This article is a continuation of a series on my site, about living off dividend or distribution income. To check out the first article in this series click here.
A short while ago on My Own Advisor I wrote a controversial post about the intent to live off dividends and distributions from our portfolio. I know some investors don’t agree with my approach, for example, readers have mentioned the following to me:
“The trouble with a “live off the dividends” approach is that I’d have to save too much in order to create my desired retirement income. For example, I’d need to save between $2.5M and $3M in order to generate $90,000 per year in dividend income. Alternatively, I could get the same $90,000 per year by simply withdrawing from a portfolio of $1.45M (assuming 5% annual growth and the portfolio lasts 30 years).”
“Your universe starts to shrink if you demand an average dividend rate of 4% or higher from your stocks. I prefer to own everything and withdraw dividends plus retained earnings (in the form of capital gains) as I see fit. The way I see it, I’m living off retained earnings whether I get them in the form of dividends or capital gains. I don’t see why I need to limit myself to dividends in order to preserve capital.”
No doubt this is a polarizing topic and another article might not help the issue – but here goes anyhow…
For me, living off your dividends or distributions is something we’re striving for, for these 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”. As part of this series, here is what Tawcan said.
I am Tawcan and I run a blog named after myself. I’m in my early 30’s, happily married. We have a toddler that keeps my wife and I busy 24/7. We live in beautiful Vancouver BC and have traveled extensively around the world. I started the blog because I am passionate about personal finance and investing and I want to share ideas and tips with everyone else. We’ve been investing in dividend paying stocks since 2007. Back then I didn’t know much about dividends and received dividends simply because I invested in a few stocks that paid out dividends. Since 2007 I’ve learned a lot about dividend growth investing and have become quite serious about investing in stocks that pay dividends.
What is your investing goal? Do you really intend to live off dividends or distributions?
Our investment goal is to reach financial independence, meaning our investment income (in this case, dividends), exceeds our expenses. Once we reach this point we have the flexibility and freedom to decide what we want to do. We may decide to travel more, we may decide to re-locate to a different country, or we may decide to continue working or do a bit of it all. Whatever we decide to do, financial independence will provide us with options and freedom to choose what we want to do. Having options is extremely powerful and gives us the freedom we are looking for.
Why does this approach work for you?
The idea of not eating into our capital is very appealing. Like Mark stated, there are just too many uncertainties and unknowns. If we have to withdraw 4% from our portfolio each year and a bear market sets in for a couple of years, our overall portfolio value will be greatly impacted, resulting the portfolio not lasting as many years as anticipated. Having the principal intact and only use dividends simply provides more options for us. Again, having options is extremely powerful.
We invest in a lot of dividend paying companies that raise their dividend payout every year. This will make sure that we can keep up or beat inflation. The annual dividend growth also means that our dividend income can continue to grow even if we don’t invest any more fresh capital. This will be essential as we start using our dividend income.
Will you eventually “eat” your capital and if so, how?
Initially after we reach financial independence and start living off on dividend income, we don’t plan to eat our capital. We may look into selling our stocks later when we’re in our 70’s or 80’s. We may also just simply donate or give our dividend stocks to charities or our heirs. One of the biggest dreams I have is to be able to write a $1 million cheque and donate to a charity someday. I might be able to do that by eating into our capital and donate that money.
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?
Right now we’re investing in dividend paying stocks in our RRSP’s, TFSA’s, and taxable accounts. According to the early retirement/financial independence spreadsheet calculator that we created, we are on target to reach FI in 8 – 15 years, which is roughly on target with our goal of reaching financial independence in our mid 40’s. Assumptions that we made in our spreadsheet include 4% withdraw rate on non-dividend portfolio, 8% growth rate for non-dividend portfolio, 8% dividend growth rate and 3.5% new stock dividend yield, dividend re-investment (DRIP), $25,000 yearly additional investments, not touching dividend portfolio principal, no real estate rental income, and that our dividend income is not taxed. Like Mark we’re doing a mix of dividend and non-dividend investments. The goal is to use dividend income to sustain our early retirement early on, and not eat into our portfolio principals until much later in life. There are a lot of assumptions in our calculation. The numbers may change but the calculation gives us a rough idea.
We are not too hung up on a specific date of reaching financial independence. If we reach it when we’re 40, great, if we reach it 5 or 10 years later, we’re not going to make a huge deal out of it. It’s simply a goal we know we will reach in the not-so-distant future.
Any last words you wish to share about your approach?
Knowledge is power. Read books, blogs and other investment information you can get your hands on. Ask questions! Take courses that specifically deal with how to invest in dividend stocks.
There are a lot of excellent blogs to follow on personal finance and investment topics. Start investing today and harvest the power of compound interest.
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 its 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. I want to thank Tawcan for sharing his investing story and stay tuned for more stories from other bloggers as part of this series.