Why I’m still planning to live off dividends and distributions
Some time ago…yours truly 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 and I can see why.
When I mention “living off dividends” some readers in the past 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).”
“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.”
No doubt this remains a polarizing topic.
Regardless of how others feel about this subject, I continue to believe that saving and investing until we reach our crossover point is something to aspire to – to retire comfortably. For us, that’s owning a paid off home/being debt-free AND owning a $1 million personal investment portfolio. (This portfolio excludes our small workplace pensions and any future value government benefits.) We’re over halfway there.
Why do this?
We’re striving to live off the dividends and distributions generated by our investment portfolio for the following reasons:
- There are simply too many unknowns about the future. Having ample capital for our financial future will give us many options.
- 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 when markets don’t cooperate.
- Saving and investing this way is my form of forced savings – there is motivation to reach our $1 million portfolio goal and spend the income from it.
A few years back I asked other bloggers and investors about “living off dividends” after I wrote about our plans to do just that. You can revisit those older articles here:
I caught up with Dividend Earner recently to ask him how his investing goals have changed (if at all), how close is he to reaching his own crossover point, and what’s he’s investing in these days.
Dividend Earner, welcome back! What’s new?
From a dividend investing strategy perspective, not much has changed.
My current focus is on dividend growth during the wealth accumulation years. My dividend income is fully re-invested as of writing this but I am considering getting it all in cash to choose where to deploy income earned every month. I will generate $1,000 per account within a couple of months and based on the market fluctuations, I could probably sprinkle it around more.
With my focus on dividend growth, it has me looking at U.S. stocks more. Right now, my exposure to U.S. stocks is about 53% and growing. In fact, 80% of my RRSP account is in U.S. holdings. I am now considering holding U.S. stocks outside of my RRSP. “WHAT?” some of you might think … sure….but consider the total return expectation. If I hold a low yield U.S. stock inside my TFSA and pay the withholding tax (you can read about withholding taxes on this dividend page here on Mark’s page) it’s not a major impact on the total return while potentially realizing significant gains.
The biggest change since our last interview was to realize that my accounts with U.S. stocks (such as my RRSP) have outperformed all of my Canadian accounts by additional 3% in my annual rate of return. In Canada, banks have been, in general, the best performers from a dividend stock perspective. I cannot have a portfolio of just banks (that would be irresponsible) although I guarantee you that bank employees have a lot riding on their employee stock programs. A company-biased portfolio is a regular water cooler topic at the office!
Do you still intend to “live off dividends”?
I certainly do.
It’s my primary retirement plan. While you may need more than a withdrawal rate strategy, why aim low? Why not attempt to reach this primary goal and fallback to a withdrawal strategy later? (Mark – I agree).
The reality is I don’t know how long I will live and money does go a long way to help if there are medical complications. I do want to skip the line for procedures if I need to and am able to financially.
Back of napkins math – my goal is to earn $60,000 per year in dividends by 2024. That’s only 6 years from now and it’s based on a growth of 21% annually in dividend from both new money added and the dividend growth. The $60,000 target also includes owning perennial low yield stocks like Canadian National Railway, Visa or Costco. The portfolio is not loaded with high yield stocks.
Can I retire sooner? It’s on my mind but not for 4 years at least. It’s not far away and I will be helping my kids with university shortly.
Do you have a crossover point like I do? If so, what is that?
$60,000 is my goal at the moment.
I will always have a year’s worth of cash ready when I stop working (note: see a similar idea I have about our cash wedge in retirement) but I’m not settled on any sort of fixed income approach or a ratio matching your age approach. I may be bolder than others and be completely in equities. High yield holdings, especially Canadian ones, have only been a disappointment over the past 5 years. Many simply dropped their dividends and there is little to no growth.
I am starting to strategize my approach. At the moment, banks are the most appealing with both good yields and good growth with the telcos not far behind from a Canadian perspective.
What are you investing in these days?
I’m buying U.S. industrial stocks along with U.S. healthcare stocks. When choosing a stock, I start with Dividend Achievers and review the dividend growth and Chowder Rule. I also review my current list of 26 stocks and assess which ones to add more money to. Every now and then I reassess if there is a better option for the underperformers in my portfolio. It’s pretty boring but it’s effective. My portfolio returns since 2009 is consistently above the indexes.
I hear ya. More approach is very boring. What’s next for you? Any big plans for 2018 when it comes to investing, family, otherwise?
Avoid lifestyle inflation as I have been doing for the past 10 years and invest as much as I can. I invest close to 50% of my income. There are 2 big goals:
First, top up the spousal TFSA account.
Second, reduce the investment line of credit (LOC). I have had a line of credit for investing for a number of years and with interest rates going back up, I will be paying it off.
Mark – sounds like good goals and you’ve done very well to date for sure. Thanks to Dividend Earner for taking the time for another interview with me. I hope to have him back in the future 🙂
Do you have questions for Dividend Earner and his investing approach, his goals, other? Share away and leave a comment below. I’ll ask him to answer them!!