Thanks for reading The Dividend Growth Newsletter!

Today I'll be sharing information about retiring and living off of your dividend portfolio.

If you want to join 1,541 other investors learning about dividend investing tactics and analysis, subscribe below:

If you like what you’re reading, please share the newsletter with your friends!

Also, check out my other articles here and find me on Twitter @DrDividend47!

Today’s issue is brought to you by Capital Gains!

It’s the gym, for your finance brain.

5-minutes per day is great, but like it or not, real gains come after putting in hours for years.

Capital Gains is an educational newsletter spun out of The Diff: a deeply analytical newsletter that applies concepts in finance, economics, and corporate strategy.

The problem is that those concepts aren’t taught in school, so the analysis tends to appeal to founders, VCs, hedge fund managers, and the like.

Whether you’re on a finance career track, trying to understand what your company’s stock options package means, or just curious about how the economy works, Capital Gains gives you the mental models you need.

Subscribe here for the free weekly email!

Now for today’s piece:

When Can You Live Off Of Your Dividends?

Highlights

The Dividend Crossover Point

The Dividend Crossover Point is a term I learned from Dividend Growth Investor.

It’s the magical point where the money you make from dividends exceeds your expenses.

At this point, you become work optional.

Your dividends take care of your lifestyle and you’re free to retire and pursue what means most to you.

Reaching the Dividend Crossover Point is a function of things you can control, and things you can’t.

Today we’ll explore when you can retire and live off your dividends, and what it takes to reach the Dividend Crossover Point.

What You Can Control

There are a number of things you can control while on your path to The Dividend Crossover Point:

1. Savings Rate

The rule of thumb is to save 20% of your income.

If you’re able to save more, you can invest more.

By having more money invested, you’ll be able to increase the compounding effects of your dividends.

2. How Long You Stay Invested

99% of Warren Buffett’s $106B fortune came after his 50th birthday.

While there’s no doubt that Buffett is a legendary investor, his biggest advantage is time.

He started investing at 11 years old and has let his investments compound for 81 years, increasing his yield on cost.

In 2022, his company Berkshire Hathaway received $6B+ from dividends.

Having a long time horizon also allows the mistakes you make to become less significant and for your winning investments to truly shine.

Buffett said it best in his 2023 letter to Berkshire Hathaway shareholders:

3. Your Portfolio’s Yield

Your portfolio’s dividend yield will determine how much money in dividends you receive relative to your portfolio’s value.

You can choose higher-yielding stocks to receive higher dividend payouts, but there’s increased risk and uncertainty that comes with this strategy.

Higher-yielding companies are often (not always) businesses that are struggling.

A high yield is usually a function of declining share prices which in itself is indicative of larger problems with the business.

These businesses are often the first to cut their dividends, drastically reducing your portfolio’s income and the ability to live off your dividends.

4. Your Spending

Your spending habits affect how quickly you can retire for a few reasons:

1. More money spent = Less money to invest

The less money you have invested, the slower your dividend compounding will be.

2. More spending leads to an increase in your standard of living and expenses.

With an increase in your standard of living comes an increase in your expenses.

This means you’ll have to invest more money in order to reach a higher Dividend Crossover Point.

Also, people entering retirement generally do not want to decrease their standard of living.

This means your dividends will have to be high enough to sustain whatever standard of living you choose, and grow enough to maintain that standard of living.

What You Can’t Control

There are also a number of things you can’t control while on your path to The Dividend Crossover Point:

1. Market Volatility

Market volatility is something that no single person can control (well except maybe Jerome Powell).

But as far as the average person like me? I have no control over how much the market will rise or fall in a given time frame.

In order to reach The Dividend Crossover Point, I have to stomach the ups and downs of the market and remind myself of a few things:

• The stock market is largely driven by emotion

• Just because a stock I bought went down in the short term, doesn’t mean I made a bad investment

• A 30% decline usually happens once every 10-12 years.

My motto is to hold for the long term but it’s easier said than done.

Identifying the things I can’t control helps.

2. The Price Of Necessary Goods & Services

Something else you or I can’t control is the price of goods & services.

Over the past year, we’ve seen the highest inflation rate of the last 40 years rear its ugly head.

The prices of common items we use like eggs have increased as much as 70% over the last year.

These spikes in inflation are something we can’t control, but they affect our savings rates and the ability to invest as much as we might want to.

Something to keep in mind when projecting your retirement day.

3. Emergencies

Emergencies happen when you least expect them to, and they affect your ability to reach The Dividend Crossover Point.

Events like a flooded basement or a car accident happen, and the money spent to fix these events is money not invested.

These emergencies are part of life, but if you’re not prepared they can seriously put a dent in your progress toward The Dividend Crossover Point.

You can cushion against these emergencies by having an emergency fund, which is cash set aside solely for emergencies.

(To keep this cash growing, you could choose to hold it in a high-yield savings account)

4. World Events

Who could’ve predicted Brexit? The 9/11 attack? The COVID-19 pandemic?

These worldwide events drastically affected the stock market and how investors view risk.

They’re almost impossible to plan for, but knowing you can’t control them is key.

If these external factors are not affecting the core business, chances are the drop in stock price is a result of fear, not an underlying problem in the business.

Still, stock prices are likely to be affected when major world events happen, and your portfolio is not immune.

So When Can You Retire?

Everyone’s saving, spending, investing, and goals are different, so there’s no way to craft a “one size fits all” approach.

In my opinion, the best way to find your dividend crossover would be to take your annual expenses and multiply them by the historical rate of inflation.

The chart below shows the average expenses paid by a single person in the U.S. ($38,266) multiplied by the average rate of inflation (3%).

_{You can find this compound interest calculator here and use it to make your own calculations.}

Then you could use this handy DRIP calculator to estimate your portfolio’s worth and dividend payouts over time.

When the dividend income exceeds your expenses, you’ve reached the coveted Dividend Crossover Point.

Final Thoughts

It’s important to remember that these calculations are done in a “perfect world” and use averages over a long period of time.

But rarely is the world average.

Major life-changing events happen more often than we plan for and will affect our calculations.

I mean, who could’ve predicted the COVID-19 pandemic? The Global Financial Crisis? The Great Depression?

And it's not just the major macro events that could affect your Dividend Crossover Point, events in your personal life can too.

Maybe you decide to have children, or your house needs unexpected repairs, or the vacation you took costs more than you planned it to.

With so many variables at play, it's hard to accurately predict when you’ll reach The Dividend Crossover Point.

There are always events that will occur outside of your control.

But there are things you as an investor can control, and by focusing on those, you're more likely to reach the Dividend Crossover Point.

Happy Dividend Investing!

Sincerely,

Dr. Dividend (Crossover Point)

PLEASE VOTE IN THE POLLS BELOW!

Your feedback truly helps create the best free newsletter I can.

Also, if you liked the breakdown and would love to donate or buy one of my books, I’d greatly appreciate it!

Links And Memes

Here are some links to some of the best stuff I read this week:

• Coca-Cola’s use of cocaine: side note- how much do you think profits would increase if they put it back in? (Trung Phan)

• A breakdown of SilverGate Bank’s incredible $80B+ collapse: are they the first domino to fall? (Brian O’Connor)

• The FBI using AI to spy on you: I know, shocker. (SmartKookie)

And of course, some memes:

Like what you’re reading?

Subscribe to get free investing content sent straight to your inbox every Monday.

Don’t forget to check out my website full of awesome free resources to jumpstart your investing!

Dr. Dividend | Linktree — linktr.ee

Interested in advertising with Dr. Dividend and The Dividend Growth Newsletter?

You can fill out this form to get your product at the top of the newsletter and into the hands of over 1,500 dividend investors!

Thanks for reading, if you liked this issue please tell a friend!