Dividend and Interest Return

I was thinking what it would take for interest income to match that of increasing dividend income. So, I did this spreadsheet. See my spreadsheet at div_int.htm.

The thing with the 3.5% I earn in dividends is that it grows every year and it grows higher than the inflation rate. The thing with earning interest is that you may get your capital back, but inflation has eaten into it. Also, the basis of return on interest is always based on the same capital value.

In order to get the same long term total income as investing in stock will get, for interest investing you have to get a higher interest rate. You would, of course, start off with a higher income. You could save the excess income to invest for future income, but it is doubtful anyone will. This is the sort of thing people say they will do, but never or very seldom ever do.

I keep good records on what my portfolio is doing. My 5 year median dividend increase is 11%. However, say that dividends were increasing at the rate of 5% per year. (I suspect that on a go forward basis that future increases will be lower.) If you were to be retired for 10 years, you would need to make 4.52% per year in interest return on your capital to end up with the same total income over that period. If you were to be retired for 20 years, you would need to make a 5.95% per year interest on your capital. For 30 years in retirement you would need to earn 8% per year interest on your capital.

The 30 years scenario is not that far off as there are a lot of reasons to suggest that most people will have around 30 years in retirement. Also, this is not considering the lower tax you will receive on dividend income compared to interest income. I am only taking gross income rather than net income or after tax income.

The other thing in dividend investing, your capital tends to increase, over the long term in line with your dividend increases. If this occurred on a $50,000 initial capital, then 5 years on, capital would be roughly $81,500.00, and 10 years on, roughly $132,664.89 and 30 years on roughly $216,100.00.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.