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 start to retirement planning but certainly not everything.
This post will tell you why.
Why living off your dividends or distributions works – somewhat!
According to an article I read by a respected financial advisor, Jason Heath, “a dividend yield of three to four per cent on a retirement portfolio is not unrealistic.” Agreed.
Very realistic.
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%.
But….it wouldn’t be a stretch to create a Canadian dividend stock portfolio of 20-30 companies that yields at least 3% or 4%.
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 equity portfolio. While there is no/never any guarantee your dividends will keep rising over time a basket of stocks could deliver income from companies that have paid dividends for generations.
Jason suggests the stocks you own should appreciate in price even if no dividends are paid. I hope so!
Therefore, it’s not dividends or nothing with me. I expect capital gains from my stocks too!
Dividends or nothing? Hardly.
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, but a flawed point.
You can always spend the capital from your portfolio too. You probably should to avoid a huge estate. I intend to.
Here is quoted complaint of this approach from my site:
“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 many years especially in semi-retirement or early retirement seems like a good financial problem to have.
- If we are able to keep our capital intact, including in early retirement years, 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. Behaviour matters.
- 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 of 2% or 3% or 4% 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. I don’t know anyone that might not spend some of their capital. Again, I intend to, just not right away in semi-retirement.
Why living off your dividends or distributions works
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.
Living off dividends works for us since this approach is more of a mindset to shape our saving and investing behaviour. Living off dividends will not occur forever.
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?
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Grant: It’s the same difference I have with others on Indexing Investing. For you Total Return offers the best options, for me concentrating on Income Generation (Not Yield and there is a difference) has proven the best choice. As I am no longer looking to the future to achieve my goal I feel confident with my statements.
However, I do feel that those who have a strategy that limits risk, keeps them invested for the long term, avoids Buying & Selling, and generally sticks with solid companies, will do well. Whether if Index, Growth, Value or DRIPping.
Cannew, I’m sure they will do just fine, and I don’t mean to imply that DGI is not a good strategy. It will get most people where they want to go, but it is not as efficient as a total return approach. Total return looks at factors beyond yield, and once you do that you find better returns and the key reason why dividend investing falls short.
@Grant: Total Return may be important to you and that’s fine. For our Grandkids (and me) we could care less. They never heard of the Financial Crisis, drop in price of oil, possible housing bubble, or even the daily change in the price of their shares. I’m sure they don’t understand compound growth or YOC,
What they do know is how much money they earned and how much more it is than last quarter. With that I’m sure they do just fine.
Cannew, I think the author well understands how dividend growth works. I think you are confusing current yield and yield on cost, which is an historical metric which ignores compounding. The $1M the author refers to is compounded capital, not invested capital. The $1M is much more that what was invested, but it is the current yield (3%), not the yield on whatever capital was invested that is important.
Similarly, the drip example of your grandkids, as it turned out a good investment, yes, but a yield on invested dollars (or yield on cost) ignores compounding. It’s the total return that matters. And the yield of the investment is the current yield, not yield on cost. If you wife got into your brokerage account and sold all this investment, you’d likely buy it right back. Now what is the yield? It ‘s the current yield, right?
@Grant: Seems we like different strategies:
You propose Index investing.
I propose Dividend Growth Investing.
Mark proposes a combination of both.
Each to their own and others may prefer a different strategy.
@Grant:” income investing and total return investing is like looking at the issue through different lenses”
I’ve repeatedly referred to buy Quality Dividend paying companies that have a long history of paying and increasing their dividend, not High Yielding ones with no growth. To me that’s investing for Income because it grows over time. With those companies one will also get a growing capital because if the income grows the price will follow. One can also say that as the company grows its earnings, it raises the dividend and the value of the company grows so the price goes up.
Examples like:
ENB 1999 price $8.52, 1999 div 30.248 cents, yield 3.55%
2015 price $44.13, 2015 div $1.39, yield 3.16%
BNS 1999 price $15.00, 1999 div 0.48 cents, yield 3.20%
2015 price $54.02, 2015 div $2.80, yield 5.18%
FTS 1999 price $2.15, 1999 div 0.116 cents, yield 5.40%
2015 price $36.20, 2015 div $1.50, yield 4.14%
Ah, therein lies the rub – you have to be able to pick these winners in advance, and the research on this, which is very clear and precise, shows that that is extremely difficult and that the vast majority of investors fall short. You may be interested in this blogger’s take on the issue.
http://jlcollinsnh.com/2011/12/27/dividend-growth-investing/
That’s a good article. I still believe holding the top-stocks in large funds and ETFs in Canada is a smart move long-term. I’m indexing more of my RRSP now – it makes sense to do so for the ex-Canada diversification. Thanks for sharing Grant.
One problem with Living Off Dividends, is that if one is invested in good stocks, they keep rising! Even if I wanted to start drawing down capital, those Rising dividends make it difficult. Here we are a month and half into 2016 and my dividends are already up $2,155.81 from December. Wonder if those Index funds have increased their distribution by the same?
Ha. This is a great problem to have Cannew. That is very impressive that your dividend income has increased that much so far in 2016. Geez…
I have our dividend income update to share with readers next week – stay tuned.
Cannew, stocks ETFs would have increased their distributions, but not as much as as a dividend focused strategy, because yield is not the focus of a total return approach – total return is. Total return looks at factors beyond yield. Once you do that you find better returns and the key reason dividend investing falls short.
@Grant: Guess when one is fully retired, Income has more meaning than whether our portfolio is up or down. Nothing wrong with Total Return, but when the Income is generating considerably more than one needs, and keeps growing, I’m not sure if I’d give up part of my Income for potential growth.
Cannew, I understand what you are saying, but income investing and total return investing is like looking at the issue through different lenses. In retirement what you need is cash flow, which can be either income from securities or capital gains from selling slivers of securities or both. With income investing you are only considering one of these sources of cash flow, with total return you are considering both.
Total return gives you access to factors that give better returns than when focusing mainly on yield; it is more efficient, so you save what you need for retirement more quickly, and that number is less than if you plan to live only off distributions.
If you have enough capital such that the income alone is more than you need, then it doesn’t really matter, but for young accumulators it does.
This article, which I think may have been posted here before, explains it better than I can and includes some risk and tax considerations as well.
http://www.moneysense.ca/save/retirement/a-better-way-to-generate-retirement-income/
@Grant: Neat article, but the writer does not understand how dividend growth works. Statements such as: “That means a balanced portfolio would need to be well over a million bucks to generate a modest $30,000 in annual income—and that’s before taxes and fees.”
Certainly if one invests a lump sum yielding 3%, yes, one would need $1Mil. However, Dividend Growth is about compounding!, If one invests in stocks which pay and grow the dividend, then over time your Yield will grow as will your dividends. And one will find that $30,000 will be generated with much less than $1 Mil invested.
I’m certain there are many who can attest to it, I certainly can.
@Grant: Here’s an actual example:
We set up a DRIP for our grandkids in Oct 2007. The price of the shares were $51.05 and the dividend was $1.68 yielding 3.29%. Funds were added to the account periodically till Apr 2011 (no further purchases) and all dividends were reinvested.
As of the last dividend payment Jan 2016 of $2.70, the price was $55.31 (dropped from $62.52 the previous quarter) and their yield on the total invested dollars is 5.53%
So just over 8 years the yield has increased 68% from 3.29% to 5.53%. So had they invested $545,000 over the eight years they would be receiving the $30,000 per year with the yield of 5.53%.
Because the same market conditions affect non dividend payers as dividend payers on the day the dividend is paid, I wouldn’t agree that there may be a difference in owning stocks that pay dividends. Why do say that? The concept applies the same to BRK as any other stock. If is just the math of taking money from your investment. Market conditions certainly do affect BRK.A. In 2008 there was a -32% return.
Agreed, market conditions affect non dividend payers and dividend payers. BRK has been an outstanding growth stock. Few other non-dividend payers could say the same thing though. Maybe Apple before it paid a dividend in recent years.
Grant, I like indexing and I believe it has great merit but I also like getting paid to be a shareholder. My portfolio value is down in recent months but my dividend income keeps rising month after month, even if I didn’t reinvest dividends, thanks for dividend raises. I might be trading off a bit of total return for income but eventually it’s the income that will pay for basic retirement expenses once income from our investments exceed them. We’re about 10 years away from that happening.
@Grant: “As the article explains, receiving a dividend and selling an equal value of shares makes no difference. You are left with the same amount of money in your investment. If you receive a dividend, you have the same number of shares but your investment is worth the same as if you have sold a few shares of the same value as the dividend. The value of your investment is the same in both cases.”
I tried to run some numbers to verify the above, but could not get them to agree. I looked at Two companies, bought at the same price and with the same price movement each quarter. One paying a dividend, the other not. Clearly the one not paying a dividend was worth less than the one that did.
I looked at a dividend stock which re-invested it’s dividend and compared it to the same stock where the dividend was taken out each quarter. Then after a period took out the same amount as was drawn each quarter, the ending numbers were not the same.
Can you explain a situation where taking a dividend and selling shares will leave your investment the same?
Cannew, I agree with your two scenarios, but they don’t have anything to do with the fact that taking cash as a dividend is no different than taking cash by selling the equivalent value of shares.
Maybe I didn’t explain very well. If you have 100 shares worth $10 each your investment is worth $1000.If the shares pay a dividend of 4%, when the dividend is paid the value of the investment drops 4% to $960 ($9.60 per share X 100) and you have $40 cash dividend payment (due to market movements that day, the stock may actually close higher, lower or the at the same price). If you have a stock that pays no dividend, but you sell 4% of of your investment ($40, or 4 shares at $10 each), you end up in the same place – $40 cash and $960 investment.
Warren Buffett explains the concept better than any other I have seen (pages 19-21 in his 2012 Lettter to shareholders)
http://www.berkshirehathaway.com/letters/2012ltr.pdf
The bottom line is that it makes no difference (taxes aside) if you take money from your investment as a cash dividend or the same amount of money by selling a few shares. There’s nothing magical about dividends, although for various behavioural reasons outlined in the post, investors often prefer dividends to selling a few shares.
Thanks Grant. Ok I now agree with your statements and understand the concept (from an accounting point of view), but as you stated “due to market movements that day, the stock may actually close higher, lower or the at the same price”. In in reality, because we are controlled by market conditions, there May be a difference by owning stocks which pay dividends.
The rule probably applies more to Buffet as he owns many companies outright and therefore market conditions have little or no affect on his holding.
No you didn’t – I was referring to the comment above by Cannew “A stock which does not pay a dividend has no intrinsic value”.
Ok, thanks for clarifying! 🙂
There is always the exception, but I always tell people not to buy Lotto tickets, because the odds are so bad. So here is Powerball with a 1.3Bil payout for a $2 investment. Hard not to think it’s worth the odds (350Mil to one), but more than likely a waste of two bucks.
actually it’s $3. not that i’m picky. the extra dollar is for the powerball number (that’s what they told me when i bought my ticket). i had one number. if i win i’ll buy the leafs and make mark my gm! (: (oops; sorry mark; we’ll buy the sens!)
Caught me, I don’t buy the tickets.
I thought this post from Bogleheads might be of interest. It looks at why investors prefer cash dividends. One off the things I like about articles and comments written by Larry Swedroe, is that they are based on peer reviewed research, not just someone’s opinion.
https://www.bogleheads.org/forum/viewtopic.php?f=10&t=181343&newpost=2751852
Hey Grant, I admit, there is a behavioural bias for me to own dividend paying stocks. I like seeing the cash come in, vs. share buybacks, capital appreciation, etc. I know full well dividends are part of the total return. The thing is though, dividends are real and tangible where as you hope for capital gains. Ultimately it’s total return that’s important.
Mark, we certainly do all have behavioural biases, and it’s good to understand them so that can changes could be made or at least the tradeoffs understood.
It’s true that capital gains are more volatile but are reliable over the long term, so as long as a plan is made to deal with that volatility, I like the increased diversification that comes with a broad market approach.
I didn’t always understand my biases to be honest Grant, I’ve tried to mature and understand that over the years. I still have work to do 🙂
Yes, capital gains are great, a very low form of taxation as well. The only challenge I see with capital gains is you cannot predict the future, you can only extrapolate from the past – very similar to dividends actually but at least dividends (like interest payments) are cash in hand in the short-term. Capital gains are like owning a bond in some respect, hoping that your long-term promise is fulfilled on your IOUs.
Quote from article “What they fail to realize is that a cash dividend is the perfect substitute for the sale of an equal amount of stock whether the market is up or down, or whether the stock is sold at a gain or a loss. It makes absolutely no difference. It’s just a matter of how the problem is framed. It’s form over substance”
In a perfect world dividends are part of Total Return, but individual investors make choices and those often don’t match market changes. If one needs cash when the market drops, ie 2007\2009 having to sell shares will make a difference.
For me I chose dividends because market changes have not affected the results I set for my portfolio. The dividends continued to rise, even during the financial crisis and that trend continues to improve. Would I done as well with another strategy, maybe, but not based on my previous performance (before I chose DG).
“If one needs cash when the market drops, having to sell shares will makes a difference”.
This is incorrect. As the article explains, receiving a dividend and selling an equal value of shares makes no difference. You are left with the same amount of money in your investment. If you receive a dividend, you have the same number of shares but your investment is worth the same as if you have sold a few shares of the same value as the dividend. The value of your investment is the same in both cases. It is the same whether the market is up or down. Ideally in a down market, you would reinvest the dividends (buy low, sell high), but if not, selling a few shares equal to the value of the dividend gets you to the same place. Your investment is the same value either way. I admit it took me a while to get my head around this total return concept. Read the to and from comments in the article as they expand in more detail this concept.
Now using a total return approach, you would have some cash or short term bonds to live off during a big down market (keep 2-4 years of expenses aside) so you wouldn’t have to sell shares, or spend dividends during big down markets.
Very interesting and as he mentions it’s human nature. my family is going through this right now. BIL is about to retire and wife is in a panic as their investments have “tanked” due to a market correction. Thankfully they have me, I told her, ignore the market and simply withdraw 4% a year and you’ll never run out of money. Spend a few days on Garth’s blog and you’ll see humanity in all it’s ugly glory LOL
Well, I didn’t win the Powerball but I didn’t buy a ticket either 🙁
happy new year mark. i thank my lucky stars that you are continuing your blog. i read some of the comments these days and all i read is blah, blah, blah, blah, blah. i read your content and it’s simple, straight forward and easy to read and understand. thank you. (:
Thanks for the kind words Gary. I enjoy running the site. I know folks who comment here don’t always agree but I think a healthy dialogue on a variety of subjects is important – I appreciate you being part of that. Best wishes for 2016!
i agree with you mark “i think a healthy dialogue on a variety of subjects is important”. i think my financial education (or lack of) sometimes precludes me from some of the comments and i get frustrated. i meant no disrespect to your readers.
You are by no means disrespectful Gary. Further, we’re all here to learn even though if we disagree sometimes on some subjects. I’m here to learn as well, there is much I don’t know and I’m not afraid to admit that 🙂
BRK.A has no “intrinsic value because it doesn’t pay a dividend”!!? Really!?
Did I say that? All companies that make money have value!
Quote from the Connolly Report:
Fourth Quarter 2015
· What does the market value in most cases depend upon? (answer below on this page)
• The main reason dividend growth investors run our own income ‘fund’ is because we can perform much better: We can concentrate on superior dividend growers – funds over diversify with hundreds of stocks, a lot more losers. In aggregate our income rises each year – most funds do not increase distributions annually. Dividend growth investors pass all the income along to ourselves – some funds don’t. Imagine! We reduce risk with at least fair price purchases by using yield, Graham value and cape as value indicators – most funds are always fully invested. We are disciplined and patient – managers have to follow the crowd to keep their job. We hold for the growing yield – they trade (eight months is the average holding period with funds). We do not pay capital gains tax on profit we do not receive – fund holders do. We do not pay annual fees – most fund owners pay over 2% per year.
· “The classic 60/40 balanced portfolio is not true diversification. Indeed, one of the best-kept secrets of the investing community is that stock market return so dominates the risk of a 60/40 portfolio that the portfolio exhibits a 98–99 percent correlation with stocks!” Rob Arnott
Answer: According to Ben Graham in his 1934 book Security Analysis (Chapter 7), the market value in most cases has depended primarily upon the dividend rate. Don’t believe it? You will have trouble being successful at investing. Why? You will be depending upon someone else buying your piece of paper (stock) at a higher price. A stock which does not pay a dividend has no intrinsic value. Don’t believe it. That’s your problem. Sorry. The dividend rate is initial yield plus dividend growth. This is what builds wealth. Would you purchase an apartment building in which the tenants do not pay rent?
“Not a $2 M portfolio but pulling in $90 k in income”
The two posts referred too don’t understand DG investing. When looking at today’s yield, yes it would take a $1.5 or $2mil to generate $90k. But when investing over time in good DG stocks and reinvesting the dividends, your YOC (invested cost) will increase. That means a $200k, $300k, $500k or more will generate more income than it’s current yield (which may only be 3%-4% and valued at a higher Market value than your YOC). Given enough time. more than 10 or 15 yrs, your portfolio could be producing double digit yields. So a $1Mil could possibly generate $100k in the future. Yea, inflation my erode the value of the $100k, so maybe you’ll need $150k, but with growing dividends you’ll reach that goal with less than current yields.
Cannew, yield on cost is an historical relic that ignores all the years of compounding, so has no use in terms of what an investment actually yields. If you bought a condo in 1985 for $175,000 and rented it out for $950 a month, that gives you an annual yield of 6.5%. Today, that condo is worth, say, $348.000 (actual inflation was 2.32%) and the rent is now $1792 a month. Would you say quoting a yield on cost of 12.3% has any meaning? Of course not. The yield of the investment is 6.3%. Quoting 12.3% ignores the compounding over the years. The concept is explained futher here.
http://canadiancouchpotato.com/2011/02/02/debnking-dividend-myths-part-6/
Guess its how we interpret things, what if the value of the property is still $175,000, could I then say its 12.3%?
If my total investment is $175,000 and I never add funds or plan to sell, but the income keeps rising, how would one calculate the return? Market value changes and as in 2007\2009 the value could easily drop to it’s initial value, so I change the return each year? I’m happy if my income rises each year ahead of inflation, I’ll ignore the changes in Market value.
We only receive cpp & oas and our dividends. I don’t have a 2 Mil portfolio, but our dividends are currently generating over $90K. That’s the advantage of the DG strategy (which I owe to discovering the Connolly Report).
Why worry about leaving money as long as you and & spouse will never have to worry? As seniors our biggest concern is our health. It’s good now but one never knows. i read an article about what one should be concerned about, early Dementia, not just for your spouse, but yourself. If that happened I’d like to know that there is enough money coming in to cover the cost of care.
There are lots of charities if one does not want to leave it all to family members.
Not a $2 M portfolio but pulling in $90 k in income is outstanding Henry. Most retirees could likely only dream of that financial comfort level. I’m pretty sure we won’t get in ‘future dollars’ but hopefully enough to cover this:
https://www.myownadvisor.ca/income-sources-needs-wants-retirement/
Our goal is to retire with enough income excluding CPP and OAS. If we can do that, I know we’ll have “enough” money in retirement.
I also worry about healthcare costs a few decades from now. They could be through the roof. If we do have some money in our old age it will likely go to some important charities of our choice. Thanks for the comment Henry.
Being a passive indexer, I don’t see the need to live off only the dividends, as I don’t plan to leave a legacy. I also prefer the greater diversification, and therefore less risk, of a broad market approach.
Brian, you might be interested in this recent post about LTC insurance.
http://www.caniretireyet.com/long-term-care-insurance-why-we-arent-buying-it/
We don’t have a plan to leave a legacy either…but I suspect for early retirement, if we can achieve it, we cannot draw down capital at will so we’ll need to live off dividends for some time. As we get older we will spend the capital but it must be a measured approach since there are so many unknowns with the future including what the market may or may not return.
Thanks for sending the link.
@Mark:
Thanks for your cool words Mark.
We are in the same kind of boat for sure, the one called Freedom 😉
Cheers
LOL. Good stuff! 🙂
Hey Mark, to tell you the truth I’m somewhat conflicted. Conventional wisdom says the CDN market is to small you need to diversify but as you mentioned you have the banks, the telcos and utilities, add in some quality REITS and you have the makings of a pretty damm good portfolio. As mentioned with my wife’s LIRA I’ve been more conservative, initially going with a 30 year bond. Very good time as it’s returned an awesome 11% per year. So I recently sold it and went with a balanced portfolio, I know it’s accepted wisdom but I’m not 100% convinced.
BTW Mark have you ever considered going FIRE or ERE? You’s seem to be the perfect candidate for this Rob
I’m conflicted as well, since I’m quite conservative, even though I own about 30-40 stocks I feel I need ETFs like VTI and others to diversify. I probably won’t ever sell my CDN banks, telcos and utilities…
I consider my bond my fixed income and likely always will…but never say never!
Yes, we have considered FIRE/ERE. We simply don’t have enough cash flow (yet) to offset our expenses. Doing the math I figure we need amount this Rob:
https://www.myownadvisor.ca/dividends/
Once we hit that goal/those goals, we’re done with work and will work on our own terms.
I plan to live off my dividends in 13 / 15 years. I can understand detractors and so on.
But the principal is to stick to your plan, and keep discipline for it, whatever the nature of this project.
But of course it depends on situation; I’m single with no familly to support, it is perhaps easier this way.
Same timeline for us farcodev, at least that’s the plan. We’ll eventually spend the capital for sure… just not right away in retirement.
Good luck on your investing goals, always great to compare notes 🙂
BTW one thing I recommend is having your portfolio reviewed by an expert before retiring, they often have points of view that you may not see or think is important.
I just turned 55 and the wife 52 so this is not an academic exercise for me. My favoured approach is Dividend Growth Stocks (DGS) The problem is however in Canada good quality DGS are thin on the ground. If you want stocks with a low payout ratio and a history of increasing dividends, as well as a decent yield than you’re pretty much limited to the Banks and a couple of utilities. Even Fortis, a favoured DGS, has a payout ratio of around 90%, same with BCE.
I think the only saving grace is iShares Core S&P/TSX Composite High Dividend Index ETF, good yield and diversification. I do have part of my portfolio in the legendary Garth Turner balanced portfolio but I’m unsure if I will continue with that or not. I prefer reinvested dividends over potential capital gains.
When we retire my thinking is we’ll draw down our main assets over a 15 – 20 year period which should be our most active and healthy years. I’ve noticed that too many people hit the older years (80+) and have more money than they really need (kids and inheritances aside). I’ve run the numbers and our pensions will be more than sufficient to pay the rent (real estate investors but not home owners) and put food on the table once we hit 85. I do think it’s wise to keep some capital back, if for no other reason, than to pay for healthcare as we age (nursing care etc).
Rob
It’s great to hear from folks like yourself Rob, near or in retirement, working on saving their capital or living off it as proof this method works.
I would agree, in Canada, you are largely limited to the stocks held in the ETF XIU:
-banks
-utilities
-telcos
I’m thinking we’ll do the same: draw down some assets over a 15 – 20 year period which should be our most active and healthy years; however we intend to keep a good portion of capital intact for our 70s or 80s for some assisted living. We intend to die broke around age 95 if we live that long.
My oh my how things have changed since I posted that comment. I bought into ETFs thanks to Garth’s blog but ended up selling them. I just couldn’t see how it worked, Yes in theory you’re supposed to re balance but XIE my main Canadian ETF has gone sideways in the nearly 4 years I’ve owned it (kept a few shares via the DRIP). Dividends on the other hand continue to grow!
Rob no longer in Munich but Frankfurt
That’s the thing about ETFs – some of the distributions do not rise very much over time. You are hoping for capital gains. This is especially true for any dividend ETF, those funds are income-oriented not really growth oriented. You can’t have both in great quantities (dividends and capital gains) since they are often two sides of the same coin!
If the quality of life will be impacted negatively from the death of a spouse, then life insurance will serve the same purpose in retirement as it did during the working years. Some seniors may need it, but for those living on dividend income, it should not be a necessity.
For insurance, I was referring to long-term care insurance, which pays a weekly benefit for insureds that become unable to do at least 2 activities of daily living (bathing, feeding, dressing, etc) or suffer a cognitive impairment. Those who do suffer from these will likely need assistance with these activities, be it home care or facility care. The cost for them will accelerate the depletion of your retirement funds, which is why I plan on buying LTC insurance to protect against this risk.
Thanks Brian. I guess this is what I was thinking about, if you can self-insure go for it but I can appreciate folks can’t always do that nor is it practical to do so.
As for LTC insurance, I think this is what the capital in a retirement portfolio is helpful for. It’s something I’m going to consider but certainly not now in my 40s. Potentially my 50s I will consider it depending upon the premiums and benefits to be provided.
I do think that living off of dividends only is very difficult. Surely not impossible, but still very hard to reach for the non frugal. And, let’s be honest, it is also more difficult for families to stay frugal enough to reach that than it is for a single man or woman.
I still believe a mix of a little work (fun one, chosen one, passionate one), some savings and a lot of dividends can work out for the majority. Once work truly is over, using a little capital can make up, although we would all prefer not to! 😉
Of course I’m a little biased on the topic as I’m currently working towards “retirement” next year. I want to live from my sites and, yes, dividend income. But that still demands for us to be more minimalists, more frugal. I surely don’t want to use capital in my thirties!
Cheers,
Mike
I like and prefer a mix of dividends, and capital gains, and side-income – but who knows if it will all work out for us?
I have a bias for passive income but it takes a bundle to achieve. Will I change my tune eventually? Probably. But living off your dividends or distributions can absolutely work and I’m convinced this mindset is what we need to get to where we want to be. I’ll be able to tell you it works in another 10-15 years!
@DM: It’s true that you can target any withdrawal rate you want (within reason) with dividends, but 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.
Robb,
Sorry, I attributed that to Echo.
” Not to say it can’t be done, but why save more and work longer than you need?”
That’s incorrect, as the premise of the article is pointing out. If you can achieve an overall portfolio yield of 4%, then you’re preserving all capital while still maintaining the same overall income level/lifestyle as the 4% SWR would recommend (even though it, too, has a failure rate in certain circumstances). Living solely off of dividend income and withdrawing 4% of your portfolio are not mutually exclusive. Not real sure why that’s a hard concept to understand.
Your math was making it sound like you can have your cake and it eat it too – achieve more income on less money all while working/saving for a shorter period of time. And that’s because your withdrawal rate was so high. That’s simply what I was pointing out. You may have a big pension to rely on, but most people don’t, which is why I was saying it shouldn’t be recommended or used as a broad example.
Best regards!
@DM – A crude example, sure, but I was simply trying to point out that I could get the same income from half the capital. My situation is unique in that I have a pension as well, so no danger of running out of money. That’s why my article said, why living off the dividends no longer appeals to ME. Not that it’s a bad strategy, but that it no longer fits with my objectives.
Preserving capital seems to be viewed as sacrosanct. Living off your dividends is a lofty goal but it requires a lot of saving over many years to realistically achieve this in retirement. Not to say it can’t be done, but why save more and work longer than you need?
Mark,
Well, you know where I stand on this. I not only plan to live off of dividend income solely, but I hope to still be writing about it for many years to come so that I can show exactly what that looks like. The built-in safety measures are too attractive for me when trying to forecast out expenses for many decades. Of course, I think this article was really targeting a more traditional retirement. For those not wanting to run in the rat race until they’re used up, it seems more prudent to me to leave the income-generating assets intact.
I will quickly note that Echo’s example of collecting $90,000 off of a portfolio of $1.45 million is very aggressive and truly something that shouldn’t be recommended. That’s a withdrawal rate of over 6%, which has a pretty high failure rate during a 30-year retirement, based on the Trinity Study (the originator of the “4% SWR). I’d rather not hope for the best, but plan for the worse.
Best regards!
Yes, I know where you stand Jason!
Spending $90k per year from a $1.45 M portfolio is aggressive for sure but I suspect Robb was simply using that as an example.
Robb is absolutely right that “living off your dividends” is a lofty goal and may not be needed. 100% agreed. For those that can pull it off though, at least in part, I suspect that’s major financial freedom. It’s our mindset that forces some good savings habits at least for the next 10-15 savings years we have left.
That’s the plan we’re following too. You can always decide to sell some stocks later. If you end up with a bunch capital still you can always set up a trust and leave it to your kids/grandkids and leave a legacy.
I plan on dying nearly broke but the problem is I don’t know when that is going to happen. Keeping my capital intact in my early retirement years is a way to hedge some risk. Thanks for your comment Tawcan.
Sounds like a good plan. I’m with others who suggest digging into the capital once retirement hits, since the idea of leaving a large estate is not one of my goals. I’ll also buy long-term care insurance sometime in my 40s to reduce the risk of losing my independence in retirement, and allowing me to spend more freely without worry.
There are a number of different ways to approach retirement lifestyle and spending. I think living off of dividends is a good foundation and from there, adjust it to your liking.
We’ll definitely dip into the capital eventually Brian but doing that, you need to know when you’re going to die. Morbid thought but true.
Instead, I’d rather focus on building an income stream now and for retirement and should I wish to spend more in retirement, i.e., the capital, I can.
When it comes to insurance I’m not planning on having any in my senior years. My wife and I are planning to self-insure. Maybe I’m too narrow-minded on this issue but unless it’s for estate planning I don’t think wealthy seniors need any form of life insurance. Simply live it up as much as you can for as long as you can.
Thoughts?
Great goal Mark and knowing a little bit about you Im sure you will get there! We have been retired for 8 years now and we tried to live off our distributions but there is always some unplanned expense and we need to draw a bit of capital. Funny thing is that due to great markets and increased distributions we have the same amount of capital as we started out with. I know I can’t see into the future but if there is a huge correction we’ll just have to ride it out.
Thanks Gary and I think reading and hearing stories like yours helps…re: “Funny thing is that due to great markets and increased distributions we have the same amount of capital as we started out with.”
I suspect you’re doing just fine Gary and much better than most and if your asset allocation is sound, you can likely ride out most 5-year equity storms.
You’re very welcome Mark.
Sorry if my reply was a little long.
I think what you’re saying is the perfect approach. Plan as if you won’t “need” to draw down capital. If you’re in excellent shape in retirement (capital goal reached, govt perks, work pension) draw down prudently and live up to your means, especially in the best years. That’s why you’re saving like you do.
Fortunately this is exactly where we are now, sans govt perks for another 5-9 years. And as you know we’re luvving it…..However the truth is I’m also having trouble digging into capital myself. A little part of me still wants to grow capital. I think being both financially conservative and retired at a younger age promotes that tendency.
Cheers and good luck to all savers
I welcome all replies Deane, short and long.
We’re planning on not needing to draw down capital but I know we will. Will we draw down capital in our 50s? 60s? 70s? I don’t know yet but I’m trying to save enough whereby I don’t need to really worry about it!
Thanks for your kind support.
Living on dividends alone is beyond my dreams, but we have a very healthy contribution to our retirement income thanks to the dividends being paid. But yes I intend to spend the capital as well.
I did make a few mistakes buying high dividend power companies without doing adequate research but I have learnt a lesson the expensive way.
$90,000 a year? Did the experts retire with a mortgage?
Totally living off our dividends is a dream as well Richard as there is no way I will be able to save this much money. I do hope dividends provide a nice portion of income.
https://www.myownadvisor.ca/dividends/
This is what we are saving for and when that milestone is reached and we have no debt we are done with the workforce!
It’s not like you have to kill the golden goose, but one day you’ll want to stop eating eggs and start carving off some meat.
Nice analogy. Thanks for checking in Robb 🙂
Well, I know which stakeholders will be big fans of this approach Mark – your children! (Or whoever else you will the estate to I guess!)
In all seriousness though Deane and Robb do have solid points in terms of needing a fairly large nest egg to generate this type of return. I also like the point about not many folks having an even keel level of spending when they are 65 versus when they are 80+. I would think maybe a little bit of capital draw down could be justified during that initial “young senior” phase.
That being said, your point is a good one. To have true iron-clad financial security, one could argue that you shouldn’t need to be touching your capital at all. Would you recommend for people using this strategy that they keep their Canadian dividend-paying stocks outside of their RRSP for tax purposes? Then keep the USA/International portion in RRSPs and only draw out the dividends generated?
Ultimately I think the only real answer here is to become one of those good-for-nothing teachers and get a defined benefit plan 😉 This way you can have your cake and eat it too. You’ll never outlive the DFP (perfect capital preservation) and you can sustainably draw down on your RRSP capital (built up using about 30 min a year due to your couch potato strategy) without worrying to a huge degree. Obviously I’m being a bit tongue-in-cheek, but it really is a nice option for those left with DFPs and should really factor in to people’s view of compensation packages going forward.
You make me laugh…
For sure, some capital drawdown as a “young” senior can be a great thing to do. I expect we’ll do this but at least having the capital you can Kyle!
Yes – this is my recommendation if RRSPs and TFSAs are maxed: keep their Canadian dividend-paying stocks outside of their RRSP for tax purposes. Then keep USA/International portion in RRSPs and only draw out the dividends generated until you want to drawdown the capital before CPP and OAS kick in.
Unfortunately I don’t have the best-in-the-world pension plan as a teacher. I chose the wrong career path to be guaranteed wealthy in retirement 😉
Mark,
LOL, I know you’ve heard this stuff from me before but here goes……
Planning to live off equity dividends can be a prudent strategy for someone that is ultra conservative, or wants to leave a legacy, or anticipates higher than average health/care costs in the future, or has limited/no other income sources and must make capital last somewhat longer. It has risks but is certainly safer than needing to have a certain amount of capital withdrawal regardless of market conditions. Of course it was more common when equity returns and interest rates were expected to be higher than going forward from now.
However IMHO, from what I know of you I think what you’re actually saying you’re planning to do and what you will actually do are 2 different things. Dividends only is a smart way to plan because it forces strong savings goals and a larger amount of capital but is not likely something that you will actually practice when retirement comes. You may live on dividends only for several initial years or during periods of market turbulence but otherwise unlikely. I believe you will use dividends as part of your overall income base and draw out additional capital as markets dictate keeping a conservative withdrawal rate. As you know this is my current practice in retirement although we also incorporate fixed income and a cash wedge approach as a tactic. It adds a different kind of balance and flexibility.
I say this because when you are close to retirement and have a secure nest egg built, a secure pension and see that CPP will be there, and possibly even OAS your evaluation will be a little different. You will realize that these other benefits offer good indexed income and that the time will be now to live the highest lifestyle and spend at a higher rate in the first 10-15 (golden) and best years of your retirement, rather than save it all for later. This is what most retirees do. At least ones that plan carefully, and I believe that is/will be you.
If you do live only on dividends through the golden years there is the greatest of likelihoods that you will leave large amounts of money that you most likely will not need in the (olden) years of retirement. You may also put yourself at risk of reaching into OAS clawback territory when you are forced to withdraw registered assets, to add to your income.
Kudos on having a great plan, and a serious commitment to reach your goals. Thanks for sharing your story and I wish you the very best on your journey to FI.
Geez, heckuva comment Deane.
I am a bit conservative for sure, I don’t deny that which is why it is certainly safer than needing to have a certain amount of capital to withdraw.
That said I couldn’t agree more with this: what we’re actually planning to do and what will happen could be night and day.
We might live off dividends for a few years but eventually, I firmly expect we’ll eat some capital. Life is for the living after all!
It will really depend on how much fixed income (pension income) we have. This is a major wildcard for us.
My wife and I have little incentive to leave a legacy so it will be a balance of not spending capital too much but also living it up as best we can. I hope those years are about 10-15 away, at least that’s the game plan 🙂
Thanks for the kind words about our goals and support of our journey Deane.
I’m with you on this one Mark. Working on building a portfolio full of dividend payers that have a history of increasing their dividend, then only spending the distributions is a surefire way to retire without a lot risk.
Great to hear from you FT. I hope to spend the dividends and distributions only in another 10-15 years. Need to save more to get there though!
In recent years, some of the big banks’ income funds have proven to have unsustainable distributions. It’s also possible to find stocks with unsustainable dividends. So, whether you can safely retire on dividends or distributions depends greatly on the stocks or funds.
Agreed Michael, which is why diversification is hugely important if you’re going to own individual stocks. Even then, you need to own a number of them, I suspect at least 40. This is why most people are better off with indexing and a total return approach – they don’t have to worry about unsustainable dividends or distributions from any financial products. I continue to index more inside my RRSP but non-registered I’m on the hunt for new CDN payers.