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By Dale Roberts, cutthecrapinvesting
Special to the Financial Independence Hub
It is the most popular rallying cry for self-directed investors in Canada and the U.S. – I plan to “live off of the dividends.” Or in retirement – “I am living off of the dividends.” The notion leaves money on the table in the accumulation stage and living off of the dividends leaves a lot of money on the table in retirement. Don’t get me wrong, I love the big juicy (and growing) dividend as a part of our retirement plan. But as an exclusive strategy, the income approach simply comes up short.
It’s not a popular Tweet, but I have suggested that no investor with a viable and sensible financial plan would live off the dividends. Add this to the points made in the opening paragraph; it might not be tax-efficient. Also, the dividend would have no idea of what is a financial plan and what is the most optimal order of account type spending. Check in with the our friends at Cashflows&Portfolios and they can show you a very efficient order of asset harvesting.
On Seeking Alpha, I recently offered this post:
Living off dividends in retirement; don’t sell yourself short.
Thanks to Mark at My Own Advisor for including that post in the well-read Weekend Reads.
Financial Planner: It may be a bad idea
From financial planner Jason Heath, in the Financial Post.
Why living off your dividends in retirement may be a mistake.
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.
In that Seeking Alpha post, I used BlackRock as the poster child for a lower-yielding dividend growth stock. The yield is lower but the dividend growth is impressive. That can often be a sign of underlying earnings growth and financial health.
2022 update: BlackRock is falling with the market (and then some); the yield is now above 3%.
Making homemade dividends
In that Seeking Alpha post, I demonstrated the benefit of selling a few shares to boost the total retirement take from BlackRock. The retiree gets an impressive income boost, and only had to sell 2.8% of the initial share count. The risk is managed.
Starting with a hypothetical $1 million portfolio, $50,000 in annual income represents an initial 5% spend rate. That is, we are spending 5% of the total portfolio value. Without share sales the retiree would have been spending at an initial 3.3%.
Share Sales (in the table) represents the income available thanks to the selling of shares: creating that homemade dividend.
The retiree who has the ability to press that sell button to create income enjoyed much higher income. In fact, the retiree would have been able to sell significantly more shares (compared to the example above) to create even more additional income.
Plus the dividend growth is so strong, it quickly eliminated the need to sell shares.
In fact, the BlackRock dividend quickly surpasses the income level of the Canadian bank index. It can be a win, win, win. Even for the dividend-loving Canadian accumulator, BlackRock is superior on the dividend flow.
But of course, the aware retiree will keep selling shares and making hay when the sun shines. They might cut back any share sales in a market correction: also known as a variable withdrawal strategy.
It’s a simple truth. Don’t let the income drive the bus. It doesn’t know where you need to go. This is not advice, but consider growth and total return and share harvesting.
Don’t sell yourself short.
In the Seeking Alpha post, I also offered:
The optimal mix of income and growth for retirement Continue Reading…
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