Wednesday, March 2, 2016

Creating a Legacy Portfolio

As a dividend growth investor, my primary focus is on analyzing and selecting solid companies that pay raising dividends over time. By doing so, the hope is to ensure that the portfolio rolls downhill in the same manner as a small snow ball. Over time, the snow ball collects more and more dividend payments (snow) and therefore becomes bigger and bigger. Eventually, the snowball then becomes big enough where the payments made by it are so big that it covers living expenses and allows one to retire on them. I feel like this is the eventual dream of every dividend growth investor. But what happens after the snow ball reaches that point? Yes, your retirement appears very solid but what happens after you kick the bucket?

Many dividend growth investors like to speak of the final dream being the final step of retiring early and living off of only the dividend payments given by the portfolio. There is a surprisingly less amount of information however when you ask those same investors as to what they're going to do with it or what they hope to come of it when they kick the bucket. As such, I propose a new final wish for the portfolio. I propose that the final dream become the idea of a rolling snow ball that we will call the legacy portfolio.

A legacy portfolio is one that doesn't simply cash out and become capital for your ancestors to squander. The legacy portfolio is a portfolio that is so big and so successful that whoever you choose to will inherit it and continue what you have built rather than buying a new Porsche and cashing it out for other items. If your portfolio is handed down to someone and you choose to dedicate a portion of your retired life to teach the person you will hand the portfolio down to how to continue compounding it, imagine the possibilities of what your portfolio could achieve?

In one lifetime, it's easy to imagine your dividend growth portfolio achieving what greatness you can give it but if you instead extend that range of life to another after you, the growth is astronomical. This is what I intend to do with my portfolio in the long run. To further drive home my point, I want to break down the numbers:

(calculated without assumed compounding interest)

Single Lifetime Portfolio Value:
Example 1) $300,000 x 0.04 (4% dividend payment) = $12,000/year in dividends
Example 2) $500,000 x 0.04 (4% dividend payment) = $20,000/year in dividends
Example 3) $1,000,000 x 0.04 (4% dividend payment) = $40,000/year in dividends

If we assume that in our own lifetime, we do not reinvest the dividends and simply take out the yearly dividend payment, our own lifetime portfolios appear they could yield an easy retirement for us all. If on the other hand we were to teach our successor to continue onward with our portfolio and call into play compounding interest once more and simply reinvest the dividends, the resulting numbers are head spinning. Before we get to that however, let's just see what the numbers would be if they simply reinvested the dividends paid and decided to put none of their own money per year into it. We'll use the same examples from above.

Continued Lifetime Portfolio with 4% dividends reinvested over 5 years:
Example 1) $300,000 with reinvested 4% ($12,000+/year) = $364,995.87
Example 2) $500,000 with reinvested 4% ($20,000+/year) = $608,326.45
Example 3) $1,000,000 w/ reinvested 4% ($40,000+/year) = $1,216,652.90

These are obviously base examples assuming that it stays at 4%, not taking into account that these will likely raise even higher than 4% per year if you're in dividend growth stocks only. That means that even off a smaller ending portfolio from your single lifetime, if your successor were to simply reinvest the dividends only, they'd be sitting with $64,995.87 more only 5 years later. Assuming your child or successor doesn't even decide to retire for another 15 years after you've left them in charge of the portfolio, the numbers basically jump them up another bracket:

Continued Lifetime Portfolio with 4% dividends reinvested over 15 years:
Example 1) $300,000 with reinvested 4% ($12,000+/year) = $540,283.05

When people talk about the power of time and compounding interest, they're not blowing smoke. This is what I hope to harness when I talk of the creation of a legacy portfolio. Obviously, these numbers are simply the base of the pyramid and they would likely even be greater with reinvesting made by those in charge of your ongoing portfolio but even with the base numbers, one can easily see where this is leading. I hope that by reading this and seeing the numbers and how they add up, those who have not thought about it before will be able to open their minds to the idea of teaching their successor of this valuable opportunity.


  1. A legacy portfolio is indeed great to create one. That's why we created a dividend portfolio for Baby T1.0. With our dividend portfolio we hope to pass it on for many generations. Can you imagine what kind of compounding it would be after 3 or 4 generations?

    1. That's what I keep thinking about! That's why I knew I had to write about it. I'm hoping that my "Cookie Jar" portfolio sees not just the end of my life but many more beyond me. Compound forever!

  2. Hey DM,

    I've thought about this a little bit. I guess depending on the amount of income, you'd expect your capital to remain intact, but you'd probably want to spend a lot of it too at some point, depending on how big it is of course.

    Compounding really is crazy. Like the multiple examples you've provided. Thanks.


    1. The great thing about it though is that if you want to spend a little bit, take out one month of dividend income and go on a trip. You're not bared from taking out of it what you'd be paid in dividends. It would strongly be ushered against taking out more than that as it would undoubtedly affect future gains/loses.

  3. I love the idea. I call it a family bank and it's one of my goals too. Rich families create family banks typically with dividend paying stocks and very large whole life insurance policies.

    There's nothing to stop us from doing the same thing with only dividends. I wrote about it here -

    1. A family bank? That's another great way to describe it. I'll definitely go check out your article soon too. I'd love to read more about it.

  4. Awesome post. I love all the numbers. It really paints a great picture for compounding. On the site they have a couple of dollar cost averaging calculators that are useful for extending this compounding growth out over a 30-year period. I've taken a couple of those spreadsheets an converted them into Google Sheets here (

    You basically input the starting investment, pick any recurring investments that are made and then choose dividend yield and growth rate. Even when plugging in conservative numbers, the results over a 30-year period are astounding!


    1. Scott,

      Thanks for stopping by. I played around with the spreadsheet that you posted... the numbers are mind boggling. I really hope that mine can be as successful over the years. I know it will be if I can keep it in the right hands.