A short while ago on My Own Advisor I wrote a controversial post about the intent to live off dividends and distributions form our portfolio. I know some investors don’t agree with my approach. That’s fine. For me, it’s something we’re striving for, for a few reasons:
- There are simply too many unknowns about the future. Having ample capital for our financial future will give us many options, including the option to retire early and convert to a total return approach if we really want to.
- If we are able to keep our capital intact we don’t need to worry as much about when to sell shares or ETF units, there are less decisions to make, and consequently there will be less transaction costs and portfolio manipulation.
- Saving and investing this way is my form of forced savings – there is motivation.
I recently caught up with a few dividend investors to ask them some questions about their financial freedom journey, including any plans to “live off dividends and distributions”. You can read what other investors told me below:
To wrap up this series here is what my friend Frugal Trader told me.
Hello everyone, I am the founder, editor, and primary author at MillionDollarJourney.com (I go by FrugalTrader online). My site started in 2006 which tracked my journey to $1 million in net worth by the age of 35 (achieved in 2014). In terms of investing, I started with mutual funds in my teens, but got more serious about building a portfolio after graduating from University (in 2003).
Dividend investing attracted my attention a few years after graduation when I was searching for ways to generate passive income. At the same time, I owned rental real estate. However, I soon discovered my lack of landlord abilities so I sold my properties and focused on investing and building my online business instead. I’ve been a dividend investor since (with some indexing as well).
When picking dividend stocks, I focus on their dividend history. How long they’ve been paying, consecutive years of dividend increases, and their dividend policies during the tough times (dot com bust, financial crisis etc.). I also read financial statements and annual reports to ensure that their dividends and earnings are sustainable.
What is your investing goal? Do you really intend to live off dividends or distributions?
The issue, as you mentioned Mark, is that your portfolio size has to be pretty large in order to produce enough income to cover monthly expenses. But who says that you need to live entirely off the portfolio? Why can’t it support a portion of your living expenses? When people retire at traditional ages, they may be eligible for CPP and OAS which can cover a significant amount of monthly expenses (especially as a couple).
Currently, my investment goal is to generate $55,000 to $60,000 in dividend income by 2020 (age 41) which would cover our current annual expenses of around $52,000/year (no debt payments, I have a paid off home). This does not cover vacations, but I will likely continue doing a side gig to generate any extra cash flow needed.
Why does this approach work for you?
As mentioned above, generating passive income resonates with me. To some, the markets may not be the best way to do that because they can’t tolerate the volatility of seeing their account balance fluctuate like a yo-yo. One way around this is to focus on the income that your portfolio is generating, rather than the capital balance. If you pick the right basket dividend stocks, your portfolio will provide reliable income for a lifetime (generations even).
I generally lean towards dividend growth stocks. These companies have a long history of increasing their dividend which is a great way to hedge inflation when living off distributions. For example, Fortis and Canadian Utilities have increased their dividend for over 40 years straight.
I also like to keep it simple. If this strategy can provide me and my family with a reliable income source and all that it requires that I check my portfolio and read the odd annual report (which I would do anyway), then it’s a keeper in my opinion.
Will you eventually “eat” your capital and if so, how?
As I plan to live off my portfolio at an earlier age, I’ll need the portfolio to last a very long time. The safest route would be to live off distributions only. For estate planning purposes, if one spouse survives the other, the portfolio will be transferred to the other. Once both spouses pass away, I envision a large part of the portfolio will be transferred to a family foundation so that my adult children can enjoy the merits of giving back.
How close are you to realizing your retirement goal? What are your assumptions about your savings rate, your portfolio value and your rates of return needed?
In my last update on my site we are currently generating around $16,000/year but with a significant amount of cash sitting in the sidelines (an investing weakness of mine). The $60,000/year goal in dividend income within 5 years (2020) is quite ambitious especially during a time of reduced income (my wife has taken a leave of absence for two years). We are pretty frugal by nature, so we will continue saving and investing for likely the remainder of our lives. Ambitious (or crazy), the $60,000/year goal by 2020 is just that, a goal, just like the million dollar net worth goal we set back in 2006.
Any last words you wish to share about your approach?
Dividend investing is not for everyone, but is an attractive strategy particularly for those that plan to retire earlier than the traditional age. One mistake newcomers make to this strategy is going after high yielding stocks. While high yields may represent an attractive time to buy a particular stock with a long dividend track record, it can be a problem as well – the market may be pricing in a dividend cut. So if you come by a stock with a high yield, make sure to do extra due diligence. You may be better off coming up with a list of your favorite dividend stocks (i.e., companies with a very long history of dividend payments, good dividend growth history as well) with coverage in every sector and then wait for a reasonable valuation to buy.
Frugal Trader was one of the first bloggers I followed after I “woke up”, to get my financial act together. His site has been an inspiration to me for many years now and I want to thank him for his support of our own financial journey and my site that describes it.
The same disclaimer applies with this post as others, the goal of living off equity dividends (or distributions) can be a prudent strategy but it’s not for everyone and dividend investing also has risks. Only you can decide what is right for you. I encourage you to consult a financial professional in the form of a fee-only advisor if you need help with your financial plan. Thanks for reading this series and I hope you enjoyed it.
Frugal Trader: “One mistake newcomers make to this strategy is going after high yielding stocks”.
That’s probably the hardest rule for new DG investors(maybe even the old-timers) to follow. Patience is a must and sticking to solid companies as Frugal Trader mentioned.
Should meet your goal and best of luck!
Great advice Cannew.
Great interview and it’s great to hear FT’s thought on living off dividend. I agree that you don’t have to entirely live off your dividend income. We just calculate our FI day based on dividend income covering expenses. We would get there earlier if we consider other income sources too.
Amazing that FT achieved $1 million in net worth by age of 35.
Thanks Tawcan. I know you’re on a similar journey to live off dividends and it’s great to read how other passionate investors are striving for the same or similar goals.
He has certainly done very well for himself by age 35. Kudos to him.
I would love to know how FT chose mutual funds in his teens. I didn’t know what a mutual funds was until my 30’s. Congratulations to him/her and you Mark for all your successes and for self educating yourselves at such a young age!
Thanks Gary. I’m only happy to run this blog and share what I know and don’t know actually. I hope it can be an inspiration to others to find their investing footing. At very least they can correct me here when I mess up. I don’t mind a healthy dialogue on investing…
FT is a very smart investor and I’ve certainly learned from him. I recall he used to invest in big bank mutual funds early on but then got his financial act together rather early in life, in his early 20s.
I agree with FT that you don’t have to entirely live off your dividend income as you likely will have other income sources when retirement rolls around. I like that he wants to keep his portfolio simple and that he has ambitious goals like the million dollar net worth. I believe the only way to achieve the success we desire is to set these goals and keep at it until we achieve what makes us happy. Great post, thanks Mark and FT.
In my conversations with FT, he is very driven. Very inspiring actually. I also like the fact he is looking to simplify his portfolio over time. I’m fairly certain he will never index invest but over time, I could see him simplifying his holdings given his focus will be on capital preservation. I hope he comments on that, I would be curious to know if I’m right 😉
“One way around this is to focus on the income that your portfolio is generating, rather than the capital balance.”
Exactly. While I track the NAV of the all the different portfolios, I generally concentrate mostly on the income generated by the investments in the RRSPs. IMO, that is the number I want to watch and grow. I should do the same with the TFSAs but I haven’t gotten around to running a spreadsheet on them.
This is why I keep my monthly income updates running on this site. It’s motivation and focus on the income the portfolio is generating vs. the ups and downs of the market.