My retirement strategy is based on living off dividends.
A successful retirement strategy is dependent on the asset returns you hold in your portfolio.
Dividends remove the guesswork of how much I can withdraw from a portfolio to live off.
I know what the dividend income is, and thus I know how much I can spend per year.
My "withdrawal rate" is not based on some study that backtests, curve-fits and optimizes historical data until it confesses.
My withdrawal rate is based on current information, available today, adjusted automatically for todays conditions.
Dividends represent a return on investment, which is generated on a consistent and predictable schedule.
The amount and timing for dividends is predictable and consistent, which makes them ideal sources of income in retirement
Dividends also tend to grow above the rate of inflation over time, which means that income not only protects purchasing power but also grows it.
A retirement plan based on living off dividends will never run out of money.
You don't have to think about sequence of return risk, because you don't have to sell.
My risk of running out of money is lowered, because I take current conditions into perspective, and adjust my spending based on the dividend paid today. I do not need to sell 4% of my portfolio value if we sell at nosebleed valuations and my yield is much lower. I could also spend more than 4% if valuations are really low, and my yield is higher.
Dividends provide excellent signaling of the current business conditions.
If the economy is doing great, businesses will be earning more and paying higher dividends. I may even generate more in dividends than I need.
If the economy is doing terribly, and we get a once in a generation depression that knocks down profits, to the point like dividends are lowered en masse, I will curtail my spending to the amount of dividends received. That flexibility, and adaptability to the current environment, versus relying on a bulky academic model, is really appealing to me.
I love the idea of living off the returns generated today, not the historical or theoretical returns we read about im a study .
That being said, I focus on the dividend income, and make sure my portfolio is constructed intelligently.
I make sure that the dividend income is diversified, comes from many sources, comes from businesses that grow earnings, that have adequate margins of safety in dividends, and keep fees and costs low.
I do not really care about price fluctuations of my portfolio, because they represent "opinions", which can go up too much in a frenzy or down too much in a depression.
I hope you enjoyed this overview on my retirement strategy.
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