Doing it on Dividends Alone?

RetirementColdHardTruth said:
I searched the forum, but couldn't get the answers I am looking for. Does anybody get all their current and future needs met on dividend income alone? By that I mean producing an income flow that allows money left over at the end of the month to keep up with inflation pad out the emergency fund etc.
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Yes. I spend less than my dividends.

RetirementColdHardTruth said:
If I was to plan that for retirement what would be some good assumptions for average div rate for a basket like a high yield dividend ETF. Just turning 40 plan on working for at least another 6-10 years. Want to use that time to see if I can build a portfolio that can create that type of stream.
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I have no idea. I have 30% Wellesley (VWIAX), but otherwise my portfolio is not oriented towards high dividends. My portfolio dividend rate for 2011 was 2.73%.

RetirementColdHardTruth said:
For number crunches out there lets assume my current lifestyle requires $4500 a month before tax. What sort of emergency fund would you keep on hand in cash to ride out a period wher dividends dropped and anything else you can see as a pitfall of this strategy. Lets assume that over the next 10 years I can build such a portfolio.

I think knowing that I could never outlive my mest egg is a big plus for me and would have me pulling the trigger quickly.
Look forward to you input.
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I have about 2-3 years' cash in Vanguard, and every month my dividends go into that Vanguard cash. Early in January I move the entire year's spending money from Vanguard to my local bank, for convenience, and make no more withdrawals from Vanguard throughout the year. This lessens any month-to-month concerns about yield. It also gives me a better handle on how I am doing with my spending, by simply looking at my bank account.

Like some others have expressed above, I do not lose sleep over the possibility of dividends dropping. In my case, I can afford to spend more than my dividends if necessary because I am already 63. I am just not inclined to do so. Right now I don't need to spend all of my dividends, and yes, it is very reassuring to know that in all probability one would never outlive one's nestegg.
 
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Ed_The_Gypsy said:
RDS is paying 5% these days, distributing only 1/3 of their earnings to do so. I do not like Shell for many reasons, but I may have to re-evaluate with a dividend that high. :(
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I picked up some RDS in my IRA. They are a foreign company, but RDS recently started offering shareholders the option to receive dividends in shares instead of cash. This means that you avoid getting hit with a foreign tax withholding of their home country - which means you can hold it in a retirement account and not loose out on deducting that foreign tax...or, if you hold it in a taxable account, you should be able to receive the shares as payment-in-kind and not have to declare the stock dividend as income in the year you receive it.

My account's at TD Ameritrade. Some brokers may not be able to accept the shares in lieu of dividends in a tax-free deal, so you might want to check first.
 
Our plan is also to fund retirement with dividends and supplement with SS and DH part time work (his choice). I do the bulk of our investing and bought stocks that have a history of increasing dividends every year. I too research investments using the Seeking Alpha site and particularly follow the contributor Dividends for Life. Currently, dividends and my part-time job are supporting us. We have a year before qualifying for SS. We have a cash reserve for emergencies. I keep track of our monthly expenditures and re-invest extra $.
I will retire in nine months, DH is finishing up a few jobs from his remodeling business.. January 2013 is our target full retirement date. I'm READY!
 
haha said:
Ed, since this is your special area of expertise, could you expand your critique of Royal Dutch?

Ha
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Part of it is personal, Ha. I don't even buy their gasoline.

More technically, they were doing some things that I did not like but I would rather not get specific. One of them had the potential to give the company a black eye one day. Maybe they do things differently now. I was not impressed with the way they dealt with problems. But they make money anyway and there are worse oil companies.

Warren Buffett likes franchises that make money in spite of themselves. Maybe I should look at it that way.
 
Both retired, with no SS nor pensions at this time.

No, we could not do it on dividends alone.

At our current total portfolio annual yield and annual inome requirements, we would need a bit over $6M invested - a bit less than we currently have, to make it work.

We are total return investors through funds, not just concentrating on high yield indivudial stocks or funds. All distributions are reinvested for additional shares. When any of our funds meet our criteria for "harvesting gains" (as in the first quarter of this/last year), we do so, as mainly capital appreciation investors.

We don't face "immediate risk" of either dividends or increase in current fund value, since we both have many years of cash (including tax due) in our respective personal portfolios. Yes, I know we face "inflation risk" in this manner, but then again, we don't face dividend risk nor have to worry about the next five plus years of what will happen in the equity/bond markets.

Just our way of doing things as current retirees, since you asked the question.
 
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"I'm also currently DRIPing nearly every equity stock/ETF/MF that I own (I let the preferred stocks in my tax-advantaged accounts spit out the divs in cash to accumulate), and I also plan on turning off the DRIPing/opening up the spigot full-blast once I FIRE (perhaps 10-12 years or so, age 45-47)."

I have been looking into purchasing preferred stocks but it seems more difficult to find good analysis on them. I also looked at the ETF, PFF. Do you purchase individual companies or ETF's for your preferred stock allocation?
 
Retired for 10 years now. I currently harvest all dividend and CG distributions from my taxable accounts which represent about 45% of liquid assets. Once I start SS this year when I turn 62 this should be sufficient to cover our regular ongoing expenses.
 
W2R said:
Yes. I spend less than my dividends.



I have no idea. I have 30% Wellesley (VWIAX), but otherwise my portfolio is not oriented towards high dividends. My portfolio dividend rate for 2011 was 2.73%.



I have about 2-3 years' cash in Vanguard, and every month my dividends go into that Vanguard cash. Early in January I move the entire year's spending money from Vanguard to my local bank, for convenience, and make no more withdrawals from Vanguard throughout the year. This lessens any month-to
-month concerns about yield. It also gives me a better handle on how I am doing with my spending, by simply looking at my bank account.

Like some others have expressed above, I do not lose sleep over the possibility of dividends dropping. In my case, I can afford to spend more than my dividends if necessary because I am already 63. I am just not inclined to do so. Right now I don't need to spend all of my dividends, and yes, it is very reassuring to know that in all probability one would never outlive one's nestegg.
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I really like this idea. I would most likely follow something very similar. 3 years cash buffer in the stock constantly getting fed by the dividends as a top up mechanisum. I would set up a spending account of around 1 year at the bank as a living account. If we had a period of drop in dividends noting that I plan on only being in etfs that have many stocks in them. That should take care of any single stock causing too much trouble.

With 4 years of cash on my side I would have many years of reduced dividends for a buffer in theory 8years if divs dropped by 50%. Also if we ever get CD back in the 4,5,6,7% range it would be worth locking a portion into those at that time.

I think most people seem to have "just enough" to retire and need to have growth to carry them through retirement. With this method you would need a bigger nest egg, but I am thinking 46 based on my calcs still seems too young for me to start Early Retirement. 50 seems much better to me and thats only 10 years out.

Thanks for you input, it is giving me a very nice feeling and confidence in my plan.
 
Leon44 said:
I have been looking into purchasing preferred stocks but it seems more difficult to find good analysis on them. I also looked at the ETF, PFF. Do you purchase individual companies or ETF's for your preferred stock allocation?
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Because of the expense ratios of the preferred funds, I just simply [-]hold my nose[/-] scan what appears to be a [-]crap shoot[/-] relatively safer bet and take a position. Given my current portfolio holdings, I consider myself enough diversified to not need to pay the preferred fund that 0.75%+ expense ratio.

Sure, you could make the argument for that for my taxable accounts with some stock ETFs, but I guess I just value the diversification with individual equities more than with the preferreds.

A good number of the preferreds are companies that I either had an equity stake in, or looked at buying an equity stake but deemed the preferred relatively safer (like MFA - which I feel will face much higher funding costs and have to slash the dividend...but hopefully still stay solvent enough to pay the preferred dividend and have a higher stake in some equity value).

I didn't start looking at preferreds until maybe 6 years ago, when rates were still relatively low over the past 30 years. If, in 10-15 years time, rates are much higher and the preferred funds have a decent yield, I would re-evaluate them.
 
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Yes. I retired in 2006 at 48 and am living entirely off individual stock dividends accessed (mostly) via 72t withdrawals, which have increased a bit over 60% in 5.5 years. This has left me a good cushion if any cut their dividends. My cash balance is minimal, usually less than 1% of my portfolio. I currently average around a 3% yield, and usually own around 10 stocks. I stick to blue chip US based stocks, but many have substantial foreign presences.
 
MooreBonds said:
I picked up some RDS in my IRA. They are a foreign company, but RDS recently started offering shareholders the option to receive dividends in shares instead of cash. This means that you avoid getting hit with a foreign tax withholding of their home country - which means you can hold it in a retirement account and not loose out on deducting that foreign tax...or, if you hold it in a taxable account, you should be able to receive the shares as payment-in-kind and not have to declare the stock dividend as income in the year you receive it.

My account's at TD Ameritrade. Some brokers may not be able to accept the shares in lieu of dividends in a tax-free deal, so you might want to check first.
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Just some additional information to clarify matters - Royal Dutch Shell is an Anglo Dutch company and have two classes of shares - RDS.A and RDS.B and both are offered as ADR's on the NYSE. RDS.B is issued by the English part and is not subject to withholding tax by England, as opposed to RDS.A which is issued by the Dutch part of the company and withholding tax does come into play.

So it is more profitable to buy the RDS.B, for me, at any rate in Canada. YMMV. Hope that clarifies matters. Scrip issuance & buybacks | Shell Worldwide

If you have deduced that I own RDS.B ADR's for >2years and have never paid withholding tax, you would be right.
 
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haha said:
Is this a function of your being Canadian?
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Not as far I have searched, withholding tax is determined in my experience by the country in which company is domiciled, and not by the country in which the ADR's/ADS's are quoted (provided that there is a taxation agreement to avoid double taxation).

There are several similar dual class shares eg Unilever which is also quoted in both the Netherlands and the UK and similar advantages/disadvantages apply, depending on which one you buy.
 
you might research preferreds, senior notes, closed end funds and some total return mutual funds all of which can provide 6% and up depending on your risk tolerance. i allocate 50% of my assets to the above and the other 50% is in a cd ladder. the cd interest is shrinking as they roll over but the stable principal smooths the volitility of the other investments. this meets my lifestyle needs and i reinvest ss and pension benefits. to answer your question, yes you can do it.
 
IMHO IF you skew your investment mix heavily towards dividend yielding equities in order to pursue a dividends only strategy then you are sacrificing diversification in your portfolio.
That would be bad.

However, if you can float on dividends alone from a highly diversified portfolio (containing not just dividend oriented stocks) then this strategy could make sense.
It does provide a fairly stable cash flow at attractive yields versus short-mid bonds.

If in a taxable account then tax minimization could work against dividends - depending on your marginal income tax rate.
 
RetirementColdHardTruth said:
I searched the forum, but couldn't get the answers I am looking for. Does anybody get all their current and future needs met on dividend income alone? By that I mean producing an income flow that allows money left over at the end of the month to keep up with inflation pad out the emergency fund etc.
Look forward to you input.
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At current market prices it seems unlikely to be able to build a diversified $2 million portfolio of well capitalized equities that provides pretax dividend income of more than $60,000.
The equities in our portfolio have been held for a cost weighted average of 5.0 years (a range of 1 day to 38.8 years) and are yielding 2.8% of their cost basis.
 
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wells said:
you might research preferreds, senior notes, closed end funds and some total return mutual funds all of which can provide 6% and up depending on your risk tolerance. i allocate 50% of my assets to the above and the other 50% is in a cd ladder. the cd interest is shrinking as they roll over but the stable principal smooths the volitility of the other investments. this meets my lifestyle needs and i reinvest ss and pension benefits. to answer your question, yes you can do it.
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Hi wells, welcome to the forum. Please stop by here Hi, I am... - Early Retirement & Financial Independence Community to tell us a little about yourself.
One question about your allocation of 50/50 to CDs and preferreds. None of those instruments increase in asset value over time. How do you deal inflation?
 
justplainbll said:
At current market prices it seems unlikely to be able to build a diversified $2 million portfolio of well capitalized equities that provides pretax dividend income of more than $60,000.
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My portfolio which consists of dividend stocks (78%), preferred stock (3%), individual debt secuities and debt mutual funds (7%), and Cash based GIC's (12%) has an overall yield of 4.29%. At that rate, a similar $2MM portfolio would generate $85.8K

By the way, I don't advocate a portfolio with this much risk. I got sucked into it during the most recent crisis. As equity prices went down, instead of selling to cut my losses, I kept buying more equities in anticipation of prices going back up. Eventually, thanks to Ben Bernanke, it worked. After three years, I made good on all of my losses, but by that time my AA was close to its high of 90% equities. I am now trying to slowly move my AA back toward a more reasonable ratio, however, a dearth of reasonably priced debt securities, makes it difficult. I mean how can I justify selling a security that yields 3.38% and has increased an average of 11.4% per year for the last 5 years (actual stats on one of my holdings, Proctor & Gamble) to buy a bond yielding just 3%?? Regardless, at a minimum, I am reinvesting all current dividends and interest in debt securities.
 
ScaredtoQuit said:
My portfolio which consists of dividend stocks (78%), preferred stock (3%), individual debt secuities and debt mutual funds (7%), and Cash based GIC's (12%) has an overall yield of 4.29%. At that rate, a similar $2MM portfolio would generate $85.8K

By the way, I don't advocate a portfolio with this much risk. I got sucked into it during the most recent crisis. As equity prices went down, instead of selling to cut my losses, I kept buying more equities in anticipation of prices going back up. Eventually, thanks to Ben Bernanke, it worked. After three years, I made good on all of my losses, but by that time my AA was close to its high of 90% equities. I am now trying to slowly move my AA back toward a more reasonable ratio, however, a dearth of reasonably priced debt securities, makes it difficult. I mean how can I justify selling a security that yields 3.38% and has increased an average of 11.4% per year for the last 5 years (actual stats on one of my holdings, Proctor & Gamble) to buy a bond yielding just 3%?? Regardless, at a minimum, I am reinvesting all current dividends and interest in debt securities.
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What's the dividend yield on the current value of your equities?
 
I already said... it's 4.29%

I don't keep track of yield on cost on a commingled basis. I don't believe it's pertinent. (although I do know my yield on cost of individual securities)
 
MichaelB said:
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One question about your allocation of 50/50 to CDs and preferreds. None of those instruments increase in asset value over time. How do you deal inflation?
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good question m.b. this is something i ponder daily. i am well hedged in r.e., will probably relocate in 8 years. one view of my "plan" is that it is a well paying annuity that will have some value in 30 years. less than, equal to, or greater than the orginal invested amount as opposed to a spia that dies with the holder. as far as cds go i have reinvested the interest since 2000, when i began this "plan" , so they have kept up with inflation until now as they roll over. my thought going forward is to take 25% of the rollover and move into higher yield/more risk to increase over all yield yet maintain lower volitility with the cd. cds also provide dry powder to take advantage of fire sale prices. some call the high yield volitile/low yield stable configuration a barbell or matching pairs strategy. another way i have always dealt with inflation is my spending habits. i always go for quality but never pay retail, there are exceptions but i am a good steward of my assets. this is a work in progress that i moniter daily looking for opportunities. so far my income needs have been met and i sleep at night. regards, jw
 
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