What If You Can Live Off Your Dividends?

I’ve spent part of my day studying General Mills (sexy, I know) because the company sells products like flour and Cheerios that are immediately recognized as indispensable. The stock never seems particularly cheap, and no one ever talks about buying it despite (1) the easy-to-understand business model, (2) an uninterrupted dividend history dating back to the 1890s, and (3) a track record of compounding at 12.5% annually over the past three decades, leaving behind in the dust almost every hedge fund that exists in America net of fees.

Someone who has steadily been committing to buying $300 shares of General Mills every month since 1983 would find himself in the interesting position of owning 22,200 shares of the cereal and breakfast product giant (of course, setting $300 in 1983 would be the equivalent of setting aside $700 today, but hopefully someone in real life would be able to increase their investable contributions over time).

What if you reach retirement age with those shares of General Mills stock? How does the story unfold for someone who is living off the dividends?

Well, the current dividend is $0.41 per quarter, or $1.64 per year. In the first year, you would be collecting $36,408 in come from the famed cereal maker.

Come next year, General Mill’s quarterly dividend should be at least $0.44 per share, based on the company’s track record of dividend increases and my assessment of its corporate health. That works out to $1.76 per year. Even though you are collecting the cash generated from your investment, you find yourself gradually getting richer: you are now collecting $39,072 each year.

By 2016, the quarterly dividend could likely be somewhere around $0.48 per share, or $1.92 annually as General Mills continues to do what it has done successfully for a century and a quarter. Now, your collection amount would be $42,624.

If the dividend goes up to $0.52 per share in 2017, you’d bring in $46,176 over the course of the year.

If the quarterly dividend hits $0.56 per share in 2018, you’d get $49,728 that year.

By 2019, and with a $0.60 quarterly dividend, you’d be collecting $53,280.

None of those projections are particularly ambitious—it assumes that General Mills grows its dividend a bit lower than its historical precedent. And obviously, you know by now that this article isn’t advocacy putting all of their money into General Mills. Instead, it’s an illustration of what life can look like when you have a diversified portfolio filled with companies that share General Mills’ overall characteristics.

And although we are all creatures of the time we inhabit (if I were writing in the 1970s, who’s to say I’d be writing about blue-chip stocks with 2-3% dividend yields when I could otherwise be writing about Certificates of Deposit yielding 11%), there is something very different about a portfolio of high-quality dividend stocks that differentiate it from a portfolio stuffed with US bonds or corporate bonds.

When you enter the world of fixed income investing, you are entering a world of either preserving wealth or lowering wealth at a very slow clip. Maybe you get an annuity that matches inflation. Maybe you have bond interest coming your way, and you only spend three-quarters of it, reinvesting the rest to boost your annual income. There are mitigating techniques like that, but almost nothing to give you significant raises above the rate of inflation.

That’s where the dividend growth strategy is at its best: even when you collect the dividends to spend, the organic growth of the business continues to make you richer. Did you see what happened to someone holding those 22,200 shares of General Mills over those five years? He went from collecting $36,000+ heading into 2015 to $53,000+ by 2019. Those dividends from General Mills went from offering about two-thirds of the typical American’s household income per year to generating something resembling the average annual income of a typical American household.

More importantly, even as you continue to spend, you go from receiving $3,000 per month to $4,400 per month. That’s why people with sizable portfolios take it as religious dogma that you don’t touch your principal when figuring out how to live off assets—by only taking your share of company profits that the Board of Directors sends your way while not diminishing your ownership stake, you start to see significant increases in the amount of money at your disposal each year that you can spend however you choose.

Generally, you reach this point by (1) developing a collection of high-quality assets at an early age, such as being a 35 year-old with a $150,000 portfolio consisting of a diversified collecting of 15-25 blue-chip stocks, or (2) if you’re late to the game, you try to change your household budget so you can come as close to saving $1,000 per month as possible, absorbing chunks of Coca-Cola, Colgate-Palmolive, Nestle, Procter & Gamble, and Johnson & Johnson that can start working for you immediately.

The formula for success is something like this: work your tail off to get 300 shares of Coca-Cola, 500 shares of General Electric, 200 shares of Procter & Gamble, 150 shares of Johnson & Johnson, and 250 shares of Colgate-Palmolive as early in life as possible. If possible, try to sit still and let them be for at least ten years, reinvesting dividends and enjoying the organic growth of the company.

People don’t think like that because it’s damn hard for a starter investor to get their hands on $400-$500 worth of Coca-Cola stock, and all they see are 10 shares sending them $3.05. Even if the dividend grows 10%, the dividend payment only grows to $3.35. That’s the deterrent. But once you reach a point where you are collecting $7,000 per year in dividends, that singular 10% dividend raise adds $700 to your income automatically, giving you two more dollars per day just for staying alive. Dividend growth investing with the best companies in the world becomes its own self-sustaining machine once you grind it out through the beginning days.

Originally posted 2014-09-22 08:00:23.

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7 thoughts on “What If You Can Live Off Your Dividends?

  1. DividendCyrus says:

    Hi CII,

    I recently read the ebook “The Dividend Lie – 10 Reasons Why you Will never live off your dividend income” and I have to admit the author has some really good points in there. For example, you say that close to $1.000 per month on fresh investments will bring you to the point where you can live off your dividends. It’s so no true, especialls not when you’re “late to the game”. Calculate it through – a $12.000 per Year contribution will bring even with a net yield of 3% only $360 income per year or let’s say $30 a month…. Especially not with a portfolio consisting only of aritocrates (as you mention KO, JNJ, PG, CL, etc) since you won’t get yields beyond 3%. Take a look at that book to get some inspiration, I can recommend it when it comes to live off your dividends.
    I fully agree on what you say that starting out is a real challenge, receiving some single bucks from KO and others. What I told myself (and I have that from a book as well, The “Ultimate Dividend Playbook”), is that damn $3 come in there quarter after quarter, for the rest of my life if I want. That really helps.

    Besides that, I love your blog, follow it for a long time now and try to become a bit more active. Congrats to this site, wish you all the best

  2. ErpichtAuf says:

    TimMcAleenan Thank you for the clarification.
    You’re formula for success is looking pretty decent. Though I’d be inclined to believe that due to current circumstances unless someone is able to throw themselves over the tangent point and hit 750 shares or so of General Electric and Procter and Gamble they’d currently be better off at 99 shares. The funds not used to purchase the 401 shares of General Electric and 101 shares of Procter and Gamble might be put to better use in the other holdings on the list or in Exxon Mobil, ConocoPhillips, or Chevron.

  3. Bill ted says:

    Of course you do realize to get to that level of dividend income you’d have to have at least 1.1 million dollars worth of GIS right?

  4. ErpichtAuf says:

    Bill ted The article and follow up comment suggests that you’d have gotten to the roughly 1.1 million dollars worth of General Mills as the result of saving roughly $111,600 over the course of 31 years plus adding the proceeds from the sale of Kenner Parker, Crystal Brands, and Darden Restarants when those shares were liquidated upon distribution.
    31 years of saving can be done before somebody reaches 55.

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