The myth
When investing for retirement, some people aim to build portfolios made up of assets that provide regular streams of income – like dividends.
They believe the dividend payments can serve as their new source of income when they’re no longer working.
The reality
To retire on dividends, you must receive enough in dividend payments to support your day-to-day needs. Keep these in mind to ensure you’re properly covered:
- Your portfolio should align with your retirement goals
Part of retirement planning is figuring out how much money you’ll need when you’re no longer working. There are different formulas that can help you figure out this amount.
Some people suggest having 25x your expected annual spending in your investment portfolio. This is so you can withdraw at a “safe” rate of 4% from your investments every year.
However, if you plan to spend only the money you get from dividends, you may not want to sell your investments to support your retirement needs.
That’s because dividend payments are calculated based on the number of shares or units of an investment you own.
For example, if an investment issues cash dividends of P1 per share and you have 1,000 eligible shares, you’ll get P1,000 for that period. Taxes and fees may be deducted from these payments.
This means you need to own enough shares to reach your target amount. You may also want to explore other income-generating investments, so you won’t have to rely on dividends alone.
- Dividends may not be guaranteed
Investments that pay regular dividends include certain stocks and all real estate investment trusts (REITs). There are also pooled funds that invest in dividend-paying assets then distribute their income to investors.
Keep in mind that dividends from stocks aren’t always guaranteed. Companies can choose to reduce, pause, or stop issuing dividends.
On the other hand, REITs are legally required to give most of their distributable income to shareholders via dividends.
This further highlights the importance of having more than 1 dividend-paying investment in your portfolio.
However, when choosing investments, dividend payout shouldn’t be your only consideration. You should also weigh an investment’s suitability based on your risk tolerance and financial situation, among other factors.
Verdict: Mostly true.
It’s possible to build an investment portfolio that will allow you to live off dividends. To know if it could work for you, understand how much time and money it might take to reach a point where dividends can fulfill your retirement needs.
Then, check your retirement plan to gauge whether your target amount is achievable given your timeline and financial capacity to invest.
When buying dividend-paying stocks, you should also look at each company’s dividend history and policy to know if they’re likely to meet your expectations.
