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Part of the reason I started this blog was to become a better investor. I’ve found that having to justify my investing decisions publicly has made me a better investor as it encourages me to think and justify my actions. It also provides a platform where I can hear and learn from readers.

I’m always curious to hear opposing views so that I can hopefully defend my strategy or make necessary adjustments. Part of my retirement strategy involves utilizing a growing stream of dividends to help pay for retirement. Naturally, when I read a National Post article by Jason Heath titled “Why living off your dividends in retirement may be a mistake” it got me thinking about my retirement plan. One quote stuck with me particularly.

Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.

I thought the author made a good point about leaving too much money on the table when you kick the bucket. Rather than hoarding money you could be out enjoying life. This is a valid point, but for my situation I’m not sure it would apply because I hope to have an early retirement age and I like the idea of the added security while I’m still young.

My goal is to become financially independent by the end of 2034 at which point I would be 48 years old. The stretch goal is 40 years old; which if I’m being honest, is quite a stretch. If the wife and I “retire” when we are 40 to 48 years old we won’t have any of the other sources of income that you typically receive at retirement as we won’t be eligible for them until we are much older. In the National Post article the author assumes a retirement age of 65. When you retire at this age you are usually eligible for government programs like the Canadian Pension Plan (CPP) or Old Age Security (OAS). These programs and perhaps a company pension can be used to help pay for retirement expenses and help reduce dependence on dividend income. Because I won’t be eligible for these alternate sources of income at such an early “retirement” age I like having the added security of only using the dividend income and not having to sell investments to cover expenses.

Related article: My Goals

Assuming the wife and I live to our mid 80s or later means that we will have roughly 40 or more years worth of expenses to cover. A lot can happen in this period of time and I don’t want to start selling investments early on in this “retirement” period unless I absolutely have to. I don’t want to run out of money too early. Relying on dividend income only, gives us a more conservative approach. This is on purpose because our retirement period will be longer than the average person.

When we start getting older and become eligible for government programs or company pensions then we can decide if we want to sell some investments and live a more luxurious life as we will have alternate income sources at that point. Because we will be retiring about 20 years before we would be eligible for government programs or company pensions I do not want to create a financial plan that relies on these programs until I get closer in time to them. I think these government programs will likely be around in the future, but with baby-boomers retiring in large numbers these plans may have been altered through pension reform by the time I would be eligible for them. I don’t want a financial plan reliant of these programs when they are so distant in the future and it is conceivable that they could be materially changed.

Another reason that I like the idea of living off of dividend income is that it makes me a more relaxed investor. I sleep better at night knowing that I don’t have to worry too much about the ups and the downs of the market because I’m a long-term investor and so long as increasing dividend payments keep coming, I’m in a good position. Focusing on a growing dividend income instead of a volatile stock price can be good investment behaviour because it promotes long holding periods, which is how I want to invest.

Conclusion

If the time comes when I have enough money to retire by selling a portion of my investments each year then I can make the decision to use that strategy vs waiting longer and retiring off of dividend income at that time. Currently I’m a long way off from that kind of money so this scenario is purely hypothetical. My main argument for retiring with dividend income is that it provides me a more conservative and flexible financial plan. I prefer retiring off dividend income initially because I plan to have a long “retirement” period and I won’t be able to rely on government or company pension programs for roughly the first two decades. Assuming these pension plans are still around when I get older, I can re-assess at that time.

What do you think, is living off of dividends a mistake?

 

Photo credit: TerranceDC / Foter / CC BY-NC

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18 Comments

  1. You’re only 29, don’t overfocus and don’t shut the the door to working like most do into later in life, life can get quite boring, grass is always greener.

    1. Totally agree. I’m always hesitant to use the word retirement, as most of the time I mean financial independence. When I get to a point where I don’t need a job to cover my expenses I’ll be financially independent, but that doesn’t necessarily mean I won’t work. I imagine that some of my passion projects in retirement will involve working and being paid. The difference will be that I don’t need the income and I can be more selective in the work I want to do.

  2. I agree with you whole heartedly!
    And I might add that as you retire early, you will also have to fund any health insurance that you may want to have. OHIP (as I’m in Ontario), does not cover any health, drugs, hospitalization until you reach 65 years and may be longer than that when you get closer. Each province may be different. CPP can be taken early, but of course at a reduced rate (I did at 60).
    If your dividends cover your expenses, then and only then can you decide if you want to sell some equity to cover any special cases

  3. We all have our reasons for following a dividend growth investment strategy with goal of living, at least partially, off the dividend stream in retirement. I can’t imagine anyone wanting to be the richest man or woman in the graveyard but no one wants to outlive their money either. In my case I want to ensure my much younger wife inherits sufficient funds to last through her lifetime.

  4. Good post and stuff. Funny, I just wrote an article about this, this weekend! 🙂

    My thinking – it’s a forced savings plan for us and like you, we have no idea what the future holds, so I prefer to sleep at night knowing my capital is at work for me.

    Cheers,
    Mark

  5. I guess it all depends on how you do it! Working 60+hours a week to make sure you live off of your dividends at the age of 60 doesn’t seem like the perfect deal for me. Doing it that way does mean sacrificing precious times with beloved ones.
    The key is always to find some balance in which you get enjoy present time while insuring you’ll have the lifestyle wanted later on.

    Cheers,

    Mike

  6. Firstly, I enjoy your blog and your journey to financial freedom! I am 55 and am concerned what the government programs will look like when I am 80, so your plan to retire without needing them is very sound! Well done!
    My only suggestion to you would be that you should not be too cautious with your portfolio. I like dividend stocks as well, but as a means to diversify from growth assets which I will roll over to dividend funds in about 2-5 years when I pull the plug on the 9-5 grind. Give yourself a chance to grow your total portfolio amount, then the dividends from this larger basket should take care of your needs.
    Good luck!

  7. @Diversified in Oakville, I’ve been invested in dividend growth funds since mid 2008. I’ve studied many investing styles and feel DGI is the best retirement strategy with respect to risk/reward. The growing dividend income tends to exceed inflation so there is little to no need to liquidate any capital. You might find yourself disappointed if you replace your dividend growth stocks with dividend funds. They generally have less growth and dividend growth than DG stocks and come with much lower yields, mostly due to fees. In my studies I’ve yet to find one that did not cut it’s distributions in the past recession. Some even have unexplained cuts during strong markets. For example the noted U.S. Vanguard Dividend Appreciation ETF (VIG) distributed 1.5% less in 2013 than it did in 2012. The cut didn’t add up…in the same year VIGs holdings raised their dividends by 12%. It’s definitely more hands on to maintain/monitor a dividend growth stock portfolio than an ETF mix but I feel the rewards outweigh the inconvenience. My spouse isn’t into learning DGI so I have suggested an alternate course for the portfolio for when I pass on or lose my cognitive functions.

  8. It is never a mistake. What’s not to like about passive income? The stocks work relentlessly and provide its income every month and will help us achieve financial independence. Haha Keep up the great work!

    BeSmartRich

  9. > Another reason that I like the idea of living off of dividend income is that it makes me a more relaxed investor. I sleep better at night knowing that I don’t have to worry too much about the ups and the downs of the market because I’m a long-term investor and so long as increasing dividend payments keep coming, I’m in a good position. Focusing on a growing dividend income instead of a volatile stock price can be good investment behaviour because it promotes long holding periods, which is how I want to invest.

    For me, this is what it’s all about. I’m new to the idea of Dividend Growth Investing on its own, but in terms of just passive income and long-term investing, you hit the nail on the head here. I don’t want to stress. I just want money to flow in. In fact, I don’t even want money to be a question anymore.

  10. Read that article some time ago and found it full of Bull! He contradicts himself several times and not an Advisor I’d consider listening to.

    Everyone has their own objective when it comes to investing and my is Income growth. I want and have achieved my goal of having my income from my investments give me enough money to live off. It’s also a growing income. I don’t know how long Me and my wife will be around, and the last thing I want is for us to run out of money while we are alive, or worse try to ensure the depleting money will meet our needs.

    If by living off our dividends (and the small gov’t pension), if we die leaving a pile of money than so be it. We don’t have to leave all to family, there are lots of charities who could use the money to help others. One has choices and I don’t mind leaving money to my family as long as our needs are being met while we are alive. I wish my parents left us with a growing income.

  11. Thats part of the draw for living off your dividends. Yeah it ensures you won’t bounce the check for the last bill you pay but it lets you leave a legacy to family or charities you admire and keeps the option of selling off assets if need be to fund extra fun un returement or if you get some dividend cuts after youre retired. Its a built in margin of safety in case you happen to retire when theres an extended bear market or a situation where the narkets go nowhere for 10 years. With the traditional 4% withdrawal rule of thumb the first 5 years of living off your assets is crucial. If you time that wrong and have to sell assets at depressed prices you’re going to be in bigger trouble down the line because you took away capital when you should have been investing some. Dividend growth investing allows your income to likely continue to grow throughout a bear market. Now thats something that intrigues me. Instead of having to decrease my lifestyle or not invest I can likely still get a pay raise.

  12. If you are going to retire “early”, you have no choice but to live off your “income”, not eat your capital as most retirement planners assume. How can you possibly estimate how long you will live if you retire in your 40s as you plan? And besides, if you use the standard live to 90 estimate, there really isn’t much difference between living off purely off your income, and eating some capital along the way anyways. Do the math for an annuity vs a perpetuity. For a long period like 50 years, the payment excluding any capital is about 90% of the payment including capital, so it works out almost the same.

  13. I like your blog very much and admire the work you do in maintaining your spreadsheets. They are great resources and I thank you very much for keeping them up!

    A few comments on your post “Is Living Off Of Your Dividends A Mistake?”. I assume many of your readers would say that this strategy in general is absolutely no mistake at all. I believe it is one of the very best strategies available to ensure a comfortable retirement.

    For those that are not convinced, I offer the following:

    To be able to do so, and as you describe and others comment on your website, for the strategy to work it requires that your portfolio contains companies that don’t just pay dividends regularly, but that grow their dividends regularly. The universe of such companies is actually quite small, and if you want to focus on Canadian companies, the universe is very small indeed. This is not necessarily a bad thing as these companies tend to be high quality. So these are your targets to be purchased at reasonable prices. Further, there are distinct tax advantages to Canadians owning Canadian companies and so, in my opinion, these should be a Canadian investor’s main focus. If you wish, it’s fine to add foreign dividend growth companies to round things out.

    The author of the National Post (NP) article makes a lot of sweeping statements that I don’t agree with. Yes, as other commenters mentioned, you ought to have a balance in your life which includes not being so focussed on growing your portfolio that you completely sacrifice your family or own personal fulfillment. But assuming you can and do keep that balance, who cares if “you die with a substantial value remaining in your portfolio”? Will it to your family. Donate it to charity, whatever.

    The goal is to have a sustainable, growing cash flow, large enough for you to live on comfortably. And, in my judgement, the NP author is correct in that you will require a million dollars or more in today’s money to be able to do that. But even if you fall short in that amount, remember that with dividend growth and reinvesting those dividends, with time your portfolio will grow. You do need time, but over the course of a 20+ year investing horizon, you should be fine especially as your cash flow grows to the point that you don’t need to touch the capital generating that income.

    Another way to look at growing dividends funding your retirement is to think of them as you would a Defined Benefit (DB) pension plan with a Cost Of Living Adjustment (COLA) provision. If you are fortunate enough to have one of these, when you die do you care what the residual value of your pension ends up being? You don’t typically get to keep any of the residual value anyway. If you don’t have a DB plan but do own enough shares in companies that grow their dividends at say an average 4 or 5% per year (a very realistic average I might add), that’s more than the COLA you’d typically expect from any BD plan. And the best part is, YOU own and get to keep the shares (the residual value equivalent) to sell some of if needed to fund major purchases, or to donate, or pass on to your heirs. You have full control.

    In conclusion, I am completely sold on Dividend Growth as the best way to fund your retirement. You absolutely can live off the dividends generated. The strategy gets very little press, and that’s just fine. It doesn’t have to be popular to work, and it does work…exceptionally well.

  14. I retired at the age of 54. Income strategy designed 20 years ago around dividend paying stocks. Everyone has their own environment /variables to deal with. However this strategy works for me and enable me levels of freedom to travel the world, enjoy life with family, and leave a considerable inheritance to my children. In addition it enables me to donate to worthwhile charities which lowers my taxes.

    1. Collin, excellent for you! You must have a substantial portfolio to be able to enjoy the lifestyle you describe, particularly if it is your only source of retirement income. That’s not to suggest that DG investing is not a great way to provide growing income…it certainly is, and also works well for me.

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