How to Live Off Dividends in Your Retirement

Mohit Oberoi, CFA - Author

Aug. 14 2020, Updated 9:44 a.m. ET

Saving for retirement is a top goal for investors, with many hoping to live off dividends. Furthermore, investors' appetite for dividends is increasing now as yields on fixed income have dropped. How exactly can investors live off dividends? It's not difficult, but you need to follow a disciplined approach.

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How to live off dividends in retirement

If you intend to live off your dividends, you first need to figure out your retirement needs and build a suitable nest egg. Financial planners advocate that your retirement income should be around 80 percent of your pre-retirement income. However, retirement needs differ from person to person—some people may want to stay at home, whereas others look forward to touring the world.

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Once you've identified your retirement goals, you need to work toward creating a commensurate fund. It’s always better to start early and save regularly. The earlier you start, the more assets you can build, and they compound over time. Albert Einstein called compounding the “eighth wonder of the world” for a reason. Warren Buffett has also discussed the power of compounding.

While building a nest egg in your earning years, allocate more to equities, especially growth stocks that hold long-term potential. These stocks might be volatile in the short term but can deliver above-market returns over longer periods. As you near retirement, start shifting the money into safer assets so that your nest egg is safe.

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How to live off dividends

Once you have the required assets, you can buy high-dividend-paying stocks. Whereas stocks with a high dividend yield are desirable, it's advisable to also look at the company’s financials before investing. Remember, dividends are a discretionary payment, and companies can increase or decrease them at any time—as we're seeing in the coronavirus-related economic crisis, many companies have either lowered their dividends or scrapped them altogether.

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Live off dividends from stocks

You can also complement your portfolio with preferred shares. Companies are mandated to pay dividends on preferred stocks, unlike common stocks. With preferred stocks, you're reasonably sure of your dividend income, unless the company runs into financial trouble. Buffett invests in preferred shares that give high yields with the option of higher returns through conversion into common stock.

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Live off dividends from an ETF

If you're not a savvy investor, you could opt for dividend ETFs, which invest in a basket of high-dividend-paying companies and pay unit holders a quarterly dividend. REITs are another way you can live off dividends. Many REITs even pay a monthly dividend. In the energy industry, midstream companies, many of which are structured as MLPs, pay good dividends. Investing in a basket of securities helps lower your risk and lets you live comfortably off your dividends.

To live off dividends, you need to do a few things. First, you need to save enough to build a sizeable corpus. Second, you should invest your savings judicially to maximize returns. And third, you need to identify and invest in a basket of good dividend-paying companies and monitor them frequently. The process is both an art and a science and requires perseverance and patience. 


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