the best strategies you can employ.
Strong dividend payers are only one side of the equation; to maximize their benefit, you must utilize the power of compounding. When it comes to investing, compounding is the process of generating higher returns on an asset by reinvesting its earnings. Simply put, by selecting high-yielding dividend stocks and reinvesting their earnings annually, you can become a millionaire before age 60.
DRIPs offer numerous benefits, including no-fee investing. Get the inside scoop on the best dividend stocks that offer no-fee DRIPs in this article.
Putting Dividends to Use
Let’s put all this into action.
Imagine a 28-year-old Millennial who invests $20,000 every year in dividend-paying stocks that yield 5% annually and grow by the same amount each year. He reinvests all his dividends by purchasing more stocks of the same companies. Assuming a conservative growth estimate of 4% annually for each stock and an average inflation rate of 3.2%, the investor can transform $20,000 into nearly $1.7 million by age 60. Using this strategy, our Millennial investor could become a millionaire by age 53 just by reinvesting dividend stocks.
Key Assumptions for a Hypothetical Portfolio
The key assumptions are summarized below.
| Parameters | Values |
|---|---|
| Age | 28 |
| Initial Investment | $20,000 |
| Monthly Additional Investment | $1,667 |
| Average Yield | 5% |
| Average Dividend Growth Rate | 5% |
| Stock Price Growth Rate | 4.00% |
| Average Inflation | 3.20% |
| Year-End Inflation-Adjusted Portfolio Value by Age 53 in Today’s $ | $1.04 million |
| Year-End Inflation-Adjusted Portfolio Value by Age 60 in Today’s $ | $1.7 million |
Projected Value of the Hypothetical Portfolio
The projected value of the portfolio based on the above assumptions are shown below.
| Future Age | Year-End Portfolio Value | Year-End Inflation Adjusted Portfolio Value in Today's $ |
|---|---|---|
| 29 | $40,522 | $39,368.91 |
| 30 | $67,781.99 | $63,643.62 |
| 31 | $95,074.43 | $86,501.70 |
| 32 | $124,952.12 | $110,160.23 |
| 33 | $157,686.27 | $134,708.62 |
| 34 | $193,578.13 | $160,242.65 |
| 35 | $232,962.59 | $186,865.15 |
| 36 | $276,212.05 | $214,686.65 |
| 37 | $323,740.89 | $243,826.15 |
| 38 | $376,010.46 | $274,411.91 |
| 39 | $433,534.68 | $306,582.36 |
| 40 | $496,886.31 | $340,487.10 |
| 41 | $566,704.16 | $376,287.97 |
| 42 | $643,700.97 | $414,160.23 |
| 43 | $728,672.53 | $454,293.93 |
| 44 | $822,507.83 | $496,895.30 |
| 45 | $926,200.57 | $542,188.36 |
| 46 | $1,040,862.12 | $590,416.73 |
| 47 | $1,167,736.23 | $641,845.51 |
| 48 | $1,308,215.60 | $696,763.48 |
| 49 | $1,463,860.70 | $755,485.46 |
| 50 | $1,636,421.01 | $818,354.93 |
| 51 | $1,827,859.12 | $885,746.98 |
| 52 | $2,040,378.10 | $958,071.49 |
| 53 | $2,276,452.46 | $1,035,776.74 |
| 54 | $2,538,863.39 | $1,119,353.35 |
| 55 | $2,830,738.71 | $1,209,338.72 |
| 56 | $3,155,598.38 | $1,306,321.88 |
| 57 | $3,517,406.20 | $1,410,948.96 |
| 58 | $3,920,628.68 | $1,523,929.21 |
| 59 | $4,370,302.13 | $1,646,041.75 |
| 60 | $4,545,114.22 | $1,658,801.76 |
Tax Considerations
The above analysis does not factor capital gains taxes, which recently underwent some revision. Below is a breakdown of U.S. tax rates at the time of writing:
| Ordinary Income Tax Rate | Ordinary Dividend Tax Rate | Qualified Dividend Tax Rate |
|---|---|---|
| 0% | 0% | 0% |
| 12% | 0% | 0% |
| 22% | 15% | 15% |
| 24% | 15% | 15% |
| 35% | 15% | 15% |
| 37% | 20% | 20% |
Dividend Reinvestment Plans (DRIPs) are a proven tool to grow your portfolio over the long haul. Learn the value of compounding interest here.
Potential Dividend Stocks to Construct a Retirement Portfolio
Now that we’ve established clear criteria, it’s time to select dividends that meet our goals. Below is a list of some consistent dividend growers with yields of 5% or more:
- AT&T (T )
- Stericycle Inc. (SRCLP)
- Main Street Capital Corp. (MAIN )
- Iron Mountain (IRM )
- Enterprise Products Partners L.P. (EPD )
- Enbridge (ENB )
- W.P. Carey (WPC )
- The Carlyle Group (CG )
These stocks represent diverse industries and generate yields of at least 5% annually. Combined, they can form the backbone of a solid income-generating portfolio for years to come.
Dividend Reinvestment Plans (DRIPs) are a proven tool to grow your portfolio over the long haul. Learn the value of compounding interest here.
The Bottom Line
$20,000 may seem like a lot of money to put away each year, but it is certainly feasible. Start by developing a monthly budget and devising new ways to save money. The more you can devote to dividend investing, the wealthier you will become over time. Through the power of compounding, Millennials can grow their wealth manifold over the span of a few decades.
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