Why my goal to live off dividends remains alive and well
Some time ago…yours truly wrote a controversial post about the intent to live off dividends and distributions from our portfolio.
Some time has passed on that post by my thinking and goals remain the same.
First, let’s back up to the controversy and offer a list why some investors couldn’t care less about my approach.
- The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income.
- Dividends are not magical – there is nothing special about them.
- A dollar of dividends is = a one-dollar increase in the stock price.
- Stock picking (with dividend stocks) is fraught with under performance of the index long-term.
- You can never possibly know long-term how dividends may or may not be paid by any company.
- And more and more and more…
In many respects these investors are not wrong. You do need a bunch of capital to generate income, dividends are part of total return and stock picking to some degree opens up opportunities for market under performance.
And the negativity doesn’t stop there…
- Advisors will argue your investing world starts to shrink if you demand 2% or 3% (or more) income from your portfolio – dividend investing leads to poor diversification.
My response to this: I don’t just invest in dividend paying stocks.
- Advisors will argue picking dividend paying stocks may lead to negative outcomes.
My response to this: while I believe markets are generally efficient, I also believe that buying and holding some dividend paying stocks (while there could be market under-performance) does not always mean market-underperformance. I may or may not at any given time trail the market index. iShares ETF XIU is my Canadian benchmark.
- Advisors will argue against owing dividend paying stocks are a stable source of income.
My response to this: well, until I get dozens of dividend decreases and/or all my companies stop paying dividends, let alone stop increasing them from time to time, I will continue to believe dividends are a source of income – dividends are not always guaranteed!
- Advisors will argue that dividends and share buybacks and other forms of reinvesting capital back into the business can be equally shareholder friendly.
My response to this: well of course that makes sense. I have never said I favour dividends over share buybacks or capital appreciation!
But you know what?
The ability to live off dividends (and distributions from our ETFs) will be beneficial for reasons and many more…
- I continue to believe there are simply too many unknowns about the future. Having ample capital for our financial future will give us many options – dividends or not.
- 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 when markets don’t cooperate.
- Saving and investing this way is my form of forced savings – there is motivation to reach our $1 million portfolio goal and spend the income from it – leave the capital intact. I intend to spend the dividends or distributions from our portfolio only in the early years of semi-retirement.
- I don’t necessarily believe in the 4% rule – the ability to draw down your portfolio for 30 years (or so) without the worry of running out of money. It’s impossible to predict next year let alone 30 more years.
- I’m conservative as an investor. Seeing dividends roll into my account help me psychologically to stick to my investing plan.
- Dividends are tangible money I can spend if and when I choose without worrying about stock market prices or gyrations.
- I agree with other investors – including many dividend investors – dividends seem to be more stable as part of total return than the hope of capital gains. I mean, has the TSX really gone anywhere for the last 10 years??? Yet my dividend income has gone higher and higher thanks to reinvested dividends.
Image via Yahoo Finance
- It is my hope dividends (and capital gains) can work together to help fight inflation. As consumer prices rise, as the cost of living rises, the companies that deliver our products and services will rise in price along with them.
- I like dividend paying stocks for a bit of the “value-tilt” they offer.
- Canadian dividend paying stocks are tax-efficient. With my RRSP growing more with U.S. assets, I tend to keep Canadian dividend paying stocks in my TFSA and inside my non-registered account. In a taxable account Canadian dividend paying stocks are eligible for a dividend tax credit from our government. This means taxation on dividends are favourable, it is a lower form of tax; lower than employment income and interest income. This will help me in the years to come.
Owning a $1 M investment portfolio has always been a huge audacious goal of mine and I never thought I would get there many years ago. Fast forward to today, this goal is actually within reach in the coming years. We’re getting there, slowly, thanks to investing in many dividend paying stocks in Canada and the U.S. (and using some low-cost ETFs that pay distributions for extra diversification).
Will I eventually spend the capital from my portfolio?
But with a “live off dividends” mindset I can do it on my own terms. I will spend more capital in “good markets” and likely spend less in bad markets.
My love for dividends…
This site continues to share a journey that includes how passive dividend income can fulfill many of our retirement income needs – whether that might be covering our property taxes, paying our utility bills, delivering enough monthly income to cover our groceries, fund some international travel or all of these things combined.
I firmly believe our focus on the income that our portfolio generates, instead of the portfolio balance, is setting us up to deliver some decent income that will complement our small workplace pensions, the ability to work as we please in our 50s and 60s, and cover some basic necessities of life stress-free.
Our goal to live off dividends to some degree is alive and well. I’ll keep you posted on it.
What’s your take on my plan? Should I simply own ETFs instead? Tell me what you think!