How big a portfolio do I need to live on dividends in retirement?

How much does one need to invest before one’s dividends pay for basic monthly expenses in retirement? I realize there are a lot of variables, but this is a very general question.

You’re correct that there are a lot of variables, but let’s do some very rough math. We’ll assume you’re retiring today, and for simplicity we’ll ignore taxes (which may not be a big factor anyway, thanks to the dividend tax credit. For more on this my Yield Hog column from this week).

Let’s further assume that your investment portfolio yields 3.75 per cent, calculated as total annual dividends divided by total market value. I didn’t pull this number out of a hat; it’s the yield of my Strategy Lab model dividend portfolio.

Could you construct a portfolio with a higher yield? Absolutely. But in my opinion a diversified portfolio of stocks yielding 3.75 per cent is easily achievable without taking on excessive risk.

Now, we need to determine what your basic expenses would be in retirement, keeping in mind that a lot of costs – raising kids and paying the mortgage, for example – may well be behind you. Let’s assume you can get by on $50,000 for basic expenses such as food, property taxes, clothing, transportation and utilities. Granted, this doesn’t leave room for lavish Mediterranean cruises or a new Lexus every few years, but you won’t be eating cat food, either.

My family of four, for example, lives comfortably on less than that. I know this because I have tracked our expenses for the past several years. I recommend you do the same; it’s the only way to know how much money is actually going out the door. One of the easiest ways to track your spending is to keep all of your bank and credit card statements, and then review them each year to see how much you’ve spent.

Now the question is, how much capital do you need in order to generate that $50,000 in annual income, assuming a yield of 3.75 per cent? The answer is: $50,000/0.0375, or $1.33-million.

Think you could get by on $40,000? You’d need a portfolio of $40,000/0.0375, or about $1.07-million. If you assume a higher dividend yield of, say, 4 per cent, you’d need a portfolio of $40,000/0.04, or $1-million.

You can play around with different scenarios on your own. The general formula is X/Y = Z, where X is your annual expenses, Y is the portfolio yield expressed as a decimal, and Z is the required portfolio value. As long as you know two of those numbers, you can solve for the third.

What about inflation? Well, if you own stocks that raise their dividends regularly, as many pipelines, utilities, banks and consumer companies do, your income will grow and protect you from rising prices.

Bear in mind that most investment professionals recommend that you also allocate a portion of your portfolio to bonds or guaranteed investment certificates. When the stock market takes a dive, you’ll be glad you have them.

Remember, too, that you may well have other sources of income in retirement, including the Canada Pension Plan, Old Age Security, registered savings and, if you’re fortunate, a company pension as well. So you probably won’t have to rely on dividends for all of your spending needs. But having some dividend income in retirement will certainly help.

There are a lot of moving parts here, and this analysis is general in nature and not meant to be taken as specific investment advice. A good financial planner can put together a comprehensive plan that addresses your specific situation.

From theglobeandmail.com

What are dividends? Why should you care?

Dividends aren’t just something rich people talk about, or a Community Chest card in Monopoly. They are the most consistent and easiest way to gain passive income as an investor. When most people think about investing in the stock market they think about movies where young men with slick hair invest in little-known companies and then profit hugely when these companies suddenly explode. The phrase, “Buy low, sell high,” rolls off of most peoples’ tongues. The fact is that this not how most people get rich, and it doesn’t really do the stock market justice. Over the past 40 years almost 60% of the overall yield of the entire stock market was produced by dividends as opposed to capital gains (capital gains refer to the money you make as a difference between what you bought your stock at, and what you sold it for). That’s an amazing statistic when think about it. Investing with a focus on companies that have a strong record of producing consistent dividends has many advantages over other, more risky styles of investing. 

The actual definition of a dividend is cash that is distributed to shareholders from a company’s earnings. The amount of your dividend is determined by the number of shares you own, and the dividend that the company is paying out. The dividend is usually listed as the amount per share (so you simply multiple this number by the number of shares you own in order to get your overall payout). The dividend is paid for with after-tax money from the company. Some companies pay their dividends quarterly (the most common), while others payout bi-annually, monthly, or annually. Regardless, the number you are most likely to read is the dividend prorated over a year. In order to determine a company’s dividend ratio, you divide its annual dividend, by the current cost per share. These two metrics are the most important ones to look at when doing dividend investing. The higher the dividend ratio, the more money you will receive back as a percentage of your principle investment.

I think all investors should look very hard at dividend investing, especially in today’s income-starved investing climate. There are several very strong dividend payers like AT&T for example, that are offering yields that are double, or even triple what the 10-year bond rates are on American Federal debt. By investing in these companies you are getting paid every year, and any value the company gains while you hold the stock is the “cherry on top” of your investing sundae. To stay consistent, if we keep AT&T as our example, their current dividend ratio is 6%. If you were to spend your dividends every year, you would have gained your principle back again in under 20 years (plus you would still own the shares you bought)! The real power of dividend investing occurs when you keep reinvesting them however. This allows compound growth to truly work wonders. If we think that AT&T might grow at an ultra-conservative rate of 3%, and keep their 6% dividend ratio, then we assume that all our dividends will be reinvested, your original principle will have doubled in only 8 years! In the long term, you could easily see your money double 4 or 5 times. Also keep in mind that great dividend paying companies typically increase their dividends over time. For example Coca-Cola has had 48 years of consecutive dividend increases. Procter & Gamble – 55 years of consecutive dividend increases.

Another reason why dividend investing is so attractive to many investors is because of the simple fact that if a company is paying a dividend, and has a strong history of paying/raising a dividend, these are two of the best indicators of the overall growth and maturity of a company. Think about the basic logic, if a company can afford to consistently pay shareholders, they have proven that they have sound management, and a pretty good business model. It is extremely rare that a company that has a good history of paying out dividends suddenly goes into bankruptcy. Instead, these are the companies that generally have the economic stability to withstand challenging conditions, and emerge with a stronger market position in spite of them. For example the Coca-Cola company has been paying dividends since 1893.

Dividend investing is a great way to give yourself a consistent stream of positive cash flow as an investor, and is a very useful way to screen out stocks that are too risky. They hold up very well during recessionary periods (like the present one) because their dividend payouts are so attractive to investors that need immediate money from their investments, and the capital gains they experience during a bull market provide a nice overall return for patient investors as well. These are some of the main reasons that dividend investing has always been, and assuredly will continue to be, one of the most solid long-term and short-term investing strategies in the marketplace.

From simplyinvesting.com

Related Books


The Dividend Growth Investment Strategy: How to Keep Your Retirement Income Doubling Every Five Years

Dividend Stocks For Dummies

5 Easy Passive Income Method

Passive Income is the income that we earn with little effort involved. Having a multiple passive income will help you to create wealth and also let you to have more freedom in your life. Nowadays, many people are talking about financial freedom and one way to achieve it is to have multiple passive incomes which can cover the monthly expenses. For those people who still don't have any passive income, I think is time for you and your family to sit down and think about it. 

Please don't think that creating passive income is a difficult task and require a large amount of money. Actually it is fun and easy... even kids also can do it. Let me share with you 5 easy passive income methods you can start with... 

1. High Yield Saving Account 

Sometimes we might not notice what is our saving account interest rate because is it relative low. However, a 0.1% differences in long run will be a huge amount. Normally bank will give 0.1% - 0.3%. Let said, if you have 100,000 dollar in bank A with interest rate 0.1% and 100,000 dollar in bank B with interest rate 0.2%. If after 1 year you check at your account in bank A the amount will be 100,100 dollar and bank B the amount will be 100,200 dollar so we can see the difference is 100 dollar. With 100 dollar we can use it to buy stationary for our kids. 

2. Fix Deposit 

This is an investment tools created by bank, where customer agree to save some amount of money in the bank with a locking period and then customer will get a guarantee return. The return is normally between 2% - 4% per annual. No service and annual fee charge required. For example, just put 1000 dollar to fix deposit with a 1 year locking period and 3% return then after 1 year when your fix deposit maturity you will receive 1030 dollar which mean that you have a 30 dollar passive income. 

3. Unit Trust Fund Investment 

If you think Fix Deposit return is low maybe you can invest in some trust fund which give better return. These kinds of trust fund normally provide 6% - 20% return. However please carefully select the fund you going to invest because normally trust fund will have a annual fee charge. 

4. Stock Investment 

Stock investment is always treating as a favorite tool for passive income. The reason is because the access is easy and also the return can come from capital appreciation and dividend. However some might think stock investment is very risky. Well, with proper planning and analysis I think we can reduce the risk. One of the way to reduce the risk is to invest in dividend stock. This kind of stock can give 4% - 10% dividend. Normally dividend stock will have a good fundamental and strong management so if any market crash they still can withstand it. Examples of dividend stock in Malaysia are BAT, Dutch Lady, Digi, Public Bank, Nestle, Guinness, Carlsberg and Telekom Malaysia. 

5. Pension Fund 

Pension Fund is also one of the passive income that for longer term. The objective of Pension fund is to provide a measure of security for the retirement to its member. In some country pension fund is a compulsory saving scheme for all employees. Normally they can withdraw their pension fund after 55 years old. In Malaysia, we call it EPF (Employee Provident Fund). Pension fund will also use the fund to invest in stock equity and the profit they get will be share to members as a dividend. 

The above are some easy passive income method which require very little amount of money and time. Please start early and enjoy the passive income you earn.