Why living off your dividends or distributions works
There. I said it. Well, I wrote it. I think living off the dividends or distributions your investments spin off is a decent retirement plan and this post will tell you why. Others don’t necessarily agree with me, so let’s tackle that first.
- According to this recent article by Jason Heath, “a dividend yield of three to four per cent on a retirement portfolio is not unrealistic.” Very true. Jason’s example of owing the S&P/TSX 60, the 60 largest and most liquid stocks on the S&P/TSX Composite index, yields roughly 2.5% and it wouldn’t be a stretch to create a Canadian dividend stock portfolio of 20-30 companies that yields at least 3%. I know. We have a Canadian stock portfolio like this.
- Jason’s article goes on to state the impact to your dividend-loving portfolio is inflation but this is true for any long-term portfolio. While there is no guarantee your dividends will keep rising over time (although there are some examples of companies that have paid dividends for generations), I agree with Jason the stocks you own should appreciate in price even if no dividends are paid.
- One of the biggest deterrents to the living off your dividends argument I read about is you might have too much money when you die. I suspect however this is a good problem to have. Besides, you can always spend the capital.
Here is another major complaint of this approach:
“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).”
For me, living off your dividends or distributions is something we’re striving for, for these reasons:
- There are simply too many unknowns about the future. If you can predict the future, great, but I certainly can’t. Keeping our capital intact for as long as possible is a good financial problem to have entering retirement.
- 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, there are less decisions to make, and consequently there will be less transaction costs and portfolio manipulation.
- Saving and investing this way, for now during my asset accumulation phase, is a form of forced savings. It’s motivation to have “enough” money for retirement; a goal I assume most of us are striving for?
- It doesn’t really matter whether our target 3% dividends or distributions per year come from a modest basket of stocks or ETFs, the point is there is money flowing to replace our part of our salaried income.
- We will have the choice of when we want to spend the capital. This is not an all-or-nothing argument since “living off your dividends” or distributions does not need to explicitly imply forever.
- We are not sacrificing today for tomorrow, our approach to living is quite balanced so forget the save too much argument for us.
Personally, I think most Canadians would be rockin’ with an equity portfolio churning out thousands of dollars per year income; as they strive to live off their dividends or distributions in some form.
This approach is more of a mindset to shape our saving and investing behaviour than something that will be an absolute certainty.
Financial planning is personal and the process of planning is important because plans change and in the end nobody can predict your financial future.
What’s your take on the living off dividend income argument?