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.
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.
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.
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.
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.
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?