Doing it on Dividends Alone?

[RetirementColdHardTruth]

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.

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.

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.

 

[GrayHare]

Ballpark: $2.5m, with $340k in emergency fund (cash), the remainder in a 60/40 equity/fixed AA. That should generate about a 2.5% return, which upon $2.16m yields $4500 monthly.

 

[RetirementColdHardTruth]

Ballpark: $2.5m, with $340k in emergency fund (cash), the remainder in a 60/40 equity/fixed AA. That should generate about a 2.5% return, which upon $2.16m yields $4500 monthly.

Again, thats not Dividends alone. AA needs to be 100% dividend etf.

 

[GrayHare]

IMO you'll get about the same 2.5% on equities alone, but with more risk.

 

[Ronnieboy]

CyclingInvestor, I believe, is pretty much living off dividends.
I am looking for something similar, but I don't really care if I leave anything behind, so if I had to dip into principle it wouldn't kill me.
I think you could generate at least 3-4% if you pick up to 40 blue chip dividend companies (PEP, KO, JNJ, CLX, MCD, HNZ, PG, COP, 3M, etc) spread the monies out evenly.

If there is a dividend cut or the company changes direction you can sell and move to another company without a huge interruption (<5%?) (unless there are many companies changing at the same time ) then you can do what most of the people on the board do and cut back a little in a down year.

 

[scrabbler1]

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.

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.

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.

Do (monthly) dividends from bond funds count? I have 3 bond funds which in 2011 generated about $28k from monthly dividends, more than what I need to cover my expenses in ER. Because any excess (surplus) is reinvested, I have a partial inflation guard to cover against that. I also have a stock mutual fund which generates quarterly dividends which are reinvested.

 

[george76]

I think you could generate at least 3-4% if you pick up to 40 blue chip dividend companies (PEP, KO, JNJ, CLX, MCD, HZ, PG, COP, 3M, etc) spread the monies out evenly.

I tried to look up the symbol HZ, but I couldn't find it. Is it supposed to be HZ?

Thanks for sharing the other companies.

 

[MichaelB]

I tried to look up the symbol HZ, but I couldn't find it. Is it supposed to be HZ?

Thanks for sharing the other companies.

Heinz, perhaps? HNZ

 

[george76]

Heinz, perhaps? HNZ

Of course. That's probably it. Thank you!

 

[haha]

Again, thats not Dividends alone. AA needs to be 100% dividend etf.

It's easy enough to figure out. Look at what you might want to buy, look at what the overall dividend income would be, and see if it suits you.

Ha

 

[nvestysly]

Planning To Do Just That...

...live off the dividends.

We are planning on a WR of ~3% based on the total of our portfolio today. I use the ~ symbol because on any given day the value of the portfolio changes but the dividends have been consistent and growing. We have been using dividend reinvestment for years in our tax deferred accounts. Starting next year we will turn off the dividend reinvestment and use that cash to live on.

We've seen the dividends decrease in the 2007/2009 time frame and now they are on the rise again. We figure we can weather that storm if it happens again.

Our monthly spend is $5500 and we're living on that amount for a year before we turn on the "spigots" to our IRA's using the 72(t) rule. We want to try this on for size before we invoke 72(t) as there are lots of restrictions once the spigots are turned on.

So the answer for us is YES. We have every intention on living on the dividends alone. I don't expect to dip into the principle since we have an emergency fund that will cover more than one year if needed. In addition, we add to the emergency fund every month. So we're actually living on less than $5500/month since some of that money goes to the emergency fund.

Another interesting aspect of this is that we will not pay much in income taxes. We will continue to itemize due to property taxes and charitable contributions - however, we will be in one of the lowest tax brackets. That will be a welcome relief since we've bumped into AMT a few times in recent years and while it was nice to have that salary it pained me to pay the tax bill.

 

[Ronnieboy]

...live off the dividends.

We are planning on a WR of ~3% based on the total of our portfolio today. I use the ~ symbol because on any given day the value of the portfolio changes but the dividends have been consistent and growing. We have been using dividend reinvestment for years in our tax deferred accounts. Starting next year we will turn off the dividend reinvestment and use that cash to live on.

We've seen the dividends decrease in the 2007/2009 time frame and now they are on the rise again. We figure we can weather that storm if it happens again.

Our monthly spend is $5500 and we're living on that amount for a year before we turn on the "spigots" to our IRA's using the 72(t) rule. We want to try this on for size before we invoke 72(t) as there are lots of restrictions once the spigots are turned on.

So the answer for us is YES. We have every intention on living on the dividends alone. I don't expect to dip into the principle since we have an emergency fund that will cover more than one year if needed. In addition, we add to the emergency fund every month. So we're actually living on less than $5500/month since some of that money goes to the emergency fund.

Another interesting aspect of this is that we will not pay much in income taxes. We will continue to itemize due to property taxes and charitable contributions - however, we will be in one of the lowest tax brackets. That will be a welcome relief since we've bumped into AMT a few times in recent years and while it was nice to have that salary it pained me to pay the tax bill.

Out of curiosity, was the yearly dividend income in 2007-2009 stagnant or did it actually drop as not all companies cut, and some even increased dividends still.
Is your portfolio individual stocks or some other setup (ETF/Mutual fund)?

 

[FIREd]

Until we reach 59.5, we plan on living on the dividends and interests generated by our taxable portfolio as well as some rental income. As of today, our largest source of passive income is equity dividends, followed by rental income (net of expenses), followed by interests generated by a CD ladder. If passive income is down, we plan on spending less.

 

[Bikerdude]

I have enough cash to last 10 yrs with a 50% dividend cut. Probably too conservative but I sleep well.

 

[Danmar]

Our plan is to live on dividends and pension, about equal on after tax basis. Portfolio yield is about 3.7% and only one insignificant dividend cut in 2009 ( since disposed of). Dividends have grown about 14% since then. Taxed at about 18% max marg rate in Alberta ,Canada. I figure the divs growth will cover the inflation risk on the non cola'd pension. Obviously, you need a good cash balance in reserve, and we do.

 

[RetirementColdHardTruth]

Looks like VYM is 2.8% and DVY is 3.3% at todays prices. I will run some numbers. Thanks for all the input it certainly looks like a good way to keep me sleeping well at night and knowing I could basically retire with ease at 46. Maybe that is just too young. It scares me to think that in 6 years I could be done with the grind. But in a good way.

 

[ziggy29]

We can't count on what isn't law yet, but those relying on dividends in taxable accounts should probably have a fallback or enough of a buffer to absorb the possibility of significantly higher tax rates in the future.

 

[FIREd]

We can't count on what isn't law yet, but those relying on dividends in taxable accounts should probably have a fallback or enough of a buffer to absorb the possibility of significantly higher tax rates in the future.

As long as dividends are not taxed higher than earned income and tax brackets don't go sky high for the middle class, we'll be OK I think (as a married couple, we'd be in the 15% tax bracket if DW stopped working).

 

[marko]

Our plan gets us there with a combo of dividends and SS taking up the slack. We have ~ 60/40. Annual overall portfolio growth (in a good year) about 9-10%.

Our SWR is 4%, dividends come in at about 3% and our WR is a little more than 2%, again with SS taking up the slack in the budget.

Love the TR Price RPSIX and PRHYX bond funds!!

 

[Helen]

If there is a dividend cut or the company changes direction you can sell and move to another company without a huge interruption (<5%?)

Typically when a company cuts a dividend the stock price drops quickly, so you might not have as much principal to invest in a new company.

Dow Chemical cut it's dividend for the first time in 97 years in 2009 - by 64% ouch! The stock price dropped like a rock. There were people who had been heavily invested in Dow and living off the dividends that were in real trouble. Some had to sell the stock to generate income back then and the stock price was in the toliet.

 

[Danmar]

I suspect the point of the OP was Asset Allocation. That is dividends as opposed to interest. You either have a pension or you don't but you can decide on AA.

 

[MooreBonds]

We are planning on a WR of ~3% based on the total of our portfolio today. I use the ~ symbol because on any given day the value of the portfolio changes but the dividends have been consistent and growing. We have been using dividend reinvestment for years in our tax deferred accounts. Starting next year we will turn off the dividend reinvestment and use that cash to live on.

+1

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).

My current portfolio yields:
3.37% Taxable accounts (US/foreign stocks/REITs/MLPs)
6.3% Tax-deferred accounts (lots of preferred; some bond ETFs/REITs/BDCs)

Total net worth AA is about 85% equities/15% fixed income

If I were able to FIRE on just a 2.5% yield, I'd be comfortable with about a 1.5 year full living expense emergency fund for supplemental needs. Because I would only use it to supplement a yield drop (and not have to fully fund the entire 1.5 years), the e-fund would actually last much longer.

When I FIRE, I hope that my net yield from my portfolio will be enough to live off of w/o regularly liquidating anything - maybe 2.5% yield? It'll be an interesting challenge to see what it is at that time, and how I factor in the (higher) fixed-yield of the preferreds/CDs to the lower withdrawal rate. Perhaps I'll just FIRE at a 2.5% withdrawal/dividend yield but with a very small emergency cushion, and just build up the cushion with the excess yield thrown off?

But, given my conservative nature, I'll probably retire with the 1.5 year e-fund already funded, and just spend whatever yield is spit off each year.

5% of my net worth is in some I-bonds from 2000/2001 that have 19 years to go before maturity, so I may just roll those at maturity into some new savings bonds and let them be my 'e-fund' (depending on what the fixed income arena looks like at that time).

 

[Ronnieboy]

Typically when a company cuts a dividend the stock price drops quickly, so you might not have as much principal to invest in a new company.

Dow Chemical cut it's dividend for the first time in 97 years in 2009 - by 64% ouch! The stock price dropped like a rock. There were people who had been heavily invested in Dow and living off the dividends that were in real trouble. Some had to sell the stock to generate income back then and the stock price was in the toliet.

Agreed.

That is why I would only put ~5% of my portfolio in each stock.

With a $1m portfolio, $25k in each company, theoretically generating about $40k/yr. If one of the companies cut the dividend to zero or disappeared overnight, you'd be out about $1k/yr (and $25k). I would have enough in my emergency fund or bucket to cover that or hopefully any extended downturn.

I think it would be about 5 companies in a year that cut their dividend to zero or stock price dropping to zero would start to be a concern, but I think the odds of that are pretty slim.

If PEP, KFT, HNZ, JNJ, MCD disappeared overnight then it would be time for the Doomsday Preppers!

 

[Ed_The_Gypsy]

I am planning to live off dividends.

You may find some things of interest here: Income Investing, Retirement Investing and Dividend Stocks - Seeking Alpha

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.

DW will not let me invest in tobacco companies, but they pay out well and from what I can see of the 3rd world, consumption is not going to go away soon.

You can get dividends alone or you can get dividends with growth, too. Check out XOM: Income Investing, Retirement Investing and Dividend Stocks - Seeking Alpha You cannot buy a bond at 2.2% that shows that kind of growth record. I have been hoping to buy on a dip as I do not think their big play on domestic natural gas is going to be a big payer.

Advice: If buying individual stocks, buy on weakness.

 

[haha]

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.

Ed, since this is your special area of expertise, could you expand your critique of Royal Dutch?

Ha