Why living off dividends still works for me – Dividend Earner
Passionate fans of this site know I’m a huge fan of dividend income.
For many years now, my dream to live off dividends remains alive and well – approaching $19,000 this year in key investment accounts!
And I’m certainly not alone in my thinking…
A few years back, I profiled some bloggers and asked them about their dividend income dreams. As part of a new series on my site, I figured I’d catch up with them to see how the last four years has gone.
I shared an update about Tawcan’s journey – now earning over $19,000 per year in his 30s.
Here was an update from The Dividend Guy – now earning a few thousand per year in dividends while he grows his online business.
Today’s post profiles Dividend Earner.
1. Welcome back! What has changed since 2015 (since our post together)?
My strategy has evolved Mark to focus on dividend growth and leverage the chowder rule in my dividend growth stock selection. It took some time to see the results but after the transformation of my portfolio (from mid- to high-dividend yield to lower dividend yield but consistent dividend growth), my dividend income has grown much faster.
Not only do I DRIP everywhere I can, like you Mark, which creates compound growth, my dividend also has an annual 10% growth on its own.
During the accumulation years, my portfolio growth is supercharged and I can be confident that when I decide to live from my dividend income, the dividend growth will also beat inflation and prevent me from dipping into my invested capital.
It’s not good enough to have a yield above inflation since that yield is your income. You need your overall yield to grow at or above the inflation rate.
2. How is your portfolio constructed now? What do you own? What accounts are you investing in?
My stocks are all blue-chip stocks that you read about here.
Generally speaking, the Canadian market is limited in terms of selection and I supplement those holdings with U.S. investments. I do hold an ETF from time to time and it’s the Vanguard S&P 500 (TSE:VFV).
Mark: VFV is one of many low-cost ETFs to own to enjoy market-like returns of the U.S. stock market.
I’m a big fan of holding U.S. stocks as a Canadian investor. It’s a much bigger economy and I got over the exchange rate mental blocker. If our Canadian-U.S. exchange rate was to change, while it would have an impact, it still beats the Canadian stock market in term of performance. My ratio of CAD vs U.S. holdings in value is 50/50. It’s not a hard rule, it’s what it is. I use the Norbert Gambit with DLR and DLR.U to avoid the currency exchange cost with my discount brokerage.
I feel you have to invest in the U.S. market. You cannot find a company like Visa or MasterCard in Canada.
I use all of the accounts available between my wife and I to invest. Our RRSP is full and so are both TFSAs. I am now investing in a non-registered account.
3. Great work. So how close are you to achieving your dividend income goal? How much more to be invested and/or time will it take to realize your dividend income goal?
Statistically speaking, I am 6 years away from my goal – which is very exciting!
Below is the growth since 2010 and the forecasted growth based on past trends. 2019 is not done but with the dividend increases from January and February, I’m forecasting I will beat my target for this year.
My portfolio and dividend tracker allows me to really see where I have been and where I am going. My annual ROR (rate of return) is between 9%-10% on my portfolio since inception. I don’t see that changing.
4. Are you going to do anything differently going forward to help you realize your goal?
Honestly, I’ve already tried the high-yield investment approach with our RESP account and that was a fail.
I figured that if I was going to use the high-yield approach in retirement, I could test it out with our RESP account. It really didn’t work. The dividend income was high, but there was limited growth in account value.
I know now I need to optimize for some yield but also focus on dividend growth.
So, in the future, I may drop the stocks with a 1.5% dividend yield with a 15% dividend growth and invest in companies that offer a 3.5% dividend yield with a 9% dividend growth. In doing so, I may say goodbye to one of my largest holding like Canadian National Railway (TSE:CNR) or at least move from a 6% exposure to a 2% exposure.
Those portfolio changes would probably boost my dividend income to the $60K range 6 years from now.
5. Earning $60,000 per year, just from the dividends, would be very impressive. What do you think the biggest factor will be in helping you realize your goal?
The boring approach continues to work – so, stay boring when it comes to investing!
I will also keep my lifestyle in check. Watch the spending and keep investing.
Here are some rules that could apply to your readers Mark:
- Don’t over think your purchases. Investing is better than doing nothing.
- Don’t over analyze the price of the stock. Avoid trying to outsmart the purchase price.
- Buy the boring blue-chip stocks in Canada and the U.S.
- Make sure you know why you buy – it keeps your portfolio stress-free.
- Continue to invest regularly.
- DRIP everywhere – let compounding do its magic!
Dividend Earner’s approach to investing is very similar to mine – but he’s also doing more of what I strive to own, that is, own more U.S. assets. I’m doing this over time buy owning more low-cost U.S. ETFs. He is doing it by owning companies like Visa, MasterCard, Apple and more. Your mileage may vary.
Ultimately I think Dividend Earner is going to get to his goal because of his high savings rate and his ability to stick to a plan he believes in. Keeping a plan we believe in should really apply to all of us!
I want to thank Dividend Earner for sharing his update and how he’s investing today. See you on the site and thanks for being a big fan and supporter of this site.
What questions do you have for Dividend Earner? Have you considering investing this way – a mix of lower yield but higher dividend growth stocks?
Other investor profiles coming up – stay tuned!
My concern with dividends is that they’re taxable, so I lose half the earnings when my income is high. I’d prefer to keep the growth value in the shares and then draw down when my tax rate is lower.
It depends Jeremy. Should you invest in dividend paying stocks inside the TFSA, dividends are not taxed. Should you invest inside the RRSP, at least the dividend paying stocks can grow and pay income on a tax-deferred basis.
I hear what you are saying in a taxable account though.
Agreed. I hold the VGRO fund in my TFSA and RRSPs to their max, and I have a portfolio in my taxable.
Mike I don’t understand your calculations with creating more room in TFSA. Can you dumb it down for me?
The *theory* is to gamble using a rapid growth investment then switch to an income focused investment once the high growth has been achieved. The TFSA is like a balloon in that it will expand as the product inside grows. It doesn’t create more contribution room, it just gets larger from internal growth. Having said that, it should be kept in mind that that rapid growth investment (or any investment) can also retract thus making the “balloon” smaller and any losses can not be re-input.
Really enjoying this series of updates from these guys. I have read all of their blogs and yours over the past number of years. Sharing your approach to personal finance helped me immensely in making the initial decision to handle my own investing.
Great to hear Laurie. DIY investing, let alone dividend investing, definitely has some risks but I certainly enjoy the psychological benefits of seeing that real cash flow into my bank account every week and month!
Lol, I agree! I remember, I was so nervous when I hit the ‘buy’ button on the first few stocks I had selected to purchase, when I started on this journey. I still own those stocks today.
Stay boring. Love it and YES. Of course you can find that dividend sweet spot by way of Kurtis Hemmerling articles on Seeking Alpha. Generally 2.% – 4%?
Interesting to see that dividend ‘explosion’ when you get to a certain level of assets and reinvestment and new monies.
Portfolios are like a bar of soap, the more you touch them and tinker with them, the smaller it gets!
There is a difference to having $$$ in a RRSP (taxed on withdraw – so you need more money in this type of account) to having $$$ in a non reg act (don’t need as much money in this account).
May: You will be fine with 1.5 mill in a non reg act at 5% div with 7% div growth. (very easy to structure). Then add in the divs from your TFSAs plus CPP, OAS etc, you will have more income than you will need. (never have to draw down – just live off the income).
Why do you think you need 2.5 mill?
I am aiming $2.5M including non-registered, RRSP and TFSA, excluding RESP. I don’t think I will have $1.5M in non registered when I hit $2.5M. The bigger part will be in RRSP and TFSA.
$2.5M is based on 4% rule to get $100K before tax. I will have at least 10 years without CPP and OAS. With high expense of two kids, $100K before tax actually might not be enough. But after kids leaving and CPP/OAS kicks in, I won’t need that much. So for now, this is a very simplified way to aiming for readiness of retirement. I need a detailed plan with tax optimization, budget changes when aging, etc. when I get there.
May, most investors are too focused on obtaining a number. In your case you feel that number is 2.5 mill. So many investors worry about the number – when in fact they should be planning around taxation. Here is what I focus on: 1) how will my investments be taxed 2) focus on the income (not the $$ value) 3) how can I create more room in the TFSAs (above what we are allowed to contribute). It will take some time to change the way to think like this – as the noise out there is all about how much $$ one has or needs for retirement. But taxation, income & room is what most investors miss and don’t plan for.
As I stated here on Marks blog before. I have NO RRSPS or GICS – never will again! (although – I understand some RRSPS for some folks is good – but not the bulk of their investment $$$)
I am curious what is the answer to your point 3? It really would be nice to have more contribution room with TFSA.
For RRSP, I am pretty sure my tax rate will be lower after I retired than my current tax rate. Especially that I do not have any pension. That’s why I think at least for me, investing in RRSP should be beneficial.
Creating more room in TFSAs can be done several ways. You & your husband can each contribute $63,500 each in contributions. So that’s $127K. If one was able to invest this in growth stocks only for the first few years (concentrating on gains and making more room) – then moving all the portfolio into dividend paying stocks and having the dividends drip (the dripping creates more room). Example: Today our TFSAs are worth over $350K and will drip over $17,800 in divs this year. So we have created $223K in new room (to date) and growing by another $17,800 this year. Then you can add on top of this the div increases of 7% each year, the reinvestment of our divs buying new shares every month (dripping) and new contributions each Jan $12K more – all in an investment that is not taxed. We also could withdraw $$$ if needed and are able to put back the following year.
Now, you could also set up TFSAs in kids name to create more room – but my kids won’t allow for this because they know the importance of the TFSAs and want to use them for themselves. In closing: if investors would considerate on taxation, income and room – they would be much better off and would not need as much $$$ overall.
Mike I don’t understand your calculations with creating more room in TFSA. Can you dumb it down for me?
I am a big fan of dividend earner. I really admire his discipline and very impressed with his investment.
Regarding to not touching the capital, I have some thoughts about it. I actually want to touch my capital as I do not see why I should not. If I raise my kids properly, they won’t need inheritance from me. So why not spend the money I earned with hard working and enjoy the life a bit.
Here is the plan: I will have the dividends covering my basic expense. Let’s assume that I have a $2.5M portfolio and I get 80K dividend. I get 5% dividend raise for the year but the inflation rate is 2%. So to have the dividend income continue to cover my increased basic expense, I have capital that generates 3% raised to sell. Which will be $75K in this case. This is surely more than enough to cover lots of fun stuff.
Any flaw with this plan? I know I may not always get dividend raise and sometimes I will get dividend cuts. Which means some years I need to have a tighter budget and if really necessary, I will dig into the capital as I am completely OK to die with a small portfolio, as long as not broken.
Thank you for the kind words. I actually agree that at some point it’s probably ok to touch the capital but it depends where you are on the timeline I would say and how much income your portfolio generates. The trick is to avoid withdrawing too much that the dividend increases offer a diminishing growth and it doesn’t keep up and you need to always draw from your portfolio.
At 2.5M, with the type of portfolio I have been building, it will grow faster than you can spend it provided you don’t spend like a billionaire.
I would put a time table together with the amount of dividend income earn for different stages in life. You should be able to see how much you can safely withdraw. There is an age where travelling is fun and we can still enjoy it and there is an age where it’s less appealing. Something to play with for sure, don’t hesitate to share if you have something.
Looking forward to your new post with withdrawal ideas. I check your blog from time to time.
May, maybe its too early but I’m not following your plan. This is what I understand from what you write. I’m unsure what the 75K refers to.
2.5M capital; 80k dividends = 3.125% yield
5% dividend growth on 80k dividends = $4k (no change in capital or reinvestment of dividends assumed)
Inflation @2% on 80k = $1.6K
Growth of capital $???
Use of capital $???
Projected spend $???
It seems to me you will have a significant income base from investments and significant capital to utilize prudently as desired for many years and indicate you also have some flexibility in lifestyle to adapt to various market swings. I expect you can look forward to some amount of indexed income from govt benefits.
IMHO, based on this you should be in a perfect position to utilize the VPW strategy or at least use as a guide for your potential annual withdrawals. You’re in great shape, and look like you’ll have a great retirement lifestyle with a lot of options.
I don’t have the 2.5M yet, but I began to (not seriously) play with all different ideas of how to live on my portfolio when the time comes. I want to be prepared. One idea is to switch low yield stock to high yield stock like Dividend Earner mentioned in the post. CNR is also my biggest holding in my portfolio. I have a few low yield high growth stocks. That’s why I didn’t expect a high yield of my overall portfolio. I hold some indexed investment too. I have quite some fixed income assets too right now. I will for sure adjust my portfolio at the time of retirement. Which way is the question to answer.
So instead of switching out of low yield high growth stock, I was thinking maybe it works this way in an ideal world:
I will have some cash bucket before I retire, meanwhile, I have 2.5M portfolio and expecting to get $80K in dividend. The yield is not very high, 80K/2.5M = 3.2%. I stop drips on all my stocks as I need cash to live on. But I still get dividend raise.
Year 1: I spent all $80K without touching capital, plus some money from my cash bucket. Through the year, my stocks raised dividend by 5%, and I expect to have $84K dividend generated next year if I didn’t do anything. But I expect inflation rate to be 2% only for Year 2. So I only need $81.6K for Year 2.
End of Year 1: I sold capitals that will generate $2400 dividend. I got 2400/0.032 = $75K. My portfolio is expected to generate $81.6K for next year.
Year 2: I spent all $81.6K dividend generated this year and the $75K I sold end of last year. Through the year, my stocks raised dividend by 5%, and I expect to have $85,680 dividend generated next year if I didn’t do anything. But I expect inflation rate to be 2% only for Year 3. So I only need $83,232 for Year 3.
End of Year 2: I sold capitals that will generate $85,680 – $83,232 = $2448 dividend. I got 2448/0.032 = $76,500. My portfolio is expected to generate $83,232 for next year.
Rinse and repeat till the end.
Of course this is the ideal situation. But I think I will have good buffer to wither market down, high inflation rate, dividend cut, lower percentage of dividend raise etc. if I really hit my $2.5M goal. After all, I consider we are frugal people and can easily cut the expense in bad times.
Actually, the fact is that I don’t need to spend $80K + $75K a year before tax, even with both my kids still in the house. So I am thinking maybe a $2.5M portfolio is really not necessary, maybe $2M is good enough. Then I can claim that I am ready to retire earlier than I originally planned. I might still work toward $2.5M but I will feel more relaxed.
I would like feedback from the very wise people on this site to point out that I might be delusional and out of my mind. I don’t want to be retired and find out my plan actually do not work at all.
May, I think you’ll find even with kids, helping them out now and then (?), but more importantly no debt/a paid off house, owning a $2 M portfolio is a HUGE chunk of change to spend in your 50s+. I hope you get there!
That will be an excellent problem to have all things considered!
Hi May, if you have a line of sight to $2.5M in capital you are well ahead of most people I know including myself so that’s obviously a great thing and should offer some piece of mind, No you are not delusional we are all trying to figure this out and it is not easy.
I would suggest that the amount needed depends on the structure of your capital from a taxation POV, I.e. $80K + 10K CPP (assumed) would net you $63K at a 30% rate if fully taxed. If your TFSA can generate $10K you’d save $3K in tax, capital gains from non registered accounts are only 50% taxed etc. A RIF has minimum withdrawal rates which increase over time so if you preserve capital within your RIF you would end up with more and more taxable income, then there is inflation so lots to consider. IMO how many $$ you put where and your withdrawal/tax strategy is as important as how many $$ you end up accumulating. I started thinking about this in 3 buckets:
1- my base (CPP/OAS/DP),50% of my retirement income, semi fixed/indexed only option is to early up/delay income
2- my RRSP/RIF, 40% of my retirement income, flexible withdrawal rates and start dates, possibly multiple RIF’s and pension splitting
3- my TFSA 10% obviously totally flexible + NO TAX!)
My intend is to set them up so they minimise our overall tax and then draw down my RIF’s first and move not needed income to tax free and/or non registered accounts to further limit tax exposure. Mind you this is still in Unicorn phase so I fully expect to encounter some challenges also I don’t want to retire in jail:)
Somewhere there will be an optimum for you, it will be different for me so the “wise” thing to do is learn as much as you can, guess we are already doing that:) There are some decent retirement planning tools online where you can do some basic calculations but at some point we all should sit down with a good planner.
Thanks for all the great points. Totally agree money in different place will work differently and it’s very important to look at it from tax POV. We definitely need a good plan on tax optimization when the time comes. Right now we just max out all registered accounts.
Ok, I understand what you’re trying to do and outline your actual practices to generate income. I don’t practice a dividend growth portfolio exclusively so my experience and plans are not the same as what you might hear back on from some of those devotees. I suspect you’ll hear it can be done and to expect higher dividend growth levels than you project. They may be right…or not.
IMHO, in theory yes it might be possible, but unlikely in practice. That’s a 6.2% withdrawal rate to start at. Extremely aggressive even @2.5M, unless you will be age 73 when you start retirement and live to 99. I recall you said longevity was in your genes.
You are using a dividend growth strategy, adding an arbitrary 75K amount as a constant and this portion wouldn’t be indexed to inflation, possibly some unknown amount of FI.
I think you should simplify and use VPW. Develop a healthy income generated base as an income floor, ideally with some growth attached as you’re doing, establish a strong cash wedge, as much indexed govt benefits as possible, and then just take 2 minutes a year to utilize VPW for suggested withdrawals under a total return approach. This gives you some idea of “reasonable” withdrawal rates to use and amounts will adjust based on annual acct balance/performance from either income/growth/loss.
I didn’t know your age but I took 3 minutes and ran a some scenarios all to age 99 that took me way longer to type than do. If you expect to live longer amounts will have to be lower.
Age Withdrawal rate amount
Retire @ 50 4.9% 122.5K
Retire @ 55 5.0% 125K
Retire @ 60 5.2% 130K
Retire @ 73 6.2% 155k
Retire @ 50 4.9% 98K
Retire @ 55 5.0% 100K
Retire @ 60 5.2% 104K
Long story short…Mark’s right 2M is very good. 2.5M gives more cushion and lifestyle, as you don’t have the work DC or DB pension.
Great point. I did not think about it from the point of withdrawal percentage. Now you point out it will be 6.2% withdrawal then I realize this is obviously not realistic.
I will be 55 four years from now. So I guess I will base the withdrawal plan utilizing VPW then. Let’s say Year 1 I have $2.5M and based on VPW I can withdraw $125K. So I will have $80K from dividend and I will sell $45K capital to get the total up to $125K. If everything goes smoothly, the second year I will have probably more than $80K dividend, but maybe less, depending on market.
Anyway, year 2 I will use VPW to calculate the amount X is what I could safely withdraw, amount Y is the dividend I expect. I will sell X – Y capital to fund my living that year.
Rinse and Repeat until the end. And yes, the end will be quite far away on the road and I surely should be carefully not broken while still alive. My grandma died at 99 and all her siblings have a long life too.
Well, let’s still aiming for $2.5M then, LOL. I figure I will need $125K before tax to feel comfortable.
I agree as you get closer you can look at a more comprehensive cash flow plan that optimizes tax, and incomes at different life stages.
Good luck keeping the pedal down towards your goal.
Ultimately cash flow is king 🙂
I agree wholeheartedly. That can include many different income & asset sources and then factor in tax considerations.