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.
- Your world starts to shrink if you demand 4% or more income from your portfolio.
- Whether you’re living off dividends or capital gains – it’s the same difference really since both are part of total return.
- 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.
But you know what?
The ability to live off dividends (and distributions from our ETFs) will be beneficial for reasons beyond the risks above. It has these benefits:
- 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.
- 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 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 years.
- I’m conservative as an investor.
- I personally believe inflation might be higher long-term and capital appreciation from equities/stocks might be lower long-term. This is a deadly, wealth killer combination. Will it happen? I don’t want to risk it.
- I find dividend income easy to track.
- It’s 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???
Image via Yahoo Finance
- 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.
- 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 reliable 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? Too aggressive? Nuts? Not balanced enough? Should I simply own ETFs instead? Tell me what you think!