Living the Dividend Lifestyle
When you live the Dividend Lifestyle in retirement, you enjoy a predictable income stream that keeps up with and often beats inflation. Home Depot stock is a great example. Home Depot stock has increased its dividend by 10% per year on average for the past decade. If their dividend was 40 cents 10 years ago, they bumped it to 44, then 49, then 55 and so on. It results in a 10% a year increase in dividends, which means a 10% increase in income every year for the retiree. You’re beating inflation with a lot of these dividend payers, especially the Aristocrats, since they are so consistent. It’s an income that you can typically count on that will be there and can then be used and spent and enjoyed in retirement.
With the choice and control that the investor has with the Dividend Lifestyle, they can structure their income however they see fit. It can be, and it should be dynamic. A portion of their portfolio is in these big dividend payers, and they’re getting, say, 5% dividends from that pot of money. Maybe they’re allocated $1 million to these dividend-paying stocks, and they’re getting 50 grand a year in passive income without ever having to sell a single share. The income is just the dividends they’re taking out, so they still enjoy the stock price appreciation over time.
Maybe they have another bucket of money with a million bucks in something else. It could be real estate, and it could be a pension. It could be non-dividend paying stocks, bonds, fixed annuities, commodities (which I love, especially during inflationary periods of time when they have historically performed very well), or any other major asset class they and their advisor are comfortable with and make sense from overall risk tolerance and asset allocation standpoint. Every investor is different, and I’ve never worked with two exactly the same. However, we all share many of the same human emotions, goals and concerns when it comes to investing. Mostly we all want some level of security and freedom. We do not want to outlive our money, we want our children and grandchildren to be happy and successful, we fear great loss, and we generally want to give something back. No matter how you structure your other assets, most all investors can and should have some level of exposure to the types of stocks we have outlined in this book. How much depends on your income needs, time horizon and risk tolerance. The remaining capital should be allocated towards other mostly income-producing assets, again, whatever the investor is comfortable with and understands.
So what do we do with all these dividends? You can take dividends out in cash which is for clients who need or desire income now, or you can reinvest them to buy more shares which is what our accumulation clients do or retirees who do not require the extra income now. The dividends are flexible, too. You can change the cash out vs. reinvestment option at any time. It’s literally a click of a mouse. Maybe you have a year in which you don’t need as much income. You can say, “Instead of taking the $50,000 in dividends out of that million-dollar bucket, I only need $25,000 this year from this portion of my assets, so I’m going to reinvest the other $25,000 to buy myself more shares this year and then defer to next year.” Next year, the dividend payout would be maybe $55,000 or $60,000 instead of $50,000 because you have more shares.
That’s a dynamic strategy that can be used for income. Full flexibility based on your needs each month and year. You take that year by year based on what tax rates are, based on your other sources of income, any big ticket items you may have and your overall expenses. There’s money that you know you need to pay to keep the lights on to cover your fixed expenses. Then there’s fun money, taking trips, and giving gifts. We get to be very flexible with how you’re utilizing these dividends, and it’s completely up to you.
Disclosure: Investing involves risk and you may incur a profit or loss regardless of strategy selected. Examples are for illustration purpose only and do not represent an actual investment. Dividends are not guaranteed and must be authorized by the company's board of directors. Investments mentioned may not be suitable for all investors. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.