How To Live Off Dividends …

A rich source of income from shares ….

Did you know that shares (not just options) are a rich source of income?

It’s almost like receiving a regular wage. Except you are not working for the income, your assets are doing the hard work.

And it’s cash paid regularly, regardless of whether the market goes up, down or sideways.

Most people don’t think about shares this way. Most think of them as just going up or down.

Actually, there’s a huge global community of Dividend Growth Investors (DGIs) who already live off dividends to fund their life.

The approach is simple: own a portfolio of solid dividend-paying companies. Live off their income. And let the capital values of those shares appreciate untouched, over time.

This works perfectly for a passive retirement.  And, in my view, it’s better than an annuity which dies with you. You own dividend payers outright and pass them on.

Finally, it mitigates sequence of returns risk because you don’t need to sell assets to fund your expenses.

Millions of DGIs have been through recessions, financial crises, the pandemic etc unscathed. They still get paid consistently and their dividends have grown each year, in excess of inflation.

Most importantly:  This income doesn’t come from being clever about timing or finding the next hot stock. It comes from owning the right higher-yielding shares and leaving them alone.

And to be clear: I do both growth and income investing.  And it’s important for most people do both, as they work well together:  Growth builds your financial future, income provides cash today.

But for income-focused investors and retirees, dividend (and options) investing becomes more important.

Dividends: more stable than share prices

Share prices (capital values) fluctuate but dividends are much more stable – see chart below …

Global Stocks:  Annual capital returns v Dividend payments (as a % or original cost) 

The chart doesn’t show what happened in Q2 of 2020.  As the world shut down, with stocks down more than 30%, global dividends hardly moved.

So even during a massive global crisis, a diversified dividend investor’s income barely moved.  Share prices sold-off significantly (then rebounded sharply).  Dividends dropped a little but kept paying the bills.

The magic of dividend growth: how a 4% yield becomes 10% … 

Say you bought a share at 100p with a 4% dividend yield. It pays you 4p in the first year.

Now suppose the company grows its dividend by 5% a year, nothing aggressive.

After 20 years, that same share is paying you 10.6p a year. Against the 100p you originally paid, that’s a yield on cost of over 10%.

And then the 2nd effect. If you add up every dividend you received along the way, it comes to 132p. i.e. More than the price you initially paid for the share.

You’ve been repaid in full. In cash (no money left in!). And you still own the shares which can appreciate further.

Around year 17, the dividends had paid for the asset. Everything after that is free income on a holding that cost you nothing.

A real example. How a 5.7% yield became 63% pa …

Warren Buffett bought Coca-Cola shares in 1994 for $1.3 billion. In 1994 that holding paid him 5.7% pa in dividends, or $75m pa. It now pays $816 million a year, which is a yield on cost of roughly 63%. The dividends alone have repaid the original purchase price many times over, and he still owns every share.

What if you don’t need income?

That’s fine. Income and capital are fungible, meaning one can be converted into another.

If you don’t need income today, you can still receive dividends but reinvest them. They buy more shares, which pay more dividends, which buy more shares.  Which is compounding turbo-charged.

But one day, when you do need the income … there’s no need to sell any assets or do anything different.  You just stop reinvesting and let the money land in your bank account instead.

Which is your whole retirement plan without doing much different.

Better than buying an annuity.  Or, after a lifetime of pension accumulation, trying to work out a “safe withdrawal rate” to safely sell assets each year without running out of money.

In my view, dividend investing is much better, and which involves less guesswork.

Dividend yields: our sweet spot is 3% – 7%

More than 7%, it may not be sustainable.

Yield can rise for a good reason – the business grows and pays higher dividends.  That leads to a higher yield but then investors buy up the shares so the yield falls back.

But yield can also rise for a bad reason: when the share price falls.

So our sweet spot is 3% – 7% pa.

Below 3% and you are not being paid enough to make income the point. Above 7% and the yield is probably the market pricing in a cut that has not yet been announced.

Good dividend payers = more stable companies

The companies that pay good and sustainable dividends are typically ones that have been around for decades. They have real cash flows, established market positions and strong balance sheets.

They’re not high-growth, high-beta names. They won’t double in a year, nor equally fall 60% because of, say, a poor earnings quarter.

How we screen for sustainability and quality of yield ..

Finding a headline high-yield stock takes ten seconds. Anyone can do that.

But in the Investment Accelerator, we have a screening process to find solid yields which are sustainable.

Before a stock makes our dividend portfolio, we filter for 5 things:

1. Balance sheet strength. Does the company have enough cash and ability to support the dividends?
2. Sensible debt. Debt is a common reason a dividend gets cut. Lenders get paid before shareholders if it came to it.
3. Profits that more than covers the payout. Dividends can only be paid from profits so we check the latter is growing and sustainable.
4. Revenue growth. A shrinking business can’t maintain a dividend for long.
5. A business model that still makes sense in ten years. A dividend can only be kept up if the company survives!

In our Investment Accelerator, we do live screenings and we do them together with you.  To uncover quality companies with good yields that are sustainable.

We give you the tools, know-how and copy-and-paste screening filters to find these stocks whenever you need.

 For a quick chat on how we can help you create a high-dividend portfolio, book a call with me here

Can you live off dividends?

Yes, millions do.  And it takes a little time and some discipline about what you own.

The people earning serious passive income from dividends today are not the ones who chased the next shiny penny.

They are like Warren Buffett who bought good businesses fifteen or twenty years ago and left them alone while the income grew.

Dividends are totally hands-off income investing. Options are reasonably passive but not totally. But you can generate considerably more income from Options with shares you can rent out, like property.

Your portfolio needs: Growth, Protection and Income ..

I say this to people all the time. Growth and income are not alternatives. They go together perfectly, and protection completes the set.

They do different jobs, and the balance between them shifts as you move through life.

And there’s a key reason to have them side-by-side: The income portfolio protects the growth portfolio.

If your income covers your spending, you’re never forced to sell your growth holdings to fund your bills. Which means those growth assets can be left alone to do their thing: compound for decades without interruption.

Which is the real answer to sequence of returns risk for retirees. It’s not about ‘income vs growth’.  It’s income so that growth never has to be touched (sold).

And the key point is this: there’s far more to investing than owning stocks and hoping they go up.  Your financial assets can do much more (and smarter) heavy lifting for you.

 For a quick chat on how we can help you build a smarter passive portfolio, book a call with me here

In this live session, we’ll explore how options strategies can be used to generate recurring income, practical ways to reduce unnecessary investment fees, and what the pension tax changes coming in April 2027 could mean for your long-term planning.

If you want practical insights to help make your investments work harder, this is a session well worth attending.

 Secure your spot here