Investing

Living off Dividends and retiring early

  • Last Updated:
  • Feb 19th, 2024 12:37 pm
Tags:
None
Deal Expert
User avatar
Dec 12, 2009
29536 posts
20456 upvotes
joepipe wrote: interesting , so similar to BK etf.....
BK is a closed end fund, don't think HMAX is the same.
Public Mobile customer, $34/50GB CAN-US, $29/30GB, $24/4GB
Tangerine, EQ, Simplii, HSBC customer
Deal Addict
Jul 3, 2007
4153 posts
4626 upvotes
Toronto
will888 wrote: BK is a closed end fund, don't think HMAX is the same.
it is? thought its just another ETF with banks in it .... what do you mean by closed though? isnt that more
for mutual funds?
Deal Expert
Jan 27, 2006
21844 posts
15619 upvotes
Vancouver, BC
nousername wrote: What’s the best age to switch from etf investing (VFV)to dividend stocks? Is it 55 , so that you have at least 10 (65)more years to go , in case there’s a big market correction? OR is it better to stay invested in the etf , since the (etf) is also paying you the distribution every quater . So, when you retire @65, instead of dripping , use that distribution for your expenses. I’m pretty sure if the investor has been investing for let’s say 30 years until retirement, they probably will have another source of income at the time of retirement. So whatever the distribution etf gives ,even though it will be less than the dividends, will be still more than enough to live on . You can let your kids inherit the etf after you pass away (without selling them).
What do you guys think on this scenario?

Edit:- this is in a TFSA.
Dividend income is a different mindset than standard investment. With dividend income, you are looking at getting a decent income stream. You don't actually care too much about how much the investments that are giving you the income is worth, only the income itself. You can leave the worrying about how much the investment is worth to the people getting those investments after you pass on.

As such, you will need to build a large enough of a nest egg so that when you convert to an income stream. For example, if you believe you need an income stream of $100,000 per year, then your yield has to produce $100,000 per year. If you assume a 5% yield on your investments, you will need a $2 million nest egg at a 5% yield to get that $100,000 per year. Notice that I didn't mention anything about age or dates.

An alternative would be a dividend growth type of income stream. It sounds similar to straight dividend but with one important detail "growth". The idea is that the amount dividend income increases over time to account for inflation and other increasing cost. In this case, we don't necessarily talk about the size of the nest egg but rather how quickly and often the dividends increase in your nest egg and at what time will those dividends meet your goals. Good companies for this type of style are ones that regularly increase their dividend payout at a high enough level so that the growth of the dividend stream is higher than the rate of inflation. Some analysts suggest 2x the rate of historic inflation so that would be something over 8%. In the above example, we used an income stream of $100,000 a year as the goal so to keep things consistent, we will use it here as well. With dividend growth investing, you need to let time be on your side and work for you as such, you want to start investing in dividend growth stocks (or ETFs) early on and you will basically ignore the actual dividend rate but focus on the dividend growth rate. If you have a portfolio that will initially yield $10,000 with a dividend growth rate of 8%, in 9 years, the yield will be $20,000 per year as the dividend growth rate compounds the dividend payout. In another 9 years (so 18 years from when you started), you will get $40,000. In another 9 years (so 27 years after you started), you will have $80,000. Therefore, in about 30 years, your dividend payout per year will be $100,000 and it will grow 8% per year.

Notice how I basically ignored the stock market and notice how I didn't put any more money into the investment as all we did was compound the dividend which the company will do automatically. The yield will improve dramatically faster if you continue to invest and re-invest those dividends that were being paid out. One important thing about dividend growth is that the dividend paid out by high dividend growth companies is usually pretty low (in the neighbourhood of 1 to 3%) so you will need a large amount of capital to get $10,000 of yield initially for this to work without investing more funds. Plus, it's hard to find companies that have a dividend growth rate of 8%+.
Deal Fanatic
Sep 23, 2007
5654 posts
2168 upvotes
cheapshopper wrote: HAHAHAHA, my 16 years old just ask me during Christmas holiday:

Daddy, In Rich Dad Poor Dad, they said don't get into the Rat Race. Don't work for money, instead make money work for you.
So can you make money work for me, so I don't have to work for money?
Robert Kiyosaki is a quack. Rich Dad Poor Dad as a whole is not "wrong". It's written in a way to appeal to people who might be suckered into buying Robert's terrible line up of books and other products. This guy releases YouTube videos, constantly claiming some black swan event is coming. He's been calling a recession pretty much every week with clickbait titles like "last warning" or something similar. All of his predictions have more or less failed to materialize. He's just making content because it's an income stream for him. The key lesson you should learn from him is that you should learn to produce content instead of consuming content.

My issue with framing the issue as "getting out of the rat race" is that it's not how most successful people think. There's no doubt that you need to make money work for you. But first you need to MAKE MONEY. People make money by offering something of value, like a skill. You make a lot of money when someone wants to buy your goods/services. So before you focus on making money work for you, focus on learning how to make yourself skilled, and how to spend money wisely. I have found that people who make decent money largely like what they do. When you like what you do, you don't think of it as a rat race.

The only book you ever need to read on investing, in my opinion, is Ben Graham's Intelligent Investor. I also agree with a lot of Warren Buffet's thoughts, though I haven't read any of Buffet's books. I read a couple of other investment books and concluded most are garbage. The author is often trying to hook you into buying some other products.
Deal Fanatic
Jan 31, 2007
6365 posts
6726 upvotes
Center of Canada
BananaHunter wrote: Robert Kiyosaki is a quack. Rich Dad Poor Dad as a whole is not "wrong". It's written in a way to appeal to people who might be suckered into buying Robert's terrible line up of books and other products. This guy releases YouTube videos, constantly claiming some black swan event is coming. He's been calling a recession pretty much every week with clickbait titles like "last warning" or something similar. All of his predictions have more or less failed to materialize. He's just making content because it's an income stream for him. The key lesson you should learn from him is that you should learn to produce content instead of consuming content.

My issue with framing the issue as "getting out of the rat race" is that it's not how most successful people think. There's no doubt that you need to make money work for you. But first you needn't to MAKE MONEY. People make money by offering something of value, like a skill. You make a lot of money when someone wants to buy your goods/services. So before you focus on making money work for you, focus on learning how to make yourself skilled, and how to spend money wisely. I have found that people who make decent money largely like what they do. When you like what you do, you don't think of it as a rat race.

The only book you ever need to read on investing, in my opinion, is Ben Graham's Intelligent Investor. I also agree with a lot of Warren Buffet's thoughts, though I haven't read any of Buffet's books. I read a couple of other investment books and concluded most are garbage. The author is often trying to hook you into buying some other products.
Oh i know, there are a lot of BS in it. But the quote was from my 16 years old daughter.
I am still teaching her how to invest and power of compound and stay in market


Not to off track of discussion here, i also teach her how i will use dividend to fund my retirement. However i dont think she understand this part at all.
******************************************************
Bright side of RFD: Often find good deal
Dark side of RFD: Tons of stuff that I don't need but still got them because of RFD
******************************************************
Deal Expert
User avatar
Dec 12, 2009
29536 posts
20456 upvotes
craftsman wrote: Dividend income is a different mindset than standard investment. With dividend income, you are looking at getting a decent income stream. You don't actually care too much about how much the investments that are giving you the income is worth, only the income itself. You can leave the worrying about how much the investment is worth to the people getting those investments after you pass on.

As such, you will need to build a large enough of a nest egg so that when you convert to an income stream. For example, if you believe you need an income stream of $100,000 per year, then your yield has to produce $100,000 per year. If you assume a 5% yield on your investments, you will need a $2 million nest egg at a 5% yield to get that $100,000 per year. Notice that I didn't mention anything about age or dates.

An alternative would be a dividend growth type of income stream. It sounds similar to straight dividend but with one important detail "growth". The idea is that the amount dividend income increases over time to account for inflation and other increasing cost. In this case, we don't necessarily talk about the size of the nest egg but rather how quickly and often the dividends increase in your nest egg and at what time will those dividends meet your goals. Good companies for this type of style are ones that regularly increase their dividend payout at a high enough level so that the growth of the dividend stream is higher than the rate of inflation. Some analysts suggest 2x the rate of historic inflation so that would be something over 8%. In the above example, we used an income stream of $100,000 a year as the goal so to keep things consistent, we will use it here as well. With dividend growth investing, you need to let time be on your side and work for you as such, you want to start investing in dividend growth stocks (or ETFs) early on and you will basically ignore the actual dividend rate but focus on the dividend growth rate. If you have a portfolio that will initially yield $10,000 with a dividend growth rate of 8%, in 9 years, the yield will be $20,000 per year as the dividend growth rate compounds the dividend payout. In another 9 years (so 18 years from when you started), you will get $40,000. In another 9 years (so 27 years after you started), you will have $80,000. Therefore, in about 30 years, your dividend payout per year will be $100,000 and it will grow 8% per year.

Notice how I basically ignored the stock market and notice how I didn't put any more money into the investment as all we did was compound the dividend which the company will do automatically. The yield will improve dramatically faster if you continue to invest and re-invest those dividends that were being paid out. One important thing about dividend growth is that the dividend paid out by high dividend growth companies is usually pretty low (in the neighbourhood of 1 to 3%) so you will need a large amount of capital to get $10,000 of yield initially for this to work without investing more funds. Plus, it's hard to find companies that have a dividend growth rate of 8%+.
Good explanation. I would add that all dividend income will have some element of growth (and shrink in some cases, think AQN). The stocks that have outsized dividend growth typically have lower yields (CNR for example) that over time could catch up with stocks having higher yield but little to no dividend growth.
Public Mobile customer, $34/50GB CAN-US, $29/30GB, $24/4GB
Tangerine, EQ, Simplii, HSBC customer
Deal Expert
User avatar
Dec 12, 2009
29536 posts
20456 upvotes
cheapshopper wrote: Oh i know, there are a lot of BS in it. But the quote was from my 16 years old daughter.
I am still teaching her how to invest and power of compound and stay in market


Not to off track of discussion here, i also teach her how i will use dividend to fund my retirement. However i dont think she understand this part at all.
Explain to your daughter that when you own stocks/ETFs/mutual funds, you actually own a share of the underlying companies. Some companies will share their net income with shareholders and that is the dividend payment.
Public Mobile customer, $34/50GB CAN-US, $29/30GB, $24/4GB
Tangerine, EQ, Simplii, HSBC customer
Deal Addict
Jun 25, 2010
2046 posts
1661 upvotes
craftsman wrote: Dividend income is a different mindset than standard investment. With dividend income, you are looking at getting a decent income stream. You don't actually care too much about how much the investments that are giving you the income is worth, only the income itself. You can leave the worrying about how much the investment is worth to the people getting those investments after you pass on.

As such, you will need to build a large enough of a nest egg so that when you convert to an income stream. For example, if you believe you need an income stream of $100,000 per year, then your yield has to produce $100,000 per year. If you assume a 5% yield on your investments, you will need a $2 million nest egg at a 5% yield to get that $100,000 per year. Notice that I didn't mention anything about age or dates.

An alternative would be a dividend growth type of income stream. It sounds similar to straight dividend but with one important detail "growth". The idea is that the amount dividend income increases over time to account for inflation and other increasing cost. In this case, we don't necessarily talk about the size of the nest egg but rather how quickly and often the dividends increase in your nest egg and at what time will those dividends meet your goals. Good companies for this type of style are ones that regularly increase their dividend payout at a high enough level so that the growth of the dividend stream is higher than the rate of inflation. Some analysts suggest 2x the rate of historic inflation so that would be something over 8%. In the above example, we used an income stream of $100,000 a year as the goal so to keep things consistent, we will use it here as well. With dividend growth investing, you need to let time be on your side and work for you as such, you want to start investing in dividend growth stocks (or ETFs) early on and you will basically ignore the actual dividend rate but focus on the dividend growth rate. If you have a portfolio that will initially yield $10,000 with a dividend growth rate of 8%, in 9 years, the yield will be $20,000 per year as the dividend growth rate compounds the dividend payout. In another 9 years (so 18 years from when you started), you will get $40,000. In another 9 years (so 27 years after you started), you will have $80,000. Therefore, in about 30 years, your dividend payout per year will be $100,000 and it will grow 8% per year.

Notice how I basically ignored the stock market and notice how I didn't put any more money into the investment as all we did was compound the dividend which the company will do automatically. The yield will improve dramatically faster if you continue to invest and re-invest those dividends that were being paid out. One important thing about dividend growth is that the dividend paid out by high dividend growth companies is usually pretty low (in the neighbourhood of 1 to 3%) so you will need a large amount of capital to get $10,000 of yield initially for this to work without investing more funds. Plus, it's hard to find companies that have a dividend growth rate of 8%+.
Thanks for the detailed explanation.
“There are the people who don’t know, and the people who don’t know that they don’t know”- Treva84
Deal Fanatic
Sep 23, 2007
5654 posts
2168 upvotes
craftsman wrote: Dividend income is a different mindset than standard investment. With dividend income, you are looking at getting a decent income stream. You don't actually care too much about how much the investments that are giving you the income is worth, only the income itself. You can leave the worrying about how much the investment is worth to the people getting those investments after you pass on.

As such, you will need to build a large enough of a nest egg so that when you convert to an income stream. For example, if you believe you need an income stream of $100,000 per year, then your yield has to produce $100,000 per year. If you assume a 5% yield on your investments, you will need a $2 million nest egg at a 5% yield to get that $100,000 per year. Notice that I didn't mention anything about age or dates.

An alternative would be a dividend growth type of income stream. It sounds similar to straight dividend but with one important detail "growth". The idea is that the amount dividend income increases over time to account for inflation and other increasing cost. In this case, we don't necessarily talk about the size of the nest egg but rather how quickly and often the dividends increase in your nest egg and at what time will those dividends meet your goals. Good companies for this type of style are ones that regularly increase their dividend payout at a high enough level so that the growth of the dividend stream is higher than the rate of inflation. Some analysts suggest 2x the rate of historic inflation so that would be something over 8%. In the above example, we used an income stream of $100,000 a year as the goal so to keep things consistent, we will use it here as well. With dividend growth investing, you need to let time be on your side and work for you as such, you want to start investing in dividend growth stocks (or ETFs) early on and you will basically ignore the actual dividend rate but focus on the dividend growth rate. If you have a portfolio that will initially yield $10,000 with a dividend growth rate of 8%, in 9 years, the yield will be $20,000 per year as the dividend growth rate compounds the dividend payout. In another 9 years (so 18 years from when you started), you will get $40,000. In another 9 years (so 27 years after you started), you will have $80,000. Therefore, in about 30 years, your dividend payout per year will be $100,000 and it will grow 8% per year.

Notice how I basically ignored the stock market and notice how I didn't put any more money into the investment as all we did was compound the dividend which the company will do automatically. The yield will improve dramatically faster if you continue to invest and re-invest those dividends that were being paid out. One important thing about dividend growth is that the dividend paid out by high dividend growth companies is usually pretty low (in the neighbourhood of 1 to 3%) so you will need a large amount of capital to get $10,000 of yield initially for this to work without investing more funds. Plus, it's hard to find companies that have a dividend growth rate of 8%+.
+1

I also encourage people to think of consistent dividends as evidence that the business is viable. The company has a business model and it's making cash such that it can pay the shareholder's dividends. A company with a long history of stable dividends is likely managed well and stable in the foreseeable future. Except for AQN I guess....but AQN is the exception and not the norm.

Whereas capital appreciation in some sense depends on market sentiments (emotions + expectations) which is inherently fickle.

A company that continues to find efficiency will be able to boost sales/reduce costs to boost the bottom line. In turn, they can choose to reinvest the money, and/or increase dividends to pay shareholders. Markets can take notice and individual actors can take actions (such as buy) that can drive the share price up in turn.

Buffet is right in many ways. At the end of the day, you are owning a business. As long as the business does well, the share price and/or the dividends will go up. How to pick good companies is the hard part. My philosophy is that there's no better indicator than a decent and stable dividend yield as it is the most objective and measurable thing. It's also the most "in your pocket" return because you don't need to action to cash out. You just need time to pass and you can focus your energies on other things in life. Even if you own index funds, you still need to sell to cash out. It's a paper gain until the day you sell. And if you happen to retire during a major market down turn, you are screwed.

Every quarter or so I update my portfolio tracker. It's a really nice feeling when the cash balance has replenished itself. I can decide if I want to deploy that new cash.
Deal Expert
Jan 27, 2006
21844 posts
15619 upvotes
Vancouver, BC
BananaHunter wrote: +1

I also encourage people to think of consistent dividends as evidence that the business is viable. The company has a business model and it's making cash such that it can pay the shareholder's dividends. A company with a long history of stable dividends is likely managed well and stable in the foreseeable future. Except for AQN I guess....but AQN is the exception and not the norm.

Whereas capital appreciation in some sense depends on market sentiments (emotions + expectations) which is inherently fickle.

A company that continues to find efficiency will be able to boost sales/reduce costs to boost the bottom line. In turn, they can choose to reinvest the money, and/or increase dividends to pay shareholders. Markets can take notice and individual actors can take actions (such as buy) that can drive the share price up in turn.

Buffet is right in many ways. At the end of the day, you are owning a business. As long as the business does well, the share price and/or the dividends will go up. How to pick good companies is the hard part. My philosophy is that there's no better indicator than a decent and stable dividend yield as it is the most objective and measurable thing. It's also the most "in your pocket" return because you don't need to action to cash out. You just need time to pass and you can focus your energies on other things in life. Even if you own index funds, you still need to sell to cash out. It's a paper gain until the day you sell. And if you happen to retire during a major market down turn, you are screwed.

Every quarter or so I update my portfolio tracker. It's a really nice feeling when the cash balance has replenished itself. I can decide if I want to deploy that new cash.
There will always be a possible stinker in a group of stocks which is why diversification is so important. We actually saw the last two years why not only stock diversification but investment philosophy diversification is so important. If you were solely invested in growth stocks, you got pounded in 2022 but if you were just in dividend payers, you did fine except in 2021 where you fell behind. And of course, those who where just invested in bonds for their fixed income saw huge losses...

As for finding viable candidates, there are a lot of easy resources out there for this - stock listings as filed by various dividend growth ETFs and MF are ideal places to start as many of those funds will list how they pick their stocks so just pick the list which have the criteria that you are looking for. For example, if you pick a dividend aristocrats fund, you can be assured that each company on that list has a long history of dividends, and in most funds, growing those dividends as well. With those lists in hand, you can start doing your research to pick which one works for you.
Deal Addict
Apr 21, 2014
2321 posts
1106 upvotes
Alberta
Just so people know a covered call etf HDIV just raised their dividend by 8% from $0.125 to $0.135 that’s a yield of 10.28% based on current market price. They have raised their dividend twice now since inception in mid 2021. It started out at $0.1175/share.
Deal Expert
User avatar
Dec 12, 2009
29536 posts
20456 upvotes
abc123yyz wrote: Just so people know a covered call etf HDIV just raised their dividend by 8% from $0.125 to $0.135 that’s a yield of 10.28% based on current market price. They have raised their dividend twice now since inception in mid 2021. It started out at $0.1175/share.
ETFs do not issue dividends. Refer to them as distributions.
Public Mobile customer, $34/50GB CAN-US, $29/30GB, $24/4GB
Tangerine, EQ, Simplii, HSBC customer
Sr. Member
Dec 8, 2013
887 posts
1347 upvotes
will888 wrote: ETFs do not issue dividends. Refer to them as distributions.
While they are referred to as distributions, they are distributed as dividends (if I understood the blurb below correctly), so the right tax treatment still applies (eg eligible dividends distributed from an ETF would still get preferential tax treatment in non-reg account and you should get the tax statements for it). Please correct me if wrong.

“ What are distributions?
ETFs may earn dividends and interest income from the securities they own, and they may realize capital gains or losses when investments are sold. This income may be reduced by the ETF’s expenses. The ETF distributes any remaining income or capital gains to unitholders by way of distributions, which are taxed at the investor’s applicable tax rate. This is preferable to having the income retained by the ETF, where it would be taxed at the highest marginal tax rate. Income is distributed in the same form as it is earned by the ETF: as interest income, Canadian dividends, foreign income or net capital gains – or a combination of the four.
Deal Fanatic
Mar 21, 2013
6150 posts
10800 upvotes
Canada
CanadaCool wrote: While they are referred to as distributions, they are distributed as dividends (if I understood the blurb below correctly), so the right tax treatment still applies (eg eligible dividends distributed from an ETF would still get preferential tax treatment in non-reg account and you should get the tax statements for it). Please correct me if wrong.

“ What are distributions?
ETFs may earn dividends and interest income from the securities they own, and they may realize capital gains or losses when investments are sold. This income may be reduced by the ETF’s expenses. The ETF distributes any remaining income or capital gains to unitholders by way of distributions, which are taxed at the investor’s applicable tax rate. This is preferable to having the income retained by the ETF, where it would be taxed at the highest marginal tax rate. Income is distributed in the same form as it is earned by the ETF: as interest income, Canadian dividends, foreign income or net capital gains – or a combination of the four.
Yes, all those things and also return of capital can form part of the distribution. Subcomponents.
Deal Addict
Apr 21, 2014
2321 posts
1106 upvotes
Alberta
will888 wrote: ETFs do not issue dividends. Refer to them as distributions.
Looking at 2021 t3 on their website it was a mix of
- eligible dividends 17%
- capital gains 82%
- foreign income 2%

98%+ of the distribution is favorably taxed
Jr. Member
Jan 3, 2023
152 posts
54 upvotes
abc123yyz wrote: Looking at 2021 t3 on their website it was a mix of
- eligible dividends 17%
- capital gains 82%
- foreign income 2%

98%+ of the distribution is favorably taxed
It is favorable insofar as the owner of the ETF shares pays less tax on it compared to their salary at the individual level. But looking at the big picture here, the dividends and capital gains are income which has already been taxed at the corporate level, and this tax is indirectly paid for by the ETF owners. So is really not clear if the tax rate really is favorable.
Deal Addict
Apr 21, 2014
2321 posts
1106 upvotes
Alberta
Gman00 wrote: It is favorable insofar as the owner of the ETF shares pays less tax on it compared to their salary at the individual level. But looking at the big picture here, the dividends and capital gains are income which has already been taxed at the corporate level, and this tax is indirectly paid for by the ETF owners. So is really not clear if the tax rate really is favorable.
I only care about it from the individual perspective, I do t really care how much tax the company pays.
Deal Fanatic
May 13, 2005
5147 posts
5846 upvotes
Montreal
abc123yyz wrote: Just so people know a covered call etf HDIV just raised their dividend by 8% from $0.125 to $0.135 that’s a yield of 10.28% based on current market price. They have raised their dividend twice now since inception in mid 2021. It started out at $0.1175/share.
The holdings of HDIV are a bunch of other companies covered call ETFs.
HDIV MER = 0.65%.
The holdings ETFs having their own MER. For example, ZWB MER = 0.71%.
Are we paying double MER here?
If we buy similar ETFs as HDIV holdings then we could save 0.65% MER charged by HDIV?

Image
https://hamiltonetfs.com/etf/hdiv/
https://www.bmogam.com/ca-en/investors/ ... s-etf-zwb/
Jr. Member
Jan 3, 2023
152 posts
54 upvotes
abc123yyz wrote: I only care about it from the individual perspective, I do t really care how much tax the company pays.
OK, I guess there is not much we can do about corporate taxation if we are shareholders of a large publicly traded corporation. it's more of an issue for small corporations with one or a few shareholders.

This reminds me of a quote by a French Finance minister a few hundred years ago: "The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing." Maybe one reason why governments will tax profit partly from the corporation and partly from the individual shareholder.
Sr. Member
Nov 14, 2006
736 posts
829 upvotes
abc123yyz wrote: Looking at 2021 t3 on their website it was a mix of
- eligible dividends 17%
- capital gains 82%
- foreign income 2%

98%+ of the distribution is favorably taxed
Paying out capital gains before you sell the “capital asset” with gain is like mutual fund manipulation where some years your NAV is negative while you, as the fund holder, paid out your share of taxes despite a value losing year. If the capital gains is so called “return of capital”, then this amount would need to be accounted in the ACB of the asset. So not necessarily tax favourable.
A mute point however if you hold the asset in a registered account.

Top