Warren Buffett on Living Off Dividends In Retirement

I am a big fan of Warren Buffett, the Oracle of Omaha. His letters to shareholders are an excellent resource for students of value investing. I've studied his strategy, investments and his work, and believe that Warren Buffett is a Dividend Growth Investor in disguise.

I am also a big fan of Dividend Growth Investing. The goal of every Dividend Growth Investor is to generate enough in dividend income to pay for their expenses in retirement. To get there you save and invest consistently in quality dividend growth companies that sell at attractive valuations. The next step is to keep at it, and also patiently let the power of compounding do the heavy lifting for you. It takes time to build this portfolio, brick by brick, but once you reach critical mass, the power of compounding is very visible. With dividend growth on top of regular dividend reinvestment and regular investment and after giving it some time, that dividend income and net worth goes in turbocharged mode.

I like the concept of Dividend Growth Investing when it comes to investing for retirement. The investor builds a diversified portfolio by investing regularly, reinvests those dividends until their dividend income covers expenses. At that point, they can retire. 

I recently saw an interesting video clip of Warren Buffett, which discussed how he would invest if he were retired.

You can read the transcript below:

"Warren Buffett: If I were retired, I had a million-dollar portfolio of stocks paying me $30,000 a year in dividends. my children were grown and the house was paid off, I wouldn’t worry too much about having a lot of cash around."

I love this video because it is short and to the point. 

A million dollar portfolio could be built today to generate $30,000 in annual dividend income quite easily. If history is any guide, that income would likely grow at or above the rate of inflation over time, thus preserving the purchasing power of that income. In addition, as the dividend grow, it's very likely that the value of the portfolio would grow over time as well. This in effect would also help protect purchasing power of principal as well.

The concept of living off dividends in retirement is a very powerful one. It's also very simple. When the amount of dividend income generated by your portfolio covers your expenses, you can retire. I use the rule of 3% to determine how much money I need to accumulate to cover expenses. This means that I need to have roughly 33 times the amount of money accumulated for each dollar I plan to spend in retirement. In other words, if I spend $30,000/year, I need roughly $1 Million invested at 3%. If I need $100,000/year, I need to accumulate around $3.3 Million in income generating assets.

Getting to the million dollar portfolio of course requires time, patience, perseverance and consistency. I would think that a long-term investor can get there in a reasonable amount of time. Getting there is a function of the the dividend yield, dividend growth, amount invested and time you invest for (assuming of course that the investor keeps costs low in the process as well).

For example, someone who invests $30,000/year in a portfolio of dividend growth stocks yielding 3% and growing dividends at 6%/year annualized, would be able to generate about $30,000 in annual dividend income withing 15 years or so. If that investor keeps investing for 22 years, the total amount of dividend income would reach $60,000/year. You may like this spreadsheet to play with assumption.

However, if they can only invest roughly $1,250/month, it would take about 22 years to reach $30,000 in annual dividend income. At a 3% average dividend yield, this translates into a portfolio worth $1 Million.

The other part I liked about the video is the discussion around owning your home and being in a phase of life where your children are grown up and on their own. 

At a certain point in life you may either have your house paid off, and/or you are ready to downsize, which reduces housing costs. That in itself reduces amount of investable assets that are needed to produce income for you. If your housing cost is $30,000/year on top of every other expense you have, you need an additional $1 Million in retirement assets (dividend stocks/401k etc). But if you can reduce that amount to say $15,000, then you need less in retirement assets to support this part of your budget.

If your kids are grown up and on their own, that further reduces ongoing costs as well. Of course, the retired couple may have higher discretionary expenses related to travel, and helping out with grandchildren or helping children as well. But the necessary costs have definitely been reduced, as discretionary costs could be reduced somewhat more easily than necessary ones. You need to eat even during a recession, but that trip to Paris could wait another season or another year.

Of course, the other thing to consider is other income sources in retirement. If you plan to retire at the traditional age in your early 60s, you may also be eligible for social security in the US or a traditional pension plan. If you spend $30,000/year in retirement, but also generate $1,000/month in Social Security, you actually need only $18,000/year in dividends to cover the shortfall. That means that you only need $600,000 portfolio, rather than thee $1 Million one. Of course, if you do not plan to start your Social Security until the age of 70 or you plan to retire much earlier, then you would likely need that full $1 Million in income producing assets, before you can retire early.

Four Dividend Growth Stocks Raising Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. This exercise is one of the steps that helps me evaluate existing holdings. It's also one of the touch points that help me potentially identify companies for further research.

This review also helps show the quick ways I go about reviewing a company. That's to decide whether a company should be added to my list for further research or not.

In general, I look for:

1) A long track record of consecutive annual dividend increases. In this case, I am looking for companies that have raised dividends for at least ten years in a row.

2) A history of increasing earnings over the past decade. Rising earnings per share are the fuel behind future dividend increases. 

3) Dividend growth rate versus most recent dividend increase. Dividend increases provide a signaling opportunity into the mind of company management teams. More often than not, it provides clues as to what management teams see happening in the business, before they commit to updating the dividend. They do not make this decision lightly, but rather after evaluating the economy, competition, the business environment and their assessment of how the business would likely perform.

4) I look at trends in dividend payout ratios when evaluating individual companies. It is important to also view trends in dividend payout ratios to determine dividend sustainability and sources of dividend increases.

5) Valuation. That's a tricky concept, which takes into consideration current P/E ratios, dividend growth rates, as well as current yields, payout ratios and earnings growth. Ultimately it also ends up as an exercise in trade-offs as well as opportunity costs.

Over the past week there were four companies that increased dividends and also have a ten year track record of consecutive annual dividend increases. The companies include:

Alexandria Real Estate Equities (ARE) is a REIT which invests in life-science properties in the US.

The REIT increased quarterly dividends by 2.40% to $1.30/share. This is a 5% increase over the dividend paid during the same time last year. This is the 14th year of consecutive annual dividend increases for this dividend achiever. The company has managed to grow dividends at an annualized rate of 7% over the past decade. The five year annualized dividend growth rate is at 6%.

Between 2014 and 2023, FFO/share  increased from $4.42 to $7.19.

The REIT is expected to earn $9.49/share in FFO this year.

The stock sells for 12.10 times FFO and yields 4.45%.

Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group, and Business to Business Products Group.

The company increased quarterly dividends by 6.90% to $0.31/share. This declaration marks the 21st consecutive year the Company has increased dividends. Over the past decade, this dividend achiever has managed to increase dividends at an annualized rate of 4.30%.

The company has managed to grow earnings from $1.18/share in 2014 to $4.13/share in 2023.

The stock sells for 19.40 times forward earnings and yields 1.65%.

UnitedHealth Group Incorporated (UNH) operates as a diversified health care company in the United States. The company operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.

The company increased quarterly dividends by 11.70% to $2.10/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Annualized dividend growth has been decelerating. The ten year annualized dividend growth is at 21.40%, while the 5 year annualized dividend growth is 16.10%.

Between 2014 and 2023 the company managed to grow earnings from $5.78/share to $24.12/share.

The company is expected to earn $27.71/share in 2024.

The stock sells for 17.70 times forward earnings and yields 1.53%.

Universal Health Realty Income Trust (UHT) is a real estate investment trust, which invests in healthcare and human-service related facilities including acute care hospitals, behavioral health care hospitals, specialty facilities, medical/office buildings, free-standing emergency departments and childcare centers. 

The REIT increased its quarterly dividends by 0.70% to $0.73/share. This was the 39th year of consecutive annual dividend increases for this dividend champion. Over the past decade, this REIT has managed to grow dividends at an annualized rate of 1.50%.

FFO/share went up from $2.78/share in 2014 to $3.23/share in 2023.

The stock sells for 11.80 times FFO and yields 7.45%.

Relevant Articles:

- Six Companies Increasing Dividends to Shareholders Last Week

- Five Dividend Growth Stocks Rewarding Shareholders With Raises Last Week

- Fourteen Dividend Growth Stocks Raising Dividends Last Week

- 15 Dividend Stocks In The News

Living Off Dividends in Retirement

The goal of every Dividend Growth Investor is to generate enough dividends to pay for their retirement. It takes patience, persistence and perseverance to accumulate that income producing nest egg. But once it is built, and that dividend income covers expenses at the dividend crossover point, work becomes optional.

The neat thing about dividend income is that it has historically increased faster than inflation in the US. While individual companies in a portfolio may cut dividends, the overall portfolio continues to generate more dividends overall, because more companies increase dividends than cut them. 

Dividend Growth Stocks are not just limited to the Dividend Aristocrats, Dividend Kings, Dividend Champions and Dividend Achievers either. I have long claimed that the entire US Stock Market is basically one giant Dividend Growth Stock.

A reader of the blog recently shared an interesting chart with me. He calculated how a $1 Million investment in S&P 500 at the end of 1993 would have done for a retiree. 

The assumption is that the retiree invested $1 Million in S&P 500 fund at the end of 1993. It follows the dividend amounts per year and provides two comparisons. The first scenario is that the dividends are spent. The second scenario basically shows how the portfolio would have grown to, if somehow dividends were not spent but rather reinvested.

While it doesn't take into consideration fees, taxes, and commissions, it is never the less a very interesting review. On the other hand, it is quite possible (and has been in the past) to build a portfolio in a retirement account such as an IRA or 401 (k), and defer taxes.

(Source)

You can see that dividend income increased pretty much every year, with the exceptions of 2000, 2001 and 2009. Those years were associated with major recessions. In general, dividend income rarely declines. This is quite evident if you observe annual dividend income over the past 80+ years.

Around the years that dividend income declined, share prices actually declined by much more.

It's fascinating how dividend income kept increasing year in and year out over the past 30 years, ultimately increasing by a factor of 5 by 2023 from the initial year. 

At the same time, the value of the portfolio increased by a factor of 10. This means that the original $1 Million investment at the end of 1993 turned to a little over $10 million by end of 2023. Or $10,225,812 to be exact. 

Had the investor not spent their dividends however, they would have ended up with $18,176,399. 

On a side note, the reader has a very interesting valuation ratio on the very right of the chart above. It shows how much one needs to invest in S&P 500 in order to get $1 worth of dividends. In effect, it is an inverse dividend yield calculation. For example paying $25 for $1 of dividend income translates into a dividend yield of 4%. You want to pay less for each dollar of dividends in general, all else being equal.

You can note that over the past 30 years, dividend yields on S&P 500 has generally declined by basically half. That means that it takes roughly twice as much capital today as in 1993 to generate the same $30,000 in annual dividends. That's mostly because the dividend yield on S&P 500 today is roughly 1.50% versus roughly 3% in 1993. 

The reason for that decline is because a lot of companies these days pay dividends and also spend much more money on share buybacks. One way to generate that 3% starting yield on investments is through a focus on dividend paying companies. Of course, one also needs to avoid the temptation to chase yield as well. However, many popular dividend ETF's such as the Schwab Dividend 100 (SCHD) yield over 3% today, and have a history of growing dividends. I am actually a firm believer that it is possible to pick and choose my own individual companies in my portfolio, in order to achieve my desired goals and objectives.

Either way, living off dividends in retirement can work well for investors. The chart above shows one example of how it worked in the past, with pretty decent results.

Thank you for reading!

Relevant Articles:

- How dividends protect income from inflation

- The Dividend Crossover Point

- Living off dividends in retirement

- The Best Dividend ETF In The Accumulation Phase

- The Best Dividend ETF to Consider

Four Dividend Growth Stocks Increasing Dividends Last Week

I review the list of dividend increases as part of my monitoring process every week. This exercise helps me monitor existing positions. This exercise also helps me potentially identify companies for further research. It is also helpful to showcase the quick drill I do on each company, focusing on the factors that I find most helpful, before putting it on the list for further research or putting it in the "too hard pile".

Over the past week, there were four companies in North America that raised dividends to shareholders and have a ten year track record of consistent annual dividend increases. The companies include:

Donaldson Company, Inc. (DCI) manufactures and sells filtration systems and replacement parts worldwide. The company operates through three segments: Mobile Solutions, Industrial Solutions, and Life Sciences. 

The company increased quarterly dividends by 8% to $0.27/share. This marked the 28th consecutive year of annual dividend increases for this dividend champion. Over the past decade, the company has managed to increase dividends at an annualized rate of 7%.

Between 2014 and 2023, the company managed to grow earnings from $1.79/share to $2.95/share. The company is expected to earn $3.27/share.

The stock sells for 22.50 times forward earnings and yields 1.47%.

Lowe's Companies, Inc. (LOW) operates as a home improvement retailer in the United States. 

The company lifted quarterly dividends by 4.50% to $1.15/share. This is the 62nd consecutive annual dividend increase for this dividend king. It's also much slower than the ten year average annual dividend growth of 20.30%/year.

Between 2014 and 2023, the company managed to grow earnings from $2.71/share to $13.24/share. The company is expected to earn $12.23/share.

The stock sells for 18.10 times forward earnings and yields 2.08%.

National Bank of Canada (NTIOF) (NA.TO) provides financial services to individuals, businesses, institutional clients, and governments in Canada and internationally. It operates through four segments: Personal and Commercial, Wealth Management, Financial Markets, and U.S. Specialty Finance and International. 

The bank raised quarterly dividends by 3.80% to $1.10/share. This is the second dividend increase over the past year, bringing the year over year increase to 7.84%. This is the 15th year of consecutive annual dividend increases for this dividend achiever. The company has increased dividends at an annualized rate of 8.80% over the past decade.

Between 2014 and 2023, the company managed to grow earnings from $4.36/share to $9.47/share.

The bank is expected to earn $10.05/share in 2024.

The stock sells for 11.60 times forward earnings and yields 3.77%. (DGI Note: All Figures for National Bank of Canada are in Canadian Dollars)

Royal Bank of Canada (RY) operates as a diversified financial service company worldwide. 

The company raised quarterly dividends by 2.90% to $1.42/share. This is the second dividend increase over the past year, bringing the year over year increase to 5.19%. This is the 14th year of consecutive annual dividend increases for this dividend achiever. The company has increased dividends at an annualized rate of 8.80% over the past decade.

Between 2014 and 2023, the company managed to grow earnings from $6.03/share to $10.51/share.

The bank is expected to earn $11.58/share in 2024.

The stock sells for 12.87 times forward earnings and yields 3.81%. (DGI Note: All Figures for RY are in Canadian Dollars)

Relevant Articles:

- Six Companies Increasing Dividends to Shareholders Last Week

- Five Dividend Growth Stocks Rewarding Shareholders With Raises Last Week

- Fourteen Dividend Growth Stocks Raising Dividends Last Week

- 15 Dividend Stocks In The News