Can you retire on dividends alone?

Is it possible to live off income from dividends alone? No matter how much you save, you will always worry that it is not enough. But with a little planning I believe that it can be possible

The four most important aspects for anyone who plans on living off their dividend income in no particular order is:

1. Dividend Growth Rate
2. Yield
3. Reinvesting Dividends
4. Time

What is Dividend Growth Rate

The Dividend Growth Rate (DGR) is the percentage rate of growth that a particular share increases over time. It is more common for the DGR to be calculated on an annual basis. if 2019’s dividend is $3 per share and 2020’s dividend is $4 per share, then there is a growth rate of 33% in the dividend.

Typically the Dividend Growth Rate is important to determine a companies profitability over a long term period.

Where to find Dividend Growth Rates

One website that can be used to find the dividend growth rate is yahoo finance. Using this website, search for the company by the ticker and navigate to the statistics tab and there will be a Dividend& Splits section.

However I always find that if you want to truly understand something than you have to get down and dirty to the nitty gritty details. This is why I am going to show you how to calculate this figure yourself.

How to Calculate Dividend Growth Rate

The formula using compounded Growth is

(D_f / D_i)^1/n – 1 where:

1. D_f = Final Dividend
2. D_i = Initial dividend
3. n = No of periods (years)

• Step 1. – determine the dividend from the start of the period you want to check.
• Step 2. – Determine the last dividend paid
• Step 3. – Divide the final Dividend by the initial dividend
• Step 4. – raise the result to the power of the reciprocal of the number of periods.
• Step 5. – subtract your answer by 1

Using $MMM as an example where the total dividend in 2019 was $5.70 compared to $5.40 in 2018 we can find the DGR to be 5.88% as shown in the spreadsheet below.

What is Yield?

Yield is a return measure over a period of time expressed as a percentage. For dividends it is based on the cost of a companies share price and the dividend per share for the same company.

Using $MMM as our example again, the current price is $130.91. The Annual Dividend is $ 5.76 hence (5.76/130.91)*100 is 4.4%

The importance of reinvesting dividends and time

Our family can currently live comfortably on €50,000 a year so my goal amount will be to make this amount every year from dividends. To achieve that income right now would require to invest €1.2 million at a dividend yield of 4.1% to acquire €50K a year.

I don’t have €1.2 million or anything close to it but I am going to show you how I can achieve the same results but only investing half the money. (Hint – by reinvesting and time)

My Current Position

As of January 1st, 2020, I had invested €18k into our brokerage account and the current dividend yield stood at 4.1% and my expected dividend income stood at €738 before tax for the year. For this example I will assume my dividend yield will remain a 4.1%

Remember I don’t have €1.2 million to invest and at my current rate of investing €1250 a month, it would take me 975 months to reach my goal or 81 years. By that calculation I will be a ripe old age of 114 before I can retire and live off my passive income dream and I haven’t even adjusted for inflation.

Looks like my dream is dead in the water before I even start!

NOT QUITE!

Ahh.. but remember there is 3 aspects that will help me

1. Time
2. Reinvesting Dividends
3. Dividend growth

My Future Me

Using 3 simple steps I hope I can show you that I can achieve my retirement goal without the need to actually invest €1.2 million myself.

To begin, I set up my spreadsheet with the following conditions:

1. The starting amount will be the amount I had invested at the beginning of the year (€18000)
2. Tax is 15% (withholding Tax)
3. Monthly Contribution will be a flat €1250 a month
4. I’m ignoring inflation
5. I am ignoring increasing my monthly contributions
6. Target Dividends per year is €50,000

By the time, I reach the retirement age of 65 I will have invested a total of €513,000

The chart below shows the following scenarios:
• 1- dividend yield of 2% and average growth of 11% (Orange)
• 2 – dividend yield of 4% and average growth of 8% (Grey)
• 3 – dividend yield of 6% and average growth of 6% (Yellow)

A couple of things stand out when you look at the results of the chart

1. In each case the max amount that I will invest is €513,000 and not the €1,200,000 I would need to invest today if I wanted the same results tomorrow. That is less the half the amount.
2. Time is the most important aspect. (I wish I was taught this in school.)
3. The less time you have the more the focus on High dividend stocks are required.
4. With more time you can chose a lower yielding stock with a higher dividend growth rate.

I hope you can see that with a small bit of planning you can live off dividend income. The sooner you start the easier it will be to reach your goals. Of course you also need to pick solid companies who will stand the test of time. To fond out how I screen my investments check out this post.

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