Harness Money

This is the question that I keep asking myself. Have you ever wondered if it’s possible to live off the income generated by your investments without selling chunks of your portfolio?

There is a strategy to live off of dividend income. This involves investing heavily into multiple assets that pay regular dividends.

Many people are familiar with the 4% rule. The 4% rule is a guideline often used in retirement planning to determine a safe withdrawal rate from a retirement portfolio. The rule was popularized by financial planner William Bengen in the 1990s. The rule suggests that a retiree can safely withdraw 4% of their retirement portfolio’s initial value each year, adjusted for inflation, without running out of money over a 30-year retirement period.

The Problem

I do not want to sell off my portfolio in little chunks to fund my retirement. It would be nice to keep my portfolio assets and continue to grow them over time.

Instead of withdraw I have been thinking about building up a portfolio of assets that pay dividends or distributions on a regular basis and then using that income to pay for all of my expenses.

The Strategy

All earned income is going directly into purchasing more dividend assets.

Whatever dividend income I receive each month is what I live off of.

This means not reinvesting dividends back into the underlying asset but instead using those payments for bills and groceries and discretionary spending.

I am the first to admin that this strategy is not for the faint of heart. There are plenty of risks associated with investing a lot of money into the stock market and expecting to earn enough each month in dividends to pay for all the expenses that life brings.

The Risks

• Dividend payments can be lumpy. They do not always happen when you think they should. The value of the payments can go up and down.
• Higher yielding assets are riskier.
• The value of the overall portfolio could decrease over time.
• The monthly income is taxed as ordinary income, while the quarterly income is taxed at the lower rate.

Most people would not consider this strategy, because you need to purchase assets that have a higher dividend yield than your average stock. Stocks that have higher dividend yields are viewed as ‘risky’. I understand. There are plenty of times I think: “Is this strategy too risky?” “Am I making a mistake?” That is when I look back at my thesis and then I look the data that I have collected and I know that the strategy is working.

How does investing make you feel?

There are plenty of great ‘safe’ stocks like Berkshire Hathaway that do not pay a dividend and will probably never pay a dividend. Berkshire has been and will continue to be a good investment. But it is a long term investment that you will need to hold for years if not decades before you realize the fruits of your labor.

Investing for dividend income is not primarily going after stock capital gains. If you invest in Zuckerberg and Meta then you are anticipating the stock price appreciating over time. As the stock price increase you can afford to sell off shares in order to fund your lifestyle and your portfolio should be fine. The sale of the stock is taxed at a lower capital gains rate.

Most investors and average citizens are obsessed with taxes.

These folks want to pay as little as possible.

Think about it, how do you feel about paying your taxes and why do you feel that way?

Investing for income means that are not as concerned with taxes. You will pay more in tax for using your dividend income. I am ok with that. I look at it as my money is working for me and I am ok sharing some of the profits of that work. I would love it to pay less tax, but that is also why I max out a ROTH IRA each year. As long as my dividend income covers my expenses and then some I am ok to pay more in tax. And you still have the ability to go out and work and earn more money to either use for living or put into your portfolio.

The other big risk is the assets. In order to actually live off of dividends you either need to invest a lot of money into traditional stocks like Verizon or McDonalds and then you may receive anywhere from about 2-4% annually or invest into assets that have a higher dividend yield like REITs or Closed-End Funds or Bonds. These assets can appear to be riskier than a total stock market ETF.

But I do not think you have to choose. You can do both. That is where diversification comes into play. Invest in those risky assets, but also invest in the boring safe assets.

Diversification is key

There are so many assets to choose from that you can become as diversified as you feel comfortable with.

I am really diversified. Right now I own about 150 different assets. Some of the pay monthly and some of them pay quarterly. Some are low risk and some are high risk. They vary across all sectors of the stock market. The one trait that links them all together is that they all pay a dividend.

The reason you also need this diversification is because each asset pays out their dividend at a different time. Apple pays out on a different schedule than Microsoft. The more diversified you can be the more often you will receive payments.

Full disclosure. In order to really live off your dividend investments in a comfortable fashion you need to have a good amount of money invested into the stock market. And then you need to invest a good amount of your money into some of the more risky assets that have a higher yield.

This also will not be a smooth ride. Some months you will receive more dividend income than other months. December is usually my biggest months for payouts. It would be wise to get really good at planning. Saving up your payouts for the long haul, because you never know when one months payouts are going to be really low. Or the economy starts to slow down and these assets reduce their payouts.

It is also a good idea to select companies that have history of increasing their dividend payouts. And make sure you do the research some of the funds that you think have done the research for you have not. Find those assets that match your investing goals.

This strategy also does not mean you should stock working. In fact you might want to work more in order to put more into your portfolio. You want to make sure that you have more than enough in your account, because the next economic recession is always right around the corner and this is the stock market. Values do not always go up.

The Benefits

• Your money will keep working for you.
• If you lose your job or business you will still have money coming in.
• These payments can last the rest of your life.
• The payments will grow over time along with the value of your portfolio.

I’m working on this strategy right now. Like most things it started off small. My first month I received $10 in dividend income. But each month it has grown.

Why should you consider this?

Even if you try this strategy on a small scale. Starting with a $100 portfolio. Buying more shares over time and watching the regular income grow. This will show you that it is possible to grow your income without doing any work.

The name of the game is not stock price. The name of the game is shares. Figure out how many shares you think you need to live comfortably off dividends and then get to work and make sure you track your progress.

Conclusion

It is possible to live off of your dividends.

• First, you must have a clearly defined goal. Then start tracking your dividend income.
• Find those assets that are going to pay you those dividends that will help you reach your goals. Make sure you are diversified
• Invest as much as possible into this portfolio.
• See if you can only live off the dividends.
• As your payments grow stash money away for a rainy day.
• As those payments keep growing reinvest some of them back into growing more dividends.

What do you think about this strategy?

Good luck!