Why living off dividends still works for me – Dividend Growth Investor
Passionate fans of this site know I’m a huge fan of dividend income.
I post monthly updates on this site, like this one in January 2019, to keep me motivated and inspired about this part of our financial plan.
Other bloggers are very passionate about their financial journeys as well….they have a plan they believe in and are willing to stick to.
A few years ago, I asked a handful of fellow dividend investors about their plans to live off dividends to some degree, a dream we all share that is alive and well!
In 2015, they shared their stories. Now that we’re into 2019, I wanted to see what has changed.
Tawcan is now earning around $19,000 per year.
The Dividend Guy quit his full-time job, is now running his online business, and making a few thousand per year in dividends.
Dividend Earner is now approaching $20,000 per year.
All impressive stuff…
Instead of focusing on our home bias like we might do with our stocks, I reached out to Dividend Growth Investor – a successful U.S. blogger – about his dividend income update. Here is what he told me.
- What has changed since 2015 (since our post together)?
Great to be back on the site Mark.
Well, quite a bit. I hit my dividend crossover point in 2017/2018.
I know you wrote about the concept of a Crossover Point before.
So you could say, I am financially independent. Since 2015, I also got married so as a whole my spouse and I are not FI. Which means there is more work to do!
In recent years, I’m placing a greater emphasis on tax deferred accounts, in order to minimize taxation today. This comes with certain restrictions however – my 401 (k) plan (like an RRSP here in Canada) only allows me to own index funds, although my Roth IRA (like a TFSA here in Canada) allows individual securities.
Since out last chat, I’ve also have been pondering whether I can replicate my success in reaching the crossover point in ten years or so with my spouse, so I started a premium dividend stock newsletter. As part of the newsletter, with my investing, I am trying to see if I can reach $1,000 in monthly dividend income within the next 10-15 years by investing roughly $1,000 per month in 10 companies every month. It’s going to be a fun exercise, it will keep me going for a few years, and it is my hope to show readers how I am applying my own experiences and lessons learned in real time.
- How is your portfolio constructed now? What do you own? What accounts are you investing in that might differ to Canadian investors?
I own mostly U.S. stocks in my portfolio.
My taxable holdings include well-known companies such as Johnson & Johnson, PepsiCo, Altria, etc. I do have holdings in a few non-U.S. companies, such as the largest 5 Canadian banks you have “up there” but these are held in a Roth IRA account, in order to avoid paying a 15% withholding tax levied by your Canadian government.
I hold most other foreign securities in a taxable account, because of withholding taxes on dividends and the fact that I get a “break” on my taxes from the IRS. This way, in essence, it’s a wash – I pay 15% to the foreign government, then I get a credit from our Uncle Sam. I believe you have something similar with your withholding taxes for U.S. assets in a Canadian taxable account.
(Mark: you’re right, we do! Readers of My Own Advisor can check out some details on foreign withholding taxes here.)
In my 401 (k) account, again, like your Canadian RRSP, I own index funds for the S&P 500, a small cap/extended cap index fund and a foreign index fund. Perhaps I am doing indexing in the wrong way, because my index fund selections have not done as well as my passive dividend growth stocks on a total return basis. The fun part is that I calculated that I get more in dividend income by maxing out retirement accounts, than by investing in taxable accounts, despite the fact that U.S. index funds have low yields.
- 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?
Well, I hit my crossover point in late 2017/2018. In doing so though, I realized that I enjoy working, and I realized that I enjoy the process of building wealth by making regular investments.
I do not like the idea of withdrawing money for living expenses.
A job also provides with the ability to contribute regular savings to investments, and root for a stock market decline.
- Are you going to do anything differently going forward to help you realize your goal?
I find I’m becoming more risk averse, as my net worth climbs.
Meaning – I like diversification more.
For example, I bought a house a couple of years ago, and want to pay it off faster than the 30 year mortgage term. I like the relative diversification of a paid-off house, since it reduces the amount of cashflow needed for monthly expenses. Housing is a large part of our monthly budget, so a paid off house could potentially reduce those expenses drastically. Of course, the downside is the maintenance of a house; some large unexpected costs that will occur from time to time.
Another downside of home ownership is having a large portion of net worth that is tied up to the local market, which is also the market that our employment income is tied up to.
I know you’ve written about why your home shouldn’t be your retirement nest egg. I agree with that.
There is also the opportunity cost. I might do better with owning stocks, and renting, versus owning a home. In the end we decided to buy a home anyhow. Why? Well, just like I buy stocks to buy and hold for dividend income, I bought the home for the ability to live there – I refer to it as the housing dividend 😉
Just like my stocks and investments, I also hope to hold the home for years, if not decades.
- Sounds like a plan! Final question – what do you think the biggest factor will be in helping you realize your goal?
I think what has helped to date, is my ability to save a large portion of income over time, and the ability to invest regularly every single month. I would encourage all investors to focus on their savings rate to help them realize their goals.
My ability to hold onto my stocks, was and will remain helpful as well.
I believe that time in the market beats timing the market.
I also believe that keeping investing costs as low as possible is super important – this includes keeping commissions-free (we are spoiled in the U.S.), avoiding costly advisors, and keeping your taxes as low as possible as well.
The other main factor that is harder to quantify is the motivation – I get it from seeing my dividend income rise over time. I’ve found that dividends are more stable than share prices, and it’s easier to predict your forward dividend income.
For example Mark, I am pretty sure that PepsiCo will pay at least $3.82/share in dividend income in 2019. However, I have no idea whether the stock will sell above $115/share or below $115/share. The company is expecting to earn $5.50/share in 2019. If 2018 was of any guidance, a company’s share price can fluctuate greatly – between $95.95 and $122.51. At the same time the quarterly dividend not only stayed stable, but actually increased from 80.50 cents/share to 92.75 cents/share. The company ultimately earned $5.66/share in 2018, but I find it crazy that the stock price fluctuated based on the emotions of fear and greed of market participants so much – between 17 and 21.60 times earnings.
Since dividends do not fluctuate like stock prices, I view them as the ideal source of retirement income for me. Dividends also make it very easy to see how I am doing relative to my goals, because of their stability.
For example, if I needed $30,000/year in retirement (like you write about from your TFSAs and non-registered account every month) but I only generate $15,000/year, I can tell you that I am half way to my income needs.
If I were invested purely in index funds, I could tell you that living off 3% or 4% of your portfolio could work but you can only sell so much equities. I feel the problem with a total return approach is you are at the mercy of stock prices and sequence of returns. Prices can be up a great deal one year, then down for a long-period of time. How long – who knows?? For example, some retirees could have been able to retire in the year 2000 but not so much after S&P 500 fell -12% in 2001 and then by another -22% in 2002. I feel dividend income is more stable and resilient than stock prices, which appeals to me.
Going forward, I plan to continue doing just that – focusing on dividend income – let’s see where it gets me to. Some folks will say that I have one more year syndrome, and that is ok with me. I like the process of building out my portfolio, and the peace of mind that investing provides for me.
Feel free to check back in, in a few years Mark. I’m sure I will have more to tell.
Dividend Growth Investor’s journey has been impressive and no doubt he’ll be paying off his mortgage faster than most with the saving and investing discipline he has. I want to thank him for sharing his update and how he’s investing today. See you on the site and thanks for all the social media support over the years – it is very much appreciated!
What investing questions do you have for Dividend Growth Investor?
Mark … Hi
I am a new subscriber.
I am sure like many, I continue to build a dividend portfolio based on light/feeble technical analysis.
Dividend Aristocrat, Kings
Solid consideration on when to buy when a stock price is at mid-point of 52 week high/low
Q1 – have you shared your general criteria – cn you share link or information
Q2 – I am way-way overweighted in Finance, Health and Energy … what is your sector allocation
Q3 – where do you manage portfolio information – Yahoo Finance, Personal Capital Dashboard (free), a Consolidator site?
Thanks for sharing
I wish I had strict criteria for buying certain stocks at certain times to share. I don’t. I’ve basically unbundled the top stocks in Canada held via VCE, VCN, VDY, XIU, XIC ETFs and various big mutual funds.
I focus on Canadian dividend growers/kings but I try and buy more at 52-week lows (or lower). That’s ideal.
Will my strategy work long-term? No idea but the last 9 or so years has been good.
re: sector allocation, I try and keep that aligned to the TSX in Canada although I do own more banks (40-50% financials), about the same energy (20% energy), but I own far more utilities than the TSX (close to 15%) vs. TSX 4-5% and more REITs (vs. TSX 3-4%).
re: I don’t use any third-party sites to manage my portfolio. I have everything I need with my discount brokerage.
All the best,
I have been investing since the 80’s. There wasn’t a lot of information out therein those days. There was enough though that I could see what was happening. I read many investment books over the years.. I own Pep, Jnj, Ko, msft, Duk, Mgee, Rpm, Vz, Cisco, WBA , Abt, Mo, Pm, as my dominant stocks.
Ya, the internet and the advent of ETFs has really changed things for sure. I own some of those U.S. stocks myself but I’m also learning to own more U.S. ETFs as I get older like VYM and HDV for the income and growth. This way, I don’t have to worry about stock selection at all with MERs around 0.08% which is peanuts even for a big portfolio ($80 per year on every $100k invested in U.S. market).
I am curious. What do you or DGI do about asset allocation? I remember Peter Lynch writing about how dividend stocks turn into “bonds” or become “bond like”. I have been investing for years. I have a steady stream of dividends in both retirement and non-retirement accounts. My allocation is 65/35. I am retired. If I were to consider my dividend paying stocks as ” bond like” my asset allocation would be more like 35/65.
Interesting question Badger. I would never consider my stocks, dividend paying stocks, “bond-like” although I think I know what you mean with the dependability factor of some payers over time.
My take – as long as I own a modest number of established CDN and U.S. companies, it is my hope I can achieve market-like returns over time but more importantly, meet my income needs so they are > expenses. Time will tell.
What stocks do you own Badger? How long have you been investing this way?
Just like Mark pointed out, dividend paying stocks are considered equities/stocks. They are not bonds. There is the possibility for risk of loss if the companies you own hit a rough patch. This can happen with bonds that are of lower credit quality too, but cannot happen with US or Canadian Government Bonds ( in nominal terms of course, governments tend to devalue their currency slowly over time).
I own mostly stocks, but do own fixed income from time to time for major purchases or my emergency fund. If I were in my 60s, and had a pension or took money from OAS/Social Security, I would view this as a bond like component.
To address your comment below, it is much easier today to find information on investments with the internet. However, there is so much information, that it is sometimes difficult to determine which source to trust.
Good luck in your retirement!
I used my qualified plan primarily for growth investments. My non qualified investments were 95% invested for income and asset appreciation. RMDs are being withdrawn now that Im turning 70 1/2 . I will use the aftertax proceeds for necessary expense, but the RMDs will allow the non qukifiedcaccounts to continue to grow free of distributions. On average over recent years, I’ve found 3.5% to be an average yield at entry. Over time the underlying assets should grow conservatively at 4-5% annually for a combined average annual return of 7.5-8.5%. That almost tracks the S&P historical averages. The beauty for us Dividend and Growth investors is the opportunity for the formation of generational wealth should we wish to pass these “eggs” along, or for a very comfortable retirement. One note, I’m not an automatic DRIP guy. I’ll accumulate cash and wait for attractive entry points. While waiting, there are good sources for attractive yields. DGI has taught me to be patient, to be attentive and to be an optimistic investor. It has paid off handsomely. I’ve encouraged my sons to follow his site.
Hey Pete, I’ve heard that from other investors and I’d be curious to know what DGI is doing now. For now, I’m taking a total return approach for the most part of reinvesting all dividends paid where I can to buy more shares commission-free every month and quarter.
I know other investors are far more strategic with their dividends and build up the cash position accordingly. The optionality is a good thing.
DGI runs a good site for sure.
Thanks for commenting,
It is great to see how you have applied the best strategy to fit your circumstances Pete. Thanks for following along.
I do not have to worry about RMD’s for a few decades, but hope that tax rates are not jacked up by then in a significant fashion. There are ways to delay RMD’s however, which is what I am exploring.
Good luck in your investing journey!
When you calculate dividend income – do you calculate how much cash you actually get or what you would get if some of the stocks you have on DRIP were paid in cash? Because I recently put some on DRIP and so the total cash I get is down and not sure what people track. Thank you and I enjoy your posts.
Great question Adrian. I track the actual cash I would expect and do receive. In many cases though, I don’t get all the cash because I reinvest most of the cash where possible into new shares via synthetic DRIPs.
So, to your point, my total cash flow is down because a great deal of the cash paid goes to buy more shares into my account every month or quarter.
I hope that makes sense 🙂
All the best,
Thank you! I had recently put some on DRIP so the actual cash I receive has decreased and I am just starting to track these metrics and not just total amount of the account and wanted to know what to count.
You bet Adrian 🙂 Happy Investing!
Adrian, I look at actual dividend income, whether it is reinvested or not. I do like to look at forward dividend income that will be generated, as it is a better reflection of the type of income I can expect to receive annually.
So if I own 100 shares of PepsiCo, I received $358.75 in dividend income in 2018.
However, based on the new increased rate of $3.82/share, I see forward dividend income as $382/year.
I will actually receive one quarterly payment of 92.75 cents/share and three quarterly payments of 95.50 cents/share, for a total dividend income of $379.25 in 2018.
If PepsiCo eliminated dividends, I may have received $358.75 in dividends in 2018, but my forward dividend income will be zero.
This is the income that matters in the FI calculation for me!
I’m similar to DGI. I have a column on my spreadsheet that shows the total dividend/distribution/interest to be earned for 12 months going forward. I also have an adjacent column to show what the compounding effect of the DRIPs/interest compounding for a 12 month period as well. If there are no changes to dividends paid, I can calculate the income for any time period going forward. Example, if the DRIPs will generate $3500 in compounded income, I can multiply that by how many years I have remaining to age 65 and add that to the existing annual distributions to come up with a forecasted portfolio income at age 65. If dividends change, I enter the new amount and the spreadsheet re-calculates the figures. I also have an exchange rate entry for the $US conversion so that changes the numbers every day.
TDDI also gives me expected income for the 12 months going forward but it is not always accurate in that a mid-month check drops distributions already paid for that month. Plus my GICs are not with TDDI so I find it more fun to just run my own spreadsheet.
Sounds similar Lloyd. I put a simplified version of my dividend tracking tool here – first link:
For U.S. I think I’m using something like 1.25 or 1.28 for USD to CDN right now. Ah well, don’t matter, can’t semi-retire yet anyhow 🙂