How To Retire Off Dividends


Looking For A Few Good Dividend

Living Off Dividends in Retirement–Not so Fast

Be sure to fuel your dividend income with the best dividend stocks. Here are a couple of great resources I use for picking and monitoring mine:

Please join me as I try to achieve my goals, find my next place to live, and make the most of my money. But understand, I am not a licensed investment adviser, financial adviser, real estate agent, or tax professional. Im a 50-something-year-old guy, CPA, retired finance professional, and part-time business school teacher with 40+ years of DIY investing experience. Im just here because I enjoy sharing my findings and research on important topics. However, nothing published on this site should be considered individual investment advice, financial guidance, or tax counsel. Because this websites only purpose is general information & entertainment. As a result, neither I nor Dividends Diversify can be held liable for any losses suffered by any party because of the information published on this blog. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.

Continue Adding To Your Investments

Reaching the point where youre able to live off of dividends will require a large portfolio, and to achieve that, youll need to add to your investments on a regular basis.

Your investment strategy should include a goal that you want to contribute each month. Put it in your budget like any other expense. Make it a priority to invest this money every month and youll see your portfolio grow faster than you expected.

The Problem: Volatile Inflation

I find the main issue with the dividend retirement income model is that most of us think the inflation-adjusted income is more stable than the reality.

I have profiled a retirement risk management software called Timeline this year and last week they did some data crunching in this area.

It is quite difficult to model the dividend retirement income model because we do not have enough data. However, Timeline allows you to model whether your retirement strategy can stand the test of historical sequences and Monte Carlo simulations. They definitely have some data.

So they sought to model only spending the dividend income in the United States and United Kingdom context.

They have historical monthly data for the United States and United Kingdom equities and also the CPI data to model inflation . That is almost 95 and 119 years respectively.

The portfolio is made up of 100% UK or US equities.

If we have those data we can find out how the monthly dividend income, capital value will look in a total of 792 30-year periods.

Fees were ignored. This benefits the portfolio to survive better.

The United Kingdom Results

The chart below shows the monthly inflation-adjusted dividend received by a retiree invested in 100% UK Equity for every 30-year rolling period since 1924:

Do note that when we say inflation-adjusted it means that if the income is below the starting point, you are losing purchasing power.

Now let us take a look at United States data

The United States Results

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Exactly How Much You Need In Dividend Stocks To Retire

Retiring on dividends is possible.

But first, it takes time and planning to have success with dividend investing. Especially when your goal is to pay for the lifestyle you desire with dividends.

And one of the most important things to know is how much to invest to retire off dividends.

To make your calculations, follow the steps below. And carefully consider the pro dividend tips I provided throughout the article.

How Are Dividends Taxed During Retirement

How to Retire Early

As the saying goes, there is no free lunch.

And that is the same for dividend investing when it comes to non-registered accounts. If you hold stocks in a non-registered account, you will have to pay a tax on the dividends you receive. The rate of tax will depend on where you reside. You should check with an accountant or licensed tax professional.

However, there are some cases where there is a free lunch with dividend investing.

For instance, Canada offers a tax-free savings account , which allows investors to invest in Canadian stocks without incurring any tax at all. There are some limitations on the amount you can invest. But the TFSA is an excellent option for dividend investors to build their dividend income portfolio in.

Alternatively, Canadian investors can invest in a registered retirement savings plan . This will allow them to defer income tax on the amount of money they invest, and it would avoid tax on dividends and capital gains. Your dividends would still be taxed as income when you withdraw them, though.

If you are outside of Canada, or for more details on how dividends are taxed, check with a licensed tax advisor or accountant to learn how dividends are taxed.

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Open A Brokerage Account And Fund It

The first step is to open a brokerage account. We like and recommend because:

  • They offer commission-free trades of stocks and ETFs
  • With the DRIP settings, you can automatically reinvest dividends or take them as cash
  • They provide a helpful list of dividend stocks and ETFs in their dividends theme
  • Their platform is very easy to use
  • No account minimums

Of course, there are other options as well, like Unifimoney, M1 Finance, and Robinhood.

Once you have the brokerage account opened, you can transfer money from your bank account to start investing.

Vital Dollar readers get free stock from Get a free slice of stock for opening a account here.

You Can Retire On Dividends Heres How

A dividend stock is a stock you buy in a particular company that pays out a portion, or dividend, of its earnings back to shareholders. These are usually large, well-established companies with a track record of good performance and reliable earnings.

Find: 25 Top-Paying Dividend Stocks That Will Make You Rich

Dividend stocks tend to conjure images of boring, yet reliable, slow-growth companies like utility companies. However, dividend stocks are still investments and should not be considered completely safe by any means. It is always important to see how management is handling dividends. In a tumultuous market, fund managers can use dividends to ease investor fears even though they might not be in the best position to do so. These investments require monitoring like any other but are an excellent way to diversify a portfolio while simultaneously bringing income.

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I: Retirement Planning For Our Hypothetical Couple

As usual, to make it easy to understand the concept, we would use our hypothetical couple – John and Lisa – to demonstrate the planning process. Let’s assume John and Lisa are 52 years of age and wish to retire in 10 years at 62. It’s possible that they would change their mind in the future and may decide to work longer, but the idea is to be prepared to retire by the age of 62 if they had to. We will assume that they both work full time, and their current household gross income is $130,000 a year, which falls solidly in the middle-class income group.

Their current savings are quite reasonable at $350,000 and mostly invested in tax-deferred plans like 401K and/or IRAs. Now, this is not a very large sum at their stage, but it is not too bad either. Moreover, we have to keep in mind that this also has been possible due to the fact that the market has done exceedingly well in the last decade. The fear is that the next decade may not be as good as the last one.

While trying to plan for their retirement:

Let’s make some more assumptions about John and Lisa’s situation.

Table 1: John & Lisa’s New Budget vs. Old

**The author is not a tax expert/consultant. This estimate is just to provide a broad idea for the purpose of demonstration the actual amounts could vary.

Estimation of Expenses in Retirement

To know the total savings requirement, they will need to first estimate their expense in retirement.

Based on the above , this is what John and Lisa came up with:

Table 5B:

Thou Shalt Favor Companies That Raise Their Dividends Consistently

Retiring early off a $2,000,000 dividend growth portfolio (Part 1)

Dividend raises for securities in your portfolio are essential when it comes to compounding returns. But a constant dividend raise can also be the sign of a healthy company. Books can be cooked and clever reporting techniques can misrepresent how a firm is actually performing, but a cold hard cash dividend simply cannot be faked. A company that constantly raises that payout is often well-managed and stable. Even if the raise is just a few pennies per year, the results can add up quickly as time goes on.

The chart below shows the payout history for Coca-Cola , a 50-year dividend grower, from its 1996 stock split through its 2012 stock split:

It should be noted that there is a drawback to a company with a history of raising dividends, as it creates more pressure to keep up those raises as time goes on. In some cases, this pressure can lead to riskier habits in order to meet investor demand, which is why you always want to keep your eye on the financials of a firm to ensure that dividends are still generated by strong earnings.

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Income From The S& p 500

The dividend yield for the S& P 500 is currently 1.45%.¹ Not only is this less than the 25-year average, but as the table below illustrates, since the 1990s, dividends began to comprise a relatively smaller portion of the overall total return of the S& P 500.

Without a large portfolio or other source of funds, dividends alone are unlikely to provide enough income in retirement, especially after paying tax. And theres always the risk that the company will reduce its dividend or stop paying one entirely. Struggling businesses may need to preserve cash to maintain operations, putting pressure on the stock price and your income steam.

Back To Basics Explaining Shares And Dividends

Lets startwith the real basics for those who dont know much or anything about investing,shares and dividends.

As shareholders,were actually business owners. Assuch, were entitled to the profits the company makes. These profits getdistributed as dividends.

But we dontown the whole company. Most companies listed on stock exchanges have hundredsof millions, if not billions ofshares on their register. So thats reallyhigh dilution. Owning one sharein any publicly listed company really isnt going to set you up for life. Ifyoure going to have your retirement funded through dividends, youre going tohave to buy a fair few shares.

Take, forexample, Commonwealth Bank of Australia , which is Australias mostvaluable company worth some $140 billion.

The company has 1.77 billion shares in circulation. Each share in the past year entitled you to a total gross dividend of $6.15. Of that, $4.31 was cash, and $1.84 was pre-paid tax in the form of franking credits. That gives you a total gross yield of about 7.6% .

So to get$1,000 of gross dividends in CBA shares per annum, youre going to need about162 shares.

Given thatCBA shares are currently trading at about $80 , that means you needto invest a just under $13,000 to get $1,000 back each year.

If youre like us and want to get a gross income of $150,000 a year and if you hypothetically only invested in CBA youd need approximately 24,390 CBA shares, worth $1,951,200.

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Living Off Dividends: Another Retirement Myth

The idea of living off dividends in retirement sounds nice, but its challenging. What investors dont always realize is how much money theyll need invested to generate enough income from dividends. For example, over the last 25 years, the S& P 500s average dividend yield was 2.01%.¹ If you have a $1M portfolio, the imputed dividend income is $20,100 per year on average. As you consider the various ways to create passive portfolio income, be aware of the less obvious risks.

The 3 Best Dividend Stocks Now For Early Retirement

How to Live Off Dividends

Dividend stocks with a history of rising dividend payments are a quality choice for passive income in retirement. But not all dividend stocks make equally good investments

So what are the best dividend stocks for retirement?

The best early retirement dividend stocks will have a mix of a history of dividend growth for likely future dividend increases and a high yield for solid current income now.

Our 3 top dividend stock selections for early retirement are analyzed below. Each of these securities have 25+ years of rising dividends and dividend yields of 4% or greater.

Early Retirement Dividend Stock #1: V.F. Corp

  • Dividend Yield: 4.9%
  • Consecutive Years Of Dividend Increases: 49

V.F. Corporation is one of the worlds largest apparel, footwear and accessories companies. Its brands include The North Face, Vans, Timberland and Dickies. The company, which has been in existence since 1899, has a market capitalization of $16 billion and has generated nearly $12 billion in sales in its last 4 fiscal quarters.

On May 22nd, 2019, V.F. Corp separated its VFs Jeanswear organization, including the Wrangler, Lee and Rock & Republic brands. The new entity is Kontoor Brands . This move focused the parent V.F. Corp. on its non-jeans brands in a hope to enhance long-term growth.

. A preview of page 1 of 3 of the report is shown below.

Early Retirement Dividend Stock #2: 3M

  • Dividend Yield: 4.6%
  • Consecutive Years Of Dividend Increases: 64

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Stock Price Appreciation From Owning Dividend

In our earlier example of the $1MM portfolio, in order to receive dividend payments, you would need to own shares in each of the companies.

As a result, when the stock prices rise, so too, does the value of the portfolio. For example, lets assume all of the stocks in the portfolio averaged a 7% annual return in price appreciation. When combined with the 3.1% average annual dividend yield, the total annual return for the portfolio would be 10.1%.

In short, a dividend income strategy provides two possible sources of income, the quarterly dividend payments and the appreciation in stock price above and beyond the original purchase price.

How To Retire At 55 And Live Off Your Dividends

A plan to retire at age 55 and live off the income from stock dividends will let an early retiree refrain from tapping the principal in his or her investment portfolio while also avoiding the need to earn income by earning an income. Due to currently low yields on dividend-paying shares, though, its particularly challenging to accumulate enough capital to generate income strictly from dividends. Therefore, a successful strategy leading to retirement at 55 will likely call for radical cuts in living expenses.

For help planning a strategy to retire at 55 and live off of dividends, consider working with a financial advisor.

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Determine Your Social Security Benefit In Retirement

Anyone who has paid into the social security system during their working years. Should be entitled to a benefit in retirement.

As of the time of this article, the average social security recipient was earning approximately $20,000 each year. Source: Social Security Administration

Pro tip:Determine your estimated social security benefit. There is an online calculator here.

Then, just like I did in the example at the beginning of the article. Deduct your estimated social security benefit from your household income needs from step #1.

Also, dont forget that your spouse or partner may be entitled to social security benefits too.

Because a second income from social security will go a long way. To reduce the amount of investment required to retire on dividend income.

Okay. Lets keep moving. And look at another possible source of retirement income.

Specifically, your 401 plan

Choosing The Right Income Protection For You

I’m Retiring Off 11 Dividend Growth Stocks. $45,000 Dividend Income

With MyIncome Protector, you dont have to settle for a one size fits all approach. We offer three packages to choose fromCore, Pro, and Maxeach with their own set of valuable riders,2 like the Catastrophic Disability Rider3 and Partial Disability Benefit Rider.4 Youll have the option to add riders and enhance coverage based on your specific needs. And if youd like to work with your financial professional to customize your very own package, you have that option too.

Core package

With this package, youll receive the base definition of disability that provides the most cost-effective coverage with a benefit period of either 10 years or to age 65.

Pro package

If you would like even more financial security, this package provides “own occupation” coverage for the full benefit period or to age 67.

Max package

For the ultimate in protection, this package provides the most robust coverage with “true own occupation” coverage and a to age 70 benefit period.

Custom package

With the help of your financial professional, you can build your own plan with tailored coverage that fits your specific needs and circumstances.

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Ways To Make Retiring On Dividends A Reality

  • Start dividend investing now
  • Live below your means to feed your dividend portfolio
  • Be careful with high dividend yields
  • Reinvest your dividends leading up to retirement
  • Supplement your dividend income during retirement
  • First, lets explore these requirements one by one. To better explain how anyone can retire with dividends.

    Second, I will provide an example. This way, you will be able to see exactly how the process works in practice. So you too can retire with dividends!

    Then, when you are done, but before you go. Be sure to check out all of our

    But for now, back to todays 5 ways. To prove out the answer to the question: Can you retire on dividend stocks?

    Living Off Dividends: How To Live On Your Investments In Retirement

    Vital Dollar may receive compensation from companies, products, and services covered on our site. For more details, please read about how we make money.

    Being able to live off of your investments is a dream for many people. Not needing to work for income or to withdraw money from your investments would be the ultimate in terms of financial freedom.

    Although its a dream, its also a realistic possibility with the right combination of time and discipline.

    In this article, well look at all of the details surrounding the topic of investing for dividends and ultimately getting to the point of living off dividends.

  • Can You Live Off Dividends? Final Thoughts
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