Using Dividends For Retirement Income


Investing In Dividend Yield Mutual Funds

How To Retire With Dividend Income?
  • the dividends declared by the stocks become part of the cash balance of the fund, and the FM can do as they please: either declare a dividend or purchase more stocks
  • mutual funds do not guarantee any dividend payouts, even in the IDCW plans
  • these funds have incredibly high expense ratios, thereby lowering overall returns

What If You Are Already Retired

Compounding of dividend income is very advantageous if you have a long time horizon, but what about if you are near retirement? For these investors, dividend growth plus a little higher yield could do the trick.

First, retired investors looking to live off their dividends may want to ratchet up their yield. High-yielding stocks and securities, such as master limited partnerships, REITs, and preferred shares, generally do not generate much in the way of distributions growth. On the other hand, investing in them increases your current portfolio yield. That’ll go a long way toward helping to pay today’s bills without selling off securities.

Dividends paid in a Roth IRA are not subject to income tax.

Nonetheless, retired investors shouldn’t shy away from classic dividend growth stocks like Procter & Gamble . These stocks will increase dividend income at or above the inflation rate and help power income into the future. By adding these types of firms to a portfolio, investors sacrifice some current yield for a larger payout down the line.

While an investor with a small portfolio may have trouble living off dividends completely, the rising and steady payments still help reduce principal withdrawals.

Frequency Of Dividend Payments

Dividends are normally paid quarterly, so in the case above, for every share of Coca-Cola that you owned you would receive $1.16 of dividend income per year.

To be entitled to the dividend from a stock, you must own the stock on its ex-dividend date. Below is information about the ex-dividend date and other dates you need to know about:

  • the date the company declares their next dividend and when it will be payable.
  • Ex-Dividend date This date is set buy the stock exchanges and you must own the stock as of this date to be entitled to the dividend.
  • Payable date this is the date the dividend will be paid.
  • To learn more about dividend dates and how a stock price can be affected the day a dividend is paid see Ex-Dividend Dates: When Are You Entitled to Stock and Cash Dividends .

    When you own mutual funds that own dividend paying stocks, the mutual fund will collect the dividends for you and pay them out to you according to their rules, usually either quarterly or monthly.

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    Reinvest Your Dividends Leading Up To Retirement

    While you are working and adding fresh capital to your dividend retirement portfolio. This is a great time to reinvest your dividends. Right back into one or more of the stocks that paid them.

    This is an important element in compounding your wealth through dividend investing.

    So, either leave instructions with your stock broker. To automatically reinvest back into the stock that paid them.

    Or, let your dividends accumulate in cash. And invest that cash lump sum. Into the dividend stocks of your choosing every month or so.

    For some of the best stock tips delivered to your inbox every month. You should check out the Motley Fool Stock Advisor.

    This leads us to our fifth and final way to improve the odds you can retire with dividends

    Turning Your Savings Into Retirement Income

    Retirement Income: 5 Monthly Dividend Stocks Paying up to 11.5%

    You’ll need to decide how you want to convert your savings and investments into retirement income. You should start thinking about these things before you retire so you can have a better understanding of what your options are and how much money you may have.

    Some options include:

    • converting an RRSP into a Registered Retirement Income Fund
    • buying an annuity
    • investing your money in other products, such as stocks or bonds
    • withdrawing your savings as cash

    You may be able to convert some of your retirement savings into income before you retire. This can help you transition from working to retiring.

    Think about your other sources of retirement income before deciding how to use or invest your savings. Your other sources of retirement income can impact the amount of money you receive from government benefits and pensions that are based on your income.

    For example, lets say you are a Canadian with a low income and receive the Guaranteed Income Supplement . If you withdraw a large amount of money from an RRSP or an RRIF, then you might not be considered low income for the next year. You may receive a lower GIS payment, or you could no longer be eligible for the GIS in that year.

    If you think you may earn a low income when you retire and will qualify for the GIS, then a TFSA may be a better savings option for you than an RRSP.

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    How To Effectively Use Dividends For Retirement Income

    Retirement is the beginning of a new phase of your life. However, to ensure you are financially secure during the later years of your life, you must make the right investments and undertake failproof retirement planning. As an investor, it is important to select investments that have the potential to give you a safe and secure retired life. During the early stages of retirement planning, you generally invest aggressively in stocks to earn high returns, even if they come with a higher level of risk. However, as you approach your retirement age, your investment strategy shifts from being aggressive to conservative. Instead of investing in stocks with high risk and high return potential, you start focusing on low-risk, moderate return securities like bonds, etc.

    After years of consistent retirement planning, when you finally retire, your investment strategy alters again. Now, your sole focus is on ensuring your accumulated retirement corpus lasts your lifetime. To avoid the risk of outliving your savings, you center your investments for capital preservation rather than growth. Living off your savings during retirement is often more challenging than saving for a comfortable retirement. Further, rising life expectancies, low bond yields, growing stock market volatility, etc., have made it difficult to build a stable retirement income stream.

    Here is everything you need to know about creating a dividend portfolio for retirement income:

    Why Living Off Dividend Income In Retirement Is Not Perfect

    When I first went down this financial independence rabbit hole, the dividend model looks pretty sound.

  • Spend only the income that is paid by your portfolio of dividend stocks
  • Your capital is untouched
  • Since I am invested in a 100% stock portfolio, if I manage the portfolio well, stocks should give a high probability of keeping up with inflation
  • Since you are not selling or drawing down your capital, the dividend income model mitigates the sequence of return risk
  • The capital is sacred. It cannot be touched.

    I have a certain degree of confidence that the dividend income model can work for my financial independence. This is because I have been investing in stocks for a while and have lived with managing a dividend income portfolio.

    So based on this model, computing how much we need is pretty simple. What is a conservative average dividend yield that we can get in Singapore?

    Probably around 4-5%. In truth, you could find stocks that give more but let us be a bit conservative. 5%. If your annual expense requirement comes up to $24,000 a year, then I would need to accumulate $24,000 / 0.05 = $480,000. Sounds doable! If I wish to be conservative, I would use 4% and I would need $600,000. Tougher but still looks doable.

    As a risk-averse person, I saw the appeal of this structure because if I have the capital, I have greater flexibility whether to leave it as a bequest or choose to pivot in life in different ways.

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    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.

    Is Living Off Dividends A Good Idea

    10 Dividend Stocks to Build a Retirement Income Stream?

    While theres something instinctively satisfying about living solely off dividends, its usually not necessary to distinguish between living off dividends versus a portfolio of equities in general.

    In truth, theres no practical difference between distributing money from your portfolio through dividends or through selling assets.

    Think of it this way: Your dividend yield is just a portion of the total return on your portfolio. If you have a 10% return, it doesnt matter whether it breaks down to 5% value growth and 5% dividend yield or 9% value growth and 1% dividend yield.

    In other words, if an asset pays you a dividend of $500 and you reinvest it, thats the same as if the shares increased such that your positions value went up by $500.

    The difference, of course, is that a dividend is relatively predictable, while appreciation is not.

    The only difference to an investor would come from a variance in tax rates when taking distributions from a taxable brokerage account. In most cases, though, that will work out in favor of selling assets over taking dividends anyway.

    If you manually sell portions of your retirement portfolio, you can use the first-in, first-out basis, which means the first asset you sell is the first one you acquired. These should always be subject to long-term capital gains taxes if youve been investing for years.

    Meanwhile, ordinary dividends are subject to the less favorable ordinary income tax rates.

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    The Pros And Cons Of Dividend Stocks For Retirement Savings

    There are many guidelines around how to drawdown your savings in retirement , but what if you dont have to spend your savings? You can generate retirement income with dividend stocks, and in a world where savings accounts produce less than a 1% return, dividends can provide a steady stream of cash without having to dip into your principal.

    Most retirement savings strategies tell you to invest in stocks when youre young and bonds when you get close to retirement. For example, the rule of 100 says you should subtract your age from 100 and the answer is how much you should invest in stocks. So if youre 25, 75% of your money should go into stocks and 25% should go into bonds. And when youre 55, 45% of your money should go to stocks and just over half should go to bonds.

    But these rules make a lot of assumptions, most of them based on investing wisdom from the 1980s. One assumption is that stocks are a lot riskier than bonds and that bonds offer steady income rather than just gaining in value.

    In reality, over the last thirty years, stocks have become a lot less risky for retail investors who are able to invest in funds that own stocks in a diversified portfolio. And because governments all over the world have been printing money to contain the 2008 Great Recession and the COVID-19 crisis in 2020, the yield on bonds the cash income you get for holding them has dropped to nearly nothing.

    Why Not Invest More In Your 401k Retirement Plan Or Roth Ira

    Another good question is why dividend stocks? Dont get me wrong. I love dividends and dividend stocks. But, what about maxing out your Roth IRA and 401k retirement plan first?

    You can contribute up to $18,000 in 401k, 403, and most 457 retirement plans. If you are a federal government employee or member of the military, you can also contribute up to $18,000 per year in the Thrift Savings Plan. The catch-up contribution limit for employees 50 years-old and over is an additional $6,000 per year for a total of $24,000.

    If you meet the income requirements, you can also invest up to $5,500 per year in a Roth IRA. And, catch up contributions for a Roth IRA are $6,500 total per year if you are age 50 or older.

    Check with your employer or plan manager on your investment options. You can choose a fund that invests in dividend paying stocks in your 401k or Roth IRA. Many investment firms also offer self-directed IRAs and Roth IRAs. You can even invest in No Fee IRA from Lending Club with a self-directed IRA or a Roth IRA.

    In our example above, Tom would need to invest almost $7,700 each year and reinvest his dividends in order to build a portfolio of 13,650 shares of Coca-Cola. This would generate the $18,000 per year he needed to supplement his pension and replace his income in retirement. This plan also lets him protect his principle and live off of the dividends it generated.

    What about you? Are you looking to use dividends for income replacement in retirement?

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    The 19 Sources Of Retirement Income: Qualified Dividends

    In this episode, John continues his series the 19 Sources of Retirement Income. He takes a deeper look at last weeks episode. He also explains qualified dividends, and how they differ from ordinary dividends. A mix of both can bring you a resilient and tax-efficient income stream.

    John is the author of 5 Ways Your Wealth is Under Attack and Its Your Wealth Keep It. He has lectured extensively on financial planning and is a recipient of the Five StarSM Wealth Manager Award.

    Dont miss Johns takeaways:

    • Dividends come from owning stock in a company. Shareholders are paid from them in regular intervals.
    • Owning stocks as an individualin addition to whatever you own in your investment accountsprovides another income stream. This can give you redundancy and protection in your retirement plan.
    • Your dividend yield should derive from both qualified dividends and ordinary dividends.


    • All dividends are ordinary unless they are specifically designated qualified. In this case they have to meet certain standards set by the IRS. A company can pay out qualified dividends if:
    • It is a US company, publicly traded on a US market, or
    • It is a foreign company that either has been incorporated in the US or is part of a comprehensive income tax treaty, and
    • The investors hold their shares for a specified set period of time.

    For more, listen above. If you are new to Smallwood Wealth schedule a Wealth Curve Conversation here.

    Lets diversify your income streams for retirement.

    I’m Budgeting A Certain Amount To Invest Quarterly

    Living off Dividends in Retirement

    Currently, I’m on a strict budget that allows me to contribute a set amount of cash every month to my SEP IRA. Now, I also want to budget a certain amount every quarter to invest in more dividend-paying stocks and funds.

    Since this isn’t my top priority right now, I’ll determine how much to invest based on what other financial goals I’ve met that quarter. As I get more financially savvy and earn more money, I plan to increase my contributions.

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    How Do You Live Off Dividends

    Living off the passive income from your investments and becoming financially independent is a captivating idea, especially if you can do it earlier than you expected.

    Fortunately, there are many ways to create an investment portfolio that can support you indefinitely. One popular option is to invest enough money in assets that pay enough dividends to cover your annual expenses.

    To figure out the amount of money youd need to invest to live off dividends like this, youll need to define two variables: the amount you plan to spend per year and the dividend yield of your intended portfolio.

    Once you have them, divide the former by the latter to get your portfolio value.

    For example:

    Say you plan to spend $40,000 a year to support yourself and your family in the future. If you believe you could achieve a portfolio with a dividend yield of 3%, divide $40,000 by 3% to find a minimum portfolio value of $1,333,333.

    $40,000 / 0.03 = $1,333,333

    The best way to start building a spending plan for the future is to assess your current expenses and adjust them as necessary. I always suggest plugging your debit or credit card into a digital budgeting tool so you can automatically track all your expenses in one convenient location.

    You could write everything down using pen and paper the old-fashioned way, but why would you? Its too easy to forget cash transactions, make typos, or give up on the practice altogether that way.

    What About Diversification

    The problem with choosing to invest only, or significantly, in stocks with large dividends is that you will naturally concentrate your portfolio. The issue here is with diversification and the ability to have a portfolio that can sustain itself for the duration of your retirement.

    Large cap stocks tend to have much higher dividends than stocks from smaller companies. If you are choosing stocks only for their dividend then you likely have a lot of large-cap value stocks. You will most likely leave out many other asset classes.

    Unfortunately, this means that you will miss out on enhanced return and diversification that the other asset classes provide. Many of the academic studies on retirement income and managing portfolios for retirement income note that incomes tend to rise and portfolios tend to last longer when smaller stocks are included in the portfolio.

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