So, on my last post, Dividend Knight left me a nice comment. The part I found really interesting is that he mentioned that he’s on track to collecting $1,600 per month in dividends. Using my handy back-of-the-envelope calculation, I figured that his portfolio might be in the $300K region.

A day later, I happened to click on the link to his latest blog post and lo and behold, his current portfolio value is $316,000.

This brings me to the point of some useful rule of thumbs that I often use:

  1. The 4-5% dividend yield
  2. Rule of 72

4-5% Dividend Rule

While this is in the Singapore context, the same rule can be modified to suit your local market conditions. The way it works is that, in Singapore, while the dividend yield* can range from as low as 0% to as high as 7-8% for REITs, I find that the yield on a portfolio typically comes up to around 4-5%.

What this means is that I can a) find out the size of the portfolio or b) find out the yearly dividend amount of a portfolio quite easily.

For a), all you would have to do is take the annual dividend amount and divide that by the yield. So in Dividend Knight’s case, given his $1,600 per month figure, his portfolio should be $384,000 – $480,000. As you can see, my estimates are higher than his actual portfolio but that’s probably because he holds a fair number of REITs which, by law, are required to distribute at least 90% of their net investment income in order to qualify for tax incentives. Another explanation is that if most of Dividend Knight’s purchases were at market extremes (such as 2008-09), then his yield would, of course, be higher. However, in the long run, the rule-of-thumb should work quite well.

As for b), that 4-5% figure basically says that if you plan to live off your dividends, then given a certain portfolio size, that’s the amount you can expect to get in an average year. For example, if you retire with $100,000 in your bank and plan to invest it all in stocks**, then you should reasonably expect to get $4,000- 5,000 each year.

Rule of 72

The rule of 72 (and this is something any Graham reader would know) is a quick hack for calculating how long it would take for something to double.

For example, at a growth rate of 7% 9% (thanks to putongren for pointing out my mistake) , a portfolio would take 8 years to double. This is calculated by simply taking 72 divided by the growth rate. Of course, this assumes that the growth rate remains constant and all dividends are reinvested but really, this rule has a much broader application- one could also use GDP growth rates and therefore calculate how much time it would take for a country to double its standard of living (although by doing so, one would probably make the grave error of putting too much stock into forecasts) or knowing the growth rate, one could calculate how much the standard of living has progressed.

Either way, remember that while rules-of-thumb are convenient, they are not the law. Growth rates don’t last forever and dividend yields are subject to change- just look at the USA where rates used to be much higher.

 

*Sustainable dividend yields and not the one-off yields that defeats the point of stock screeners.

** I’m not saying this is the way to go. Portfolio allocation is a much more multi-faceted subject than this.

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