Hi again friends. 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. Some investors don’t agree with me on this:
“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).”
“Some of the big banks’ income funds have proven to have unsustainable distributions.”
“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.”
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 about Dividend Growth Investor and his journey here.
You can read about Tawcan and his approach here.
As part of this series, for today’s post, here is what Mike from The Dividend Guy Blog / Dividend Stocks Rock told me about his intent to live off dividends or distributions.
My name is Mike Heroux and I author The Dividend Guy Blog. I am also the owner and portfolio manager over at Dividend Stocks Rock. I earned my bachelor degree in finance-marketing, hold a CFP title along with an MBA in financial services. I started my investor journey back in 2003 with an audacious leveraged plan that led me to successfully build a $50K cash down payment to buy my first house in 2006. Besides being a passionate investor, I’m also happily married with three beautiful children. I started my online venture to educate people about investing and also to be able to spend more time with my family.
What is your investing goal? Do you really intend to live off dividends or distributions?
Since 2010, I’ve switched my portfolio to 100% dividend growth stocks. My goal is to build a strong money making machine for my retirement. I divide my portfolio into two segments: 1) a core portfolio with very solid dividend growth stocks (that I will probably never sell) and 2) a growth portfolio where I buy stocks with stronger potential (and risk) with a holding time horizon of 18-24 months to unlock the potential. I intend to use both dividends and capital to fund my retirement.
Why does this approach work for you?
It enables me to build a strong portfolio with long term holdings while I have also the ability to benefit from buying opportunities in the market. I’ve successfully made transactions with Seagate Technology (STX) and Apple (AAPL) for example. The core portfolio segment requires less attention and provides consistently growing dividends.
Will you eventually “eat” your capital and if so, how?
There is a good chance I will eat my capital as I plan to retire early. I do not wish to work past the age of 55 as I would rather travel and enjoy life. Since I have also a defined benefit pension plan, the dividend portfolio will be there to compensate for the penalty of retiring early attached to my pension plan.
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?
This is a tough question to answer right now as I’m taking a sabbatical in 2016 to travel across North and Central America with my family. At the moment, I’m right on target for my retirement, but things will change a lot in the upcoming years. I’m turning 34 and taking my chances with my online business during the RV trip. If this is successful, I might retire from the 9 to 5 job environment at 35!
Any last words you wish to share about your approach?
I think the key to successful investing in the stock market is to perform exhaustive research to find which investment strategy best fits with your goals and risk tolerance. Once this is done, establish investing principles that you will follow religiously. I’ve identified 7 principles for my investing strategy (you can read about them here). Too many investors panic during bullish markets and forget about sticking to their own strategy.
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 to Mike McNeil for participating in this series. Stay tuned to My Own Advisor for a couple more investor profiles.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
I agree with you Gary, Mark,
our education system sucks big time when it comes down to financial literacy. I wonder why they don’t include personal finance in math classes. It’s a real mystery for me!
We’ll never know. I’ll be too old when our education system deems this a priority. Or, the education system is sponsored by large corporate with deep pockets because our government is broke!
I agree with you Mark; starting early is the key. (I was 37) I sometimes blame our education system for letting us down. I’m so thankful there are bloggers like you and Mike that are able reach out via the internet. Kudos to you all!
Our education system certainly doesn’t prepare to us to be good investors….heck, I don’t think they even teach you how to deposit money or write a cheque or anything. Let the money institutions take care of that. And your wallet 🙂
Thanks for sharing this Mark and Mike. I bet there is lots of research that goes into investing and picking what is right for you. I don’t do any of my own investing but I’d like to invest in dividends especially since our mortgage is paid and we have spare money to play with. I find it hard to break past that nervous point and just starting and Mark has been such an inspiration with lots of great resources on his blog. It’s like starting a diet regime or quitting smoking. Once you start and push through the rough spots you become focused on the end goal. Right now we have an advisor who looks after our money. I’d love to retire at 55 as well which leaves me with quite a number of years left to invest.
What would you suggest to someone who is just starting out and wants to invest in dividend paying stocks?
Thanks Mr. CBB.
To be honest, the faithful Canadian stocks that pay dividends is rather short.
https://www.myownadvisor.ca/canadian-dividend-stocks-buy-mostly-forget/
Will they continue to pay dividends in the future? Probably, but dividends are never guaranteed.
The learning curve to DIY investing can be steep but taking things one step at a time is the way to solve a larger challenge.
The Value of Simple is good book to walk you through the process of becoming a DIY investor.
https://www.myownadvisor.ca/value-simple-book-review-giveaway/
It’s not a perfect recipe but it will make you less nervous and start the process of making you feel more in charge.
I have some future posts to answer that exact question: what would you suggest to someone who is just starting out and wants to invest in dividend paying stocks? Stay tuned and thanks for reading.
Hey Mark,
Thank you for giving me the opportunity to be part of your series.
Cannew,
I don’t expect to use my investment as a source of income for some time. I rather focus on my capacity of generating cash flow through my sites or my job. I agree with you, once your portfolio has to generate X cash flow to sustain your lifestyle, it’s no time to focus on growth but rather on solid dividend payments!
Cheers,
Mike
Happy to have your story here Mike. Thanks for sharing.
34 with clear objectives, investment plan, and a sensible approach to investing. Should be able to achieve the goal he wishes and if not his portfolio will continue to grow. As one get closer to retirement more concentration should be placed on the Core holdings and less on growth.
Mike is quite focused Cannew. I read stories like his and feel I started my investing journey too late. Kudos to him and I wish Mike success in his online businesses.