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Do You Need To Be Frugal Or Lucky To Retire Off Your Dividends?

Summary

You don't need to be frugal.

You don't need to be lucky.

The size of the dividend income stream is determined by the time of compounding, not by the size of the original purchase price.

I recently wrote an article about how my dividends pay for my retirement.

Someone commented to me on a different article: 

"Robert, most people cannot accumulate enough assets to provide the level of dividends necessary for retirement unless they have a pension, or saved a large portion of their earnings while working. Not enough people are either frugal enough or lucky enough to accumulate the necessary nest egg of which you speak."

and

"Your dividend stream today is greatly determined by the amount of capital you have saved and not spent."

I'm writing this article in order to more fully respond to those comments.

Is investing all about "accumulating enough assets"?

Not for me. For me, investing is all about:

[1] owning a portfolio of companies that pay me a safe, reliable, dependable, stream of income from dividends,

[2] that is sufficient to pay for my retirement expenses without being forced to sell anything to produce cash (i.e. "never touch principal",

[3] and that rises each year by at least as much as inflation, so I do not lose purchasing power.

Is my dividend stream today determined by the amount of capital I have saved?

No. My dividend stream today is far more determined by the time over which my dividends compounded via reinvestment.

I wrote an article about an investor who began investing on December 19, 1988 with the purchase of 10 shares of a company for which they paid $852.00. They reinvested dividends for the next 27 years and 9 months, with no subsequent buys or sells, at which point they owned 1246.454676 shares, which had a market value of $17,489.34.  Over the almost 28 years, the shares paid a total of $16,637.34 in dividends, and were paying dividends at a rate of $834.50 (almost as much as the original investment) per quarter, or $3,338.01 per year.

Clearly the dividend income stream was virtually completely determined by the compounding over almost 28 years.

Do you have to "accumulate enough assets to provide the level of dividends necessary for retirement"?

No, you just have to start with a small amount, and let compounding work over a long interval.

Do you have to be "frugal"?

No, you can start with a small amount, and you don't need to make any additional investments (other than dividend reinvestments).

Do you have to be "lucky"?

Rather than use the word "luck", let's discuss what had to go right in order for this outcome to happen.

You had to choose a company that would stay in business for those 28 years.

You had to choose a company that would pay a dividend for those 28 years.

You had to choose a company that would raise its dividend for those 28 years.

PG was a good choice, as it has raised its dividend for 61 consecutive years, meaning it was already a Dividend Champion at the time of the original investment in 1988.

None of that sounds like "luck" to me.

How much "capital" did I "save and not spend"?

The original purchase price was $852.00. After that, there was a lot of dividend reinvestment, but no further "saving and not spending" was required.

How is dividend reinvestment like payroll tax withholding?

The government wants to make sure you will pay federal, state, and perhaps county taxes on your income. The government wants to make sure you will pay your taxes in a timely fashion. They don't let you wait until April 15 of next year to pay all of your taxes due from this year; for self-employed individuals who receive 1099 income, they pay quarterly estimated taxes; for non-self-employed individuals who receive W2 income, their paycheck is reduced by a portion of the taxes they will owe.

I was self-employed for 24 years. I can tell you that writing that check every quarter used to make my hand hurt for days, because of the size of the number on the check. I had to make sure that I had saved enough cash over the quarter to write that check.

W2 employees don't have to write any checks, because the taxes are withheld; the size of the number is much smaller if you divide it by many paychecks per year, so it hurts less. W2 employees are more used to living off the net amount on their paycheck, rather than the gross amount. If a portion of the tax is withheld, then it doesn't go into your pocket, so it doesn't have to come out again, so it doesn't feel like "saving" or "spending".

Reinvesting dividends is exactly like that. The dividend doesn't go into my pocket, so it doesn’t have to come out again, so it doesn't feel like "saving" or "spending" 

Psychologically speaking, reinvesting dividends is the easiest, least painful, way to invest.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.