How To Live Off Dividends In Retirement

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How To Live Off Dividends In Retirement

How To Live Off Dividends In Retirement

Published on June 10th, 2022 by Bob Ciura

Income investors have faced a significant challenge in recent years. Generating suitable income to live off a dividend portfolio has not been easy, as the Federal Reserve kept interest rates low for many years. And, soaring stock prices caused the average dividend yield of the S&P 500 Index to sink to multi-decade lows.

As a result, income investors such as retirees who want to live off the dividends generated by their investment portfolios, should consider investing in high dividend stocks. However, many high-dividend stocks with yields above 5% have questionable fundamentals that mean their high dividend payouts may not be sustainable.

Income investors should try to avoid dividend cuts whenever possible. This is why we recommend income investors focus on quality dividend stocks such as the Dividend Aristocrats, a group of 65 stocks in the S&P 500 Index which have raised their dividends for 25+ consecutive years.

There are currently 65 Dividend Aristocrats. You can download an Excel spreadsheet of all 65 (with metrics that matter such as dividend yields and price-to-earnings ratios) by clicking the link below:


At the same time, investors looking for high yields may not find the Dividend Aristocrats immediately attractive, as many of them have relatively low yields. Therefore, the task for income investors hoping to live off their dividends in retirement, is to find stocks that have a combination of a high yield and a high level of dividend safety.

With the proper research, investors can construct a portfolio that allows income investors to live off their dividends in retirement.

Table Of Contents

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Why Invest In Dividend Stocks For Retirement?

There are a number of different asset classes that investors can gain exposure to, in the search for higher income. One of the most popular asset classes for retirees is fixed income, otherwise known as bonds. These are debt securities issued by corporations, governments and municipalities which pay investors periodic interest, as well as principal at maturity.

Bonds are certainly a worthwhile selection for income investors such as retirees, particularly for those with a higher level of risk aversion. Bonds generally carry a higher level of safety than stocks, as bondholders are paid before common stockholders.

At the same time, stocks have certain advantages of their own. For investors who are willing to accept a higher level of risk by investing in the stock market, the trade-off is that stocks could pay higher income over the long-run.

The reason is because many quality dividend stocks raise their dividend payouts on a regular basis. The Dividend Aristocrats have raised their dividends for at least 25 consecutive years, while the Dividend Kings have increased their payouts for over 50 years. Contrast this with bonds, which will pay a fixed level of interest to bondholders (which is why bonds are called fixed income).

Consider a hypothetical comparison of an investor who allocates $10,000 into a fixed income security paying 3% a year for 30 years. In year 30, the investor will receive the same 3% payout (equal to $300) as in year 1.

Now consider the case of a quality dividend growth stock that pays a 3% annual dividend on the same $10,000 investment. In year 1, the investor will receive $300. Now assume that the stock raises its dividend by 5% per year. In year 30, the stock would pay a dividend of nearly $1,300. And, the investor would receive an even higher payout in year 30 by reinvesting dividends each year along the way.

This is the concept of yield on cost. Taking the $1,300 annualized dividend payments and dividing by the initial investment of $10,000, this scenario results in a yield on cost of 13%.

The power of dividends (and reinvesting dividends) is truly remarkable. According to a report from Hartford Funds, since 1960 approximately 84% of the total return of the S&P 500 Index was due to reinvested dividends and compounding.

Source: Hartford Funds

To be sure, retirees do not have 30 years to grow their income. But dividend stocks can Even without the benefit of a long investing time horizon, retirees can structure a quality portfolio of dividend-paying stocks that allows them to live off the dividends now.

If an investor allocates $10,000 to a portfolio of dividend stocks paying 4%, the year 1 income level would be $400. Using the same hypothetical example of 5% annual dividend growth, in 5 years the investor’s yield on cost would be an attractive 5.1%, resulting in a year 5 dividend payout of $510.

It’s fair to say that a retiree needs more than $510 in annual income to live on dividends. As a result, the typical portfolio size would need to be larger. But assuming an investor has a retirement portfolio of $500,000, a collection of dividend stocks paying 4% per year would result in a year 1 income level of $20,000.

And using the same dividend growth rate of 5% per year, this portfolio would generate dividend income of $25,525 in year 5 (again, this would be even higher if dividends are reinvested). This level of income would afford retirees a much better standard of living, especially when used in combination with Social Security benefits or other sources of income.

It is certainly not difficult finding quality dividend stocks that combine a 4% starting yield with 5% annual dividend growth. At the same time, investors must take precaution to avoid risky stocks with extremely high dividends. Stocks with elevated dividend yields above 5% are instantly appealing for income investors, but retirees must be careful with extreme-high yielders.

Such companies are often in fundamental distress, with collapsing share prices that have elevated their dividend yields to unsustainable levels. This is particularly true when it comes to certain segments of the stock market such as Business Development Companies or mortgage REITs.

What Retirees Must Avoid

The most important thing for retirees investing in the stock market, is to avoid dividend cuts or eliminations. This happens when a company is no longer able to pay the dividend at the current rate, usually due to a drop in company revenue and earnings.

The following graphic shows the historical performance of stocks broken down into several groups, which are dividend growers and initiators; dividend payers; stocks with no change in their dividend policy; stocks that do not pay dividends; and stocks that either reduce or eliminate their dividends. These groups are juxtaposed with the performance of the broader S&P 500 Index:

Clearly, the best-performing group was dividend growth stocks, whereas dividend cutters and eliminators actually lost money for their investors over the ~50 year time frame.

This shows the importance of investing in quality companies that can grow their dividends over long run, and at the same time avoiding companies that cut or eliminate their dividends.

There are a number of different asset classes that investors can gain exposure to, in the search for higher income and sustainable dividends.

The following 4 dividend stocks have current yields of at least 4%, and can reasonably be expected to grow their dividends by at least 5% per year going forward.

4 Quality Dividend Stocks Yielding Over 4%

With all this in mind, the following 4 dividend stocks represent quality businesses with durable competitive advantages. These companies have proved the ability to grow their dividends each year, regardless of the overall economic climate.

They all have dividend yields above 4%, are members of the Dividend Aristocrats, and could be expected to raise their dividends by at least 5% per year going forward.

T. Rowe Price Group (TROW)

T. Rowe Price Group is one of the largest publicly traded asset managers. The company provides a broad array of mutual funds, subadvisory services, and separate account management for individual and institutional investors, retirement plans and financial intermediaries. T. Rowe Price had assets under management of $1.69 trillion as of December 31st, 2021.

On February 9th, 2021, T. Rowe Price declared a $1.08 quarterly dividend, representing a 20.0% increase and marking the company’s 35th year of increasing its payout.

On April 28th, 2022, T. Rowe Price reported first quarter results for the period ending March 31st, 2022. Revenue grew 1.6% to $1.86 billion, in-line with estimates. Adjusted earnings-per-share of $2.62 compared to $3.01 in the prior year and was $0.14 below expectations.

During the quarter, assets under management (AUM) declined $136 billion to $1.55 trillion. Net outflows totaled $5.3 billion as inflows to multi-asset, fixed income, and alternative products of $6.7 billion, $5.3 billion, and $800 million, respectively, were more than offset by $18.1 billion of outflows and market volatility. Operating expenses increased 5.6% to $986 million.

Click here to download our most recent Sure Analysis report on T. Rowe Price (preview of page 1 of 3 shown below):

Federal Realty Investment Trust (FRT)

Federal Realty was founded in 1962. As a Real Estate Investment Trust, Federal Realty’s business model is to own and rent out real estate properties. It uses a significant portion of its rental income, as well as external financing, to acquire new properties. This helps create a “snow-ball” effect of rising income over time.

Federal Realty primarily owns shopping centers. However, it also operates in redevelopment of multi-purpose properties including retail, apartments, and condominiums. The portfolio is highly diversified in terms of tenant base.

Source: Investor Presentation

Federal Realty reported Q1 earnings on 05/05/22. FFO per share came in at $1.50, up from $1.17 in the year-ago quarter. Total revenue increased 17.7% to $256.77M year-over-year. Net income available for common shareholders stood at $0.63, up from $0.60 in the year-ago period. During the quarter, Federal Realty continued record levels of leasing with 119 signed leases for 444,398 square feet of comparable space.

The trust’s portfolio, during the quarter, was 91.2% occupied and 93.7% leased, up by 170 basis points and 190 basis points, respectively, year-over-year. That said, the trust maintained a 250 basis points spread between occupied and leased. Moreover, small shop leased rate was 88.7%, up by 130 basis points quarter-over-quarter. Federal Realty also reported Q1 comparable property operating income growth of 14.5%.

Meanwhile, the company raised its 2022 earnings per share guidance to $2.36-$2.56 from $2.30-$2.50 and FFO per diluted share guidance to $5.85-$6.05 from $5.75-$5.95.

Click here to download our most recent Sure Analysis report on Federal Realty (preview of page 1 of 3 shown below):

V.F. Corp (VFC)

V.F. Corporation is one of the world’s largest apparel, footwear and accessories companies. The company’s brands include The North Face, Vans, Timberland and Dickies. The company, which has been in existence since 1899, generated over $11 billion in sales in the last 12 months.

In mid-May, V.F. Corp reported (5/19/22) financial results for the fourth quarter of fiscal 2022. Revenue and organic revenue grew 9% and 12%, respectively, over the prior year’s quarter, driven by the EMEA and North American regions, which experienced a negative impact from the pandemic in the prior year’s period.

Source: Investor Presentation

Adjusted earnings-per-share grew 67%, from $0.27 to $0.45, but missed analysts’ consensus by $0.02. For the new fiscal year, V.F. Corp expects revenue growth of at least 7% and adjusted earnings-per-share of $3.30 to $3.40.

Click here to download our most recent Sure Analysis report on V.F. Corp. (preview of page 1 of 3 shown below):

3M Company (MMM)

3M sells more than 60,000 products that are used every day in homes, hospitals, office buildings and schools around the world. It has about 95,000 employees and serves customers in more than 200 countries.

Source: Investor Presentation

3M is now composed of four separate divisions. The Safety & Industrial division produces tapes, abrasives, adhesives and supply chain management software as well as manufactures personal protective gear and security products.

The Healthcare segment supplies medical and surgical products as well as drug delivery systems. Transportation & Electronics division produces fibers and circuits with a goal of using renewable energy sources while reducing costs. The Consumer division sells office supplies, home improvement products, protective materials and stationary supplies.

On April 26th, 2022, 3M reported first quarter earnings results for the period ending March 31st, 2022. Revenue fell 0.3% to $8.8 billion, but was $50 million better than expected. Adjusted earnings-per-share of $2.65 compared to $2.77 in the prior year, but was $0.34 above estimates. Organic growth for the quarter was 2%.

Safety & Industrial grew 0.5% due to strength in industrial adhesives and tapes, abrasives, and masking systems, though personal safety declined. Transportation & Electronics decreased by 0.3%. Commercial solutions growth was offset by a decline in transportation and safety. Health Care grew 4.7%. Consumer was higher by 3.4% as demand for home care, stationery and office and home improvement products continues to be strong.

3M provided an updated outlook for 2022, with the company now expecting adjusted earnings-per-share of $10.75 to $11.25.

Click here to download our most recent Sure Analysis report on 3M (preview of page 1 of 3 shown below):

Final Thoughts

Retirees have had a challenge producing satisfactory income over the past decade, due to historically low interest rates which have brought down yields across fixed income and the stock market. Interest rates have spiked to begin 2022, and the 10-year U.S. Treasury now yields 3.15%.

But investors can still do better than this, by buying shares of quality dividend-paying stocks with yields above 4%. And, the best dividend stocks such as the Dividend Aristocrats, can grow their dividends each year. Importantly, dividend growth helps protect investors’ purchasing power against inflation, whereas most bonds do not offer inflation protection.

The four dividend stocks on this list can be the foundation of a quality income-producing portfolio, allowing retirees to live on their dividends.

Other Dividend Lists

The Dividend Aristocrats list is not the only way to quickly screen for stocks that regularly pay rising dividends:

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