It is the most popular rallying cry for self-directed investors in Canada and the U.S. – I plan to “live off of the dividends”. Or in retirement – “I am living off of the dividends”. The notion leaves money on the table in the accumulation stage and living off of the dividends leaves a lot of money on the table in retirement. Don’t get me wrong, I love the big juicy (and growing) dividend as a part of our retirement plan. But as an exclusvie strategy, the income approach simply comes up short.
It’s not a popular Tweet, but I have suggested that no investor with a viable and sensible financial plan would live off the dividends. Add this to the points made in the opening paragraph; it might not be tax efficient. Also, the dividend would have no idea of what is a financial plan and what is the most optimal order of account type spending. Check in with the our friends at Cashflows&Portfolios and they can show you a very efficient order of asset harvesting.
On Seeking Alpha, I recently offered this post –
Living off dividends in retirement; don’t sell yourself short.
Thanks to Mark at My Own Advisor for including that post in the well-read Weekend Reads.
Financial Planner: It may be a bad idea
From financial planner Jason Heath, in the Financial Post.
Why living off your dividends in retirement may be a mistake.
Retirement planning is a personal decision, but you might be making a big mistake if you go out of your way to ensure you can live off your dividends, since you will be leaving a great deal of money when you die. In the process, you may have worked too hard at the expense of family time or spent too little at the expense of treating yourself.
In that Seeking Alpha post, I used BlackRock as the poster child for a lower yielding dividend growth stock. The yield is lower but the dividend growth is impressive. That can often be a sign of underlying earnings growth and financial health.
2022 update: BlackRock is falling with the market (and then some), the yield is now above 3%.
Making homemade dividends
In that Seeking Alpha post, I demonstrated the benefit of selling a few shares to boost the total retirement take from BlackRock. The retiree gets an impressive income boost, and only had to sell 2.8% of the initial share count. The risk is managed.
Starting with a hypothetical $1 million portfolio. $50,000 in annual income represents an initial 5% spend rate. That is, we are spending 5% of the total portfolio value. Without share sales the retiree would have been spending at an initial 3.3%.
Share Sales (in the table) represents the income available thanks to the selling of shares – creating that homemade dividend.
The retiree who has the ability to press that sell button to create income enjoyed much higher income. In fact, the retiree would have been able to sell significant more shares (compared to the example above) to create even more additional income.
Plus the dividend growth is so strong, it quickly eliminated the need to sell shares.
In fact, the BlackRock dividend quickly surpasses the income level of the Canadian bank index. It can be a win, win, win. Even for the dividend-loving Canadian accumulator, BlackRock is superior on the dividend flow.
But of course, the aware-retiree will keep selling shares and making hay when the sun shines. They might cut back any share sales in a market correction – also known as a variable withdrawal strategy.
It’s a simple truth. Don’t let the income drive the bus. It doesn’t know where you need to go. This is not advice, but consider growth and total return and share harvesting.
Don’t sell yourself short.
In the Seeking Alpha post, I also offered.
The optimal mix of income and growth for retirement
I am a big fan of generous dividends. They bring joy and warmth when they arrive. A big dividend payment is like a financial hug.
And I like the idea of the ‘best of both worlds’. I enjoy some very generous dividends from our (for my wife and my own accounts) Canadian Wide Moat Stocks. Our U.S. stock portfolio holds more of the BlackRock’s. It’s a most advantageous mix. And as per the all-weather posts on Cut The Crap Investing I pay attention to sector arrangement and weights.
For inflation protection we hold commodities (PRA.TO) and Canadian energy stocks. We hold bonds and cash in the area of 10% to 25% in accounts. We have modest amounts of gold and new gold – bitcoin.
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I am prepared for the uncertain times. We are in a period of economic transition. And we don’t know where we will land.
The markets this week
U.S. stocks ended sharply lower on Friday, tumbling to two-month lows as a warning of impending global slowdown from FedEx hastened investors’ flight to safety at the conclusion of a roller coaster week. The TSX also ended the week lower.
All three major U.S. stock indexes slid to levels not touched since mid-July, with the S&P 500 closing below 3,900, a closely watched support level. Rattled by inflation concerns, looming interest rate hikes and ominous economic warning signs, the S&P 500 and the Nasdaq suffered their worst weekly percentage plunges since June.
The Dow Jones Industrial Average fell 139.4 points, or 0.45%, to 30,822.42, the S&P 500 lost 28.02 points, or 0.72%, to 3,873.33 and the Nasdaq Composite dropped 103.95 points, or 0.9%, to 11,448.40. The S&P 500 on Friday posted its worst weekly performance since mid-June, slumping 4.78% for the five-day session. The losses came on the back of a solid 3.65% gain last week. Investors dumped equities in three of the five sessions.
For the week, the Canadian stocks lost 2%.
Hot, hot, hot inflation print
A chunk of the week’s selling came on Tuesday on the heels of a hotter than anticipated consumer price inflation report, with the headline print for August rising 8.3% year over year. The focus is now on the U.S. Federal Reserve’s policy meeting decision next week on Wednesday. Most market participants are anticipating a significant rate hike of up to 75 basis points.
The Canadian dollar weakened to its lowest level in nearly two years.
Hot Dollar
By late afternoon, the Canadian dollar was trading 0.3% lower at 1.3270 per U.S. dollar, or 75.36 U.S. cents, after touching its weakest since November 2020 at 1.3307. For the week, the loonie was down 1.8%, its biggest weekly decline since June.
That said, the Canadian dollar is very strong against most other currencies. And remember, our U.S. dollar assets are getting a currency boost.
Check out the cool currency comparison chart in this video …
“The dollar is an unstoppable juggernaut right now, with higher-than-expected inflation and an ever-more-hawkish Federal Reserve sucking capital into the United States and inflicting damage on the rest of the world economy,” said Karl Schamotta, chief market strategist at Corpay.
Canada’s inflation data for August is due next Tuesday.
Sector peformance
Value stocks continue to suck a lot less. That likelihood was put on the table (on this blog and on MoneySense) from almost a year ago.
My goodness friends, keep investing. This is why we invest. Assets are getting cheaper. The more they get beat up, the less risk there is over the longer term, and even near term (think 1-5 years out). Remember, dollar cost averaging even worked during the Depression – the worst market conditions, ever.
I can’t tell you where markets are going (of course). More rough weeks and months and years may be ahead. Corrections are wonderful wealth building opportunities.
Retirees need to protect enough of their wealth.
Recession in Canada?
Who knows, but as always, be prepared. Recessions are known to happen. 🙂
Thanks for reading. We’ll see you in the comment section. You can follow this blog (it’s free) by entering your email address in the Subscribe area.
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Dale,
Re: “Making homemade dividends”
Selling shares reduces the share count and dividend growth going forward more than if there had been no selling. Have your charts taken this into account?