Living the Dividend Dream

Today’s post highlights one of those investors for investing inspiration…

But let’s back up a bit …

Some time ago … yours truly wrote a controversial post about the intent to live off dividends and distributions from our portfolio.

Indexers gasped and likely unsubscribed to my site!

Well, even though some considerable time has passed since that post my thinking and income goals remain the same – as least in part for semi-retirement planning:

I continue to believe “living off dividends” (and/or distributions) should work out well for us.

And I’m not alone.

For today’s post, I’m profiling a very successful investor …. who not only dreams of dividends but is living the dividend dream right now.

Living The Dividend Dream

Welcome to the site for this latest investor profile, The Dividend Dream.

I look forward to sharing this interesting new investor profile below but first up, a recap about why dividends and distributions continue to matter to me/us on our income journey.

Yes, my approach to live off dividends remains alive and well in 2023!

My dedicated page including many of the stocks I own. 

Here are some reasons why some investors couldn’t care less about dividends:

• The trouble with any “live off the dividends” approach is that you’d need to save too much to generate your desired income. Fair. 
• Dividends are not magical – there is nothing special about them. Sure, of course they are not magical or free! 
• A dollar of dividends is = a one dollar increase in the stock price. True. 
• Stock picking (with dividend stocks) is fraught with under performance of the index long-term. I’m not convinced about that. 
• You can never possibly know long-term how dividends may or may not be paid by any company. Fair. 

You do need a bunch of capital to generate meaningful dividend income.

Dividends are part of total return.

Stock picking to some degree opens opportunities for market under performance.

However, my responses and approach to some of these items are as follows, since I believe dividend investing offers far more good than harm:

• While market underperformance may occur (that is subjective and up to personal investment success, luck, and other factors that are very difficult to substantiate), dividend investing offers up some essential long-term investing discipline, for me at least, to stay the investing course, including when markets tank in any given year. If anything, I buy more!
• This way of investing provides HUGE motivation and inspiration – to keep investing, in any market climate. The way I see it: money that makes money can make more money.
• Dividend investing, seeing the tangible money flow into our accounts month-after-month, reinforces my belief that nobody cares more about my financial well-being than I do (except for my wife!). Ha.

All kidding aside…dividend investing and having a plan associated with building ever-growing income offers something that some other ways of investing just can’t readily offer: support for the emotional discipline to execute this strategy, come heck or high water, or even until the end of all capitalism as we know it!

But that’s just me and our plan.

Your mileage might vary and that’s OK.

There are many ways to invest and many reasons that folks invest in what they do.

That said, dividend investing is far from any local phenomena.

I reached out to The Dividend Dream for her to share her reasons for investing in dividend paying stocks, including why dividends matter (or not!), and any considerations she has for any investors at any age on their investing journey. [Editor’s note: for now, “she” wishes to remain anonymous, as explained below; hence there is no photo-JC]

Living The Dividend Dream – Dividend Dream – welcome to the site! 

Hey hey … thanks for having me. I appreciate the invite!

Before we dive into your investing thesis, why you own what you own, and much more – tell us a bit about yourself.

Well, what can I say. People call me The Dream, Dream Girl, aka Dreamer.

I’m anonymous for now as I’m still working a bit, although I entered into a “freestyle” work optional state this year (2023). I’m a businesswoman, living in the southern United States. My field is strategy and marketing, and I went to a top MBA school. I’m in my mid-40s and am married to a wonderful woman who is a professor. I am the breadwinner in the family – by far – so I feel financially responsible for our future. And yeah … that’s the skinny, essentially.

Interesting!

I feel personal finance is personal – a constant refrain on this site. What I mean by this is: everyone’s financial situation is different, and they have personal reasons to invest the way they do, to realize their individualized goals.

How did you get started with investing?

I actually have been thinking about “retirement” ever since I was a teenager. Really, it’s always been more about being financially secure and independent. My family fell on some hard times and it scared me. I didn’t really have any choice but to rely on myself. I held several jobs in high school and throughout college. So … long story short, after college I started like everyone else with a 401(k) at work, trying to max that out every year. But when I started getting into my 30s that’s when I started to really breakout out of the mold, rolling past 401(k)s into investment accounts where I had complete control and could pick to hold whatever assets I wanted, not just the choices provided by an employer.

Awesome. OK, let’s get into it. Why dividend investing? Why do you invest the way you do?

For background – I’ve invested in mutual funds, CDs (Mark: certificate of deposit – like a GIC here in Canada), ETFs, bonds, growth stocks, dividend stocks and real estate. So I’ve kind of done it all. With mutual funds, the costs, one-time a year payout, and little control over the mix always bothered me. Bonds are fine, but you’re invested in a long-term play there. Real estate rentals are ok, but I hate when my tenant calls me to fix something… and for some reason it’s always at an inopportune time like the holidays or when I’m on vacation.

When I really started thinking about the opportunity and power of dividend investing, I instantly knew it was for me. I used to think about a draw-down strategy where I’d plan the exact amount I needed to last until my last day and end with zero. That’s kind of morbid, and anyway, how exactly do you estimate that?

With growth stocks, the “luck” aspect of selling at the right time always concerned me. But with dividend investing, I can have my cake and eat it! I can have assets kicking off cash flow that can replace my salary, they continue to grow annually both in dividends and appreciation (total return), and I don’t have to sell when I don’t want to. Or ever, perhaps.

What’s your stance on indexing then? Why or why not?

Oh, index funds? Yeah I’m onboard. I have ETF index funds too, like SCHD. But the issue with standard broad based ones is the yield is not going to be enough to cover your salary, and therefore not enough to be “life-changing” for real. And when I say that I mean, you can actually change your life or lifestyle like I’m doing now. That is, unless you have a ton of moolah. Now I suppose you can use more adventurous ETFs like JEPI or DIVO for immediate cash flow, but then the issue is capped upside.

So I’m not against them. And for some folks it’s a good option if they don’t want to stock pick or worry about company research. For me, ETFs / index funds are in my portfolio mix to play a role of diversification or cash flow, but I’d say about 90% of my portfolio is dividend stocks.

What are the downsides to dividend investing? Be harsh – it’s not perfect, right?

Be harsh? Ok Mark. Are you ready? If you pick the wrong stocks, it can be… not good. Really bad in fact. If you concentrate highly in a handful of stocks, especially if they are the wrong picks, you might not succeed. How’s that?

That’s pretty harsh (and correct)!

OK, let’s come back to your investing style and approach. What stocks or securities do you own and why?

I lean heavily into dividend aristocrats, dividend contenders, dividend kings, and the like. Companies that have a very strong track record of paying out and increasing dividends for 25, 50 and even 100 years. I always look at FCF (free cash flow) and payout ratio, and want to make sure the business is healthy and can cover that dividend. I also like companies with regulated or restricted competition, and moats to protect the business. Add industries that are recession proof… that’s basically where I like to pick from.

What are some of your largest holdings, for how long, and why?

I was 100% in cash when the covid crash hit, because I cashed out thinking there was going to be an emergency of some kind in the US due to problematic leadership. So about a month after the crash happened, I dove back in and bought everything I have now. Some of my largest holdings include so-called sin stocks (MO, BTI, PM), Telcom (BCE, T, VZ), Healthcare (ABBV, PFE), REITs (O, STWD), Tech (MSFT, IBM), Utilities (DUK, SO), and Canadian Banks (BNS, BMO).

I show my full portfolio on my YouTube channel, if your readers are interested:

http://youtube.com/@thedividenddream

Thanks for sharing.

A question/concern for many DIY investors is ample diversification and/or concentration risk from just owning a few stocks or the wrong stocks. What’s your reply to that? How many stocks do you own and why? How many stocks might be enough?

Like I mentioned, yes this is the core risk! I don’t have any holding that is more than 10% of my full portfolio of $1.5M. That’s one rule.

I also make sure I diversify across industry and geography. I hold about 75 stocks, and that fluctuates +/- a few stocks depending on opportunity. I rebalance when I feel I need to if one position is getting too big or has had a major run up.

Some say that 10-20 stocks is enough to be diversified, but I like what I call “the long tail” which gets me way past diversification minimums. But here’s the thing, I actually ENJOY reading, keeping up with, and reviewing all of these companies. It’s fun for me. So in that way it fits my personality. Part of being a great investor is knowing yourself and how you will best be successful.

Well put, that last part.

Related to my investing journey, it is my hope that dividends (and capital gains) can work harmoniously together to help fight inflation – as prices and costs of living rise over time – I hope that the companies I own can help fight inflation via raising their dividends to shareholders. What’s your take on owning dividend paying stocks for fighting-fighting power? Do you see that fighting power in your own portfolio?

Without a doubt.

My portfolio is packed with dividend raisers, and I expect to get that raise every year for years to come. That is actually a key to the success of this strategy. In the mix, I have more bond-like higher yield dividend stocks that deliver cash now. But added to those is higher CAGR (5%-10%+) growers that give me the ability to grow the dividend salary each year to fight inflation.

I have a plan/dream as you might be aware to “live off dividends” and work part-time as part of my upcoming semi-retirement plan.

As someone has been there, done that a bit, what advice or caution do you have for this plan of mine?

I’d say the plan to stair-step down and try to live partially off dividends and partially off active income is a good one. I actually tried an experiment in 2022 where I took a 6-month sabbatical, and let me tell you it’s a shock to the system. I also burned through my emergency cash so fast it was scary. I had more emergencies come up last year than just about any year.

(Mark – good to know!)

So my advice would be, have a cushion of cash that well exceeds what you think you need. Try to get those dividends to above what you think you’ll need. And maybe have a few work options that would allow you to flex up and down those first couple years in case you need… or want to. Another issue I had was when I quit cold turkey I did get stir crazy a little bit and needed mental stimulation. So having non-work hobbies or passions you can dive into. That is something else to think about. So often our identities are tied to what we do, that we don’t even know who we are without them.

I don’t believe in any 4% safe withdrawal rate (I’ve got some links on that – although it’s a decent back-of-napkin rule of thumb).

Do you agree or disagree?

And…

Thoughts?

Well, I plan to have a 0% withdrawal rate. In other words, I’m hoping to reach $100,000/yr US in dividends this or next year. This doesn’t include any of my wife’s assets or social security, or even my social security when I collect it.  Our HH (household) expenses are $90,000/yr.

So, I’m hoping to not have any withdrawal. But broadly to answer your question, I just think that’s a rule of thumb like anything else, and the rate should be custom to the amount of the portfolio and the expected lifespan of the person/couple. That’s it.

Cool.

Finally….lots of questions I know for this one…what’s your take on “living off dividends” solving some of these issues that early or full-on retirees might experience? Do you agree such an approach is valid in at least helping to address some of these retirement planning concerns and constraints below? Why or why not?

I’m not going to sell anything, thus I don’t have to incur any gains tax if I never sell. And dividends are tax free up to $89,250 for married couples in the US in 2023.

The only thing I don’t agree with here is the no rebalancing. I do rebalance as some of my stocks just keep growing because when the snowball gets this big, it grows like a weed on dividends. So like STWD I’ve had to sell off many times because it just keeps getting huge. And with others like BCE I have about $150,000, so I use the dividends to spread into some of my other positions and no longer DRIP into it. But I suppose if you’re at a static point where you’re not reinvesting anything anymore, perhaps then!

Great stuff and very interesting stuff. 

Thanks again!

Living The Dividend Dream summary and closing thoughts…

Well, lots to unpack here and lots of different lifestyles associated with any investing approach, but here are my takeaways from this latest investor profile. I would be curious to know about yours! From me:

1. Dividend investing, while this investing approach has some risk no doubt, I feel it can very financially rewarding over time.
2. While any individual company can, could or might occasionally cut their dividend it should be the DIY investor’s focus on the collective performance of their basket of stocks related to their financial goals – that should reward said investors in meeting their financial goals over time. Otherwise, index invest away as you wish if you’re concerned or in major doubt.
3. While dividends are never guaranteed (just like stock prices are never guaranteed to go up) by investing in proven companies that reward shareholders AND by building diversification into the DIY stock portfolio, there are many positives that can be gained from an income-replacement approach.

In closing, it is my hope that I can continue to profile many investors on this site for inspiration or other – to highlight there are very personal and interesting paths to wealth building.

You can find The Dream, Dream Girl, aka Dreamer and her very interesting YouTube channel to ask more questions about her investing approach and more below.

Here is one of her latest updates including screenshots from her portfolio.

YouTube channel: http://youtube.com/@thedividenddream

Twitter: https://twitter.com/DreamDividend