When I was a child the lottery fascinated me. And who could blame me? People hitting it big simply by buying a colourful piece of paper with seven or so large magical numbers on it makes for a fascinating and tantalising story to children. I wanted to win the jackpot too. And I still do.
However, as I grew older and familiarised myself with the principle of probability, the mathematical foundation every lottery is built upon, I lost all interest in actually playing the lottery. I still wished to hit a large jackpot like Euromillions, but I didn’t want to buy the tickets to do so. I felt like I would waste good money, as Steve from Kapitalust showed us a while ago.
At that time, I was around the age of fifteen, money didn’t come easy. I made quite a lot of money building websites and helping people out with all sorts of chores, but all things considered I wasn’t making much by the hour. Instead of buying lottery tickets, putting money away in a piggy bank and seeing my stash grow appealed more to me. So that’s what I did.
Be that as it may, one lottery game kept drawing me: Win for Life. The game offers winners a lifetime annuity up to €2,000 a month. A €3 ticket gives you a one in a million chance to receive €2,000 in interest every single month until your death – amazing, right? Even though I could potentially afford a ticket once in a while, I wrote winning for life off as a mere fantasy.
“You’re a rational person. Rational people don’t take one in a million bets.”
Years went by without giving Win for Life too much thought. Every now and again someone would bring up how great it would be to win €2,000 every month, but conversations never got any further than wild fantasies about a lifetime of riches. Until I discovered dividend growth investing.
“Holy hell, you can actually build your own Win for Life?”
Granted, it’ll take you quite a long time to fund your own Win for Life – a monthly free-of-work payment of €2,000 is more than mere pocket change, after all – but the chance to successfully build an income stream through dividend growth investing is much, much higher. Almost infinitely so. Here’s why.
Let’s suppose you manage to sock away about €1,500 every single month like I have over the past year or so. Like a metronome you invest your savings in stocks offering a 2.5% net yield and an average dividend growth rate of 5.0% after inflation. On top reinvesting your dividends, you also manage to earn and save 3.0% more each year.
Punching those numbers into an Excel spreadsheet gives us the following table:
|Year||Invested capital||Net yield||Monthly income|
As you can see, it’ll take us exactly twenty years and almost 650,000 Euros to build the same level of monthly income as a single Win for Life lottery ticket worth only 3 Euros. Compounding interest is a powerful force, but it clearly can’t work miracles overnight. Still, after 17 years you’ll have caught up with the lottery winners.
The success rate of a dividend growth investing strategy is hard to determine, but judging by the throngs of dividend growth investors publishing their progress and achievements online it must be rather high. At any rate, dividend growth investors don’t have to beat odds of one in a million, thus making it a much better option than Win for Life if you’re looking to receive €24,000 annually without having to work.
What’s more, by the time you have saved and invested yourself towards your own Win for Life fund, you’ll see that the dividends don’t stop there. They’ll continue to grow even if you don’t put in anymore money, boosting the €2,000 cheques higher every month, albeit at a slower pace. Meanwhile inflation eats away at Win for Life players’ fixed winnings.
So now you know where my habbit to save lots comes from, but also why I like the idea behind dividend growth investing so much. As a child I had the saving part down, but didn’t see how that could lead to free-of-work or passive income. Now I do and I couldn’t be more determined to make my own Win for Life happen.
How about you? Would you pick Win for Life or dividend growth investing?