Stop me if you've heard this one before: Thirty years ago, if you'd bought $1,000 worth of Johnson & Johnson (NYSE: JNJ) and reinvested the dividends, you'd be sitting on more than $51,000 today.

Alternately, if you'd invested $1,000 in Altria (NYSE: MO) in 1981 and held steady to now, your investment would be up more than 5,200% and you'd be receiving large dividend checks every quarter.

I could go on, but I'll spare you. Instead, let's look at a real-life dividend success story.

Jar of coins labeled "dividends"

Image source: Getty Images.

Meet Hayford Peirce
Hayford is a science-fiction writer by trade -- although he told me he thinks of himself more as an investor "because that's what I do." After inheriting family assets at a young age, he took an interest in managing his own portfolio.

Not merely as an intellectual exercise, though. "The whole point of owning stocks was to live on the dividends," Hayford told me. Though The Future for Investors author Jeremy Siegel labeled dividends "bear market protectors and return accelerators" because of the power of reinvesting them, Hayford needed the quarterly checks: "Reinvesting is just fantastic but I can't afford to do it."

A peek inside the portfolio
Hayford holds a very concentrated collection of high-yielders. All told, he currently owns 14 total investments, and by his precise estimates, these 14 investments will spin off $146,194 in 2011:

  • Three common stocks (Altria, J&J, Philip Morris International (NYSE: PM))
  • Nine master limited partnerships (Alliance Resources, Enbridge Energy, Energy Transfer, Enterprise Products, Inergy, Kinder Morgan, ONEOK Partners, Plains All American, and Suburban Propane)
  • One bond
  • One annuity

His Altria investment is an incredible story. Hayford began buying shares of the tobacco company back in 1987, when it was quite a bit more than just a tobacco company. Over the years, he kept buying more (in '88, '91, '96, and '97), and eventually accumulated 11,000 shares of Altria (then known by the more familiar Philip Morris name). "Every time there was a panic in the market about Philip Morris, it would go from $70 down to $20 because of a smoking case, I would go out and I'd buy some more." Through spinoffs, his original 11,000 shares of Altria stock turned into an astounding 11,000 shares of Altria, 7,000 shares of Kraft, and 11,000 shares of Philip Morris International.

He still owns Altria and Philip Morris International, but sold Kraft. "At one point my basis for everything, including the Kraft [spinoff], was about $200,000 and it was worth about $1.25 million."

Not bad for a company famously dogged by litigation fears over the past three decades.

30% yields
That Altria investment is spinning off incredible "effective yields" -- measuring today's dividend checks against the original cost basis, rather than the current share price. Hayford's getting a 37% yield on Altria and a 28% yield on Philip Morris International.

That's by design. About half of the $146,194 in investment income will come from Hayford's annuity and the lone bond. The other half will come from a very deliberate investment process in dividend stocks. On a 1995 trip to Tahiti (where he lived for 25 years), Hayford sat down with a legal pad, pen, and his collection of stock tickers:

I was looking over my portfolio. And say there were 12, 14 companies in it, and 8 of them were blue chips like GE and Coke and Johnson & Johnson. … I said, "These suckers are bringing in $14,200 in income this year. Let's see what would happen if we just increased that dividend by 10% every year for 30 years."

Upon returning to the States, he transferred his legal pad scribblings to a series of spreadsheets, and the long-term vision for these 12-14 dividend stocks took hold. His stated goal was to increase his annual investment income from $14,200 in 1995 to $250,000 in 2025. "Up until a year and a half ago, I was ahead."

Then the financial crisis hit, former widow-and-orphan stocks like GE and Bank of America (both owned by Hayford in '08) slashed their dividends, and even the best-laid of plans went to mush. Hayford tilted his dividend portfolio toward high-yielding MLPs.

The importance of a road map
When he sat down with that legal pad in Tahiti, Hayford was 53 years old. He devised his plan, he said, out of sheer necessity: "Just about everyone in my family except my poor father lives forever in good health, and I said I fully expect to live to be 100 years old."

If you think every retiree or near-retiree outlines such a game plan, think again. The 2011 Retirement Confidence Survey, administered by the Employee Benefits Research Institute, found that many folks simply don't plan for retirement. Forty-two percent of respondents, in fact, said they determined their retirement savings needs "by guessing."

As my colleague, the retirement expert Robert Brokamp, is fond of saying, you can't get to where you want to go if you don't know how to get there. 

Hayford's journey would be tough to emulate -- he grew up in a wealthy family and inherited assets upon his father's death (Hayford was just 4 years old). Before he self-directed the portfolio years later, the Fiduciary Trust Company ran things. Also, he was candid about how many "major mistakes" he's made over the course of his more than four decades of investing.

Still, Hayford's a shining example of three crucial investment principles. I'll let him do the talking:

  • Setting goals. "What it really comes down to is, What are your goals in investing? Everyone has different goals, and my goal is to not go to work and to live on my dividends."
  • Discipline. "I still have that 30-year spreadsheet that I update every year and I plug in all the figures, and it's just like what they say about compound interest -- it's magic, it works."
  • Dividends. "I would love to just have 10 stocks that I bought 30 years ago and never had to sell, as long as they kept raising their dividends."

Living off $146,149 in investment income may sound like a long putt for most, but those three simple and straightforward steps will guide you right.