I was looking for a dividend growth calculator online the other day that would allow me to get an idea of how my dividends would evolve over time if I took into account taxes, capital appreciation, dividend growth, dividend reinvestment, and the addition of new capital. Alas, I was unable to find quite what I was looking for. So I decided to just create my own instead. After a night of nerding out on Notepad++, my cute little project is complete. And since this fun little tool really presents the power of dividend investing in a tangible way, I decided to share it with you all. Yay!
The calculator is super straightforward. You enter the initial amount of capital that you have (e.g. your portfolio’s current value), and the amount of capital that you plan to add on an annual basis. You then enter the initial yield (e.g. your portfolio’s current yield), the expected annual dividend growth rate of your portfolio, the expected annual capital growth rate of your portfolio, and your state’s income tax. Lastly, enter the time frame that you would like the algorithm to model for you.
Now, of course, this calculator won’t give you a truly accurate picture since it is based on the assumption that a static dividend growth rate and static capital appreciation rate will be maintained every single year, which is highly unlikely. It also assumes that one will keep contributing a static amount of fresh annual capital, which is also unlikely, as a lot of people will earn more money over time and thus likely invest more. Furthermore, to make the math easier, the calculator assumes that all dividends and fresh capital are added all at once at the end of each year, after the yearly capital appreciation rate has been applied to the portfolio, whereas most people invest on a monthly basis.
Oh, and federal taxes are baked directly into the calculator, using the 2015 single-filer tax brackets with $37,451 for the 25% bracket threshold (at which point dividends are taxed at 15%), and $413,201 for the 39.6% bracket threshold (at which point dividends are taxed at 20%). To reduce the number of calculations in my code, though, I actually apply the 15% tax even when the dividends fall under $37,451 (plus, I think it’s fair to assume that most people already fall squarely in the 25% bracket with their regular job income anyway). The net investment income tax is ignored in my calculations, because fuck the net investment income tax.
With these things in mind, though, this calculator will still give you a pretty good idea of what you could expect to earn over time as a dividend growth investor in the U.S. (the taxes used in my algorithm obviously won’t be correct for those of you living in other countries, sorry 🙁 )
So go ahead and try it out! If you play with the capital appreciation rate you’ll notice that the smaller it is, the faster your dividends increase. This makes sense, seeing as lower capital appreciation allows for dividends and fresh capital to be invested at a lower cost. I love this because it really hammers home the point that, as dividend investors, we should welcome bear markets and stock price declines, as they are to our benefit! You’ll also see that, even with modest amounts of capital, you can achieve some pretty crazy numbers if you use time frames of 50+ years. And while most of us chasing early retirement will likely start tapping into our dividends much earlier than that, it’s still fun to see the exponential power of compound interest at work. It truly is a magical thing. Kinda like chocolate chip cookies.