Wednesday, March 7, 2012

When can you retire on dividends?

The goal of every dividend investor is to one day accumulate a portfolio of income producing stocks, which would throw off a large amount of dividends every month. The goal of living off dividends is achievable, but it takes capital, time, skill or luck in order to get to the magic point.

The magic point is where the dividend income exceeds the expenses of the dividend investor.

In a previous article I discussed how investors can increase their dividend income, in order to reach their crossover point. It is very important to follow a few simple rules in order to create a sustainable dividend producing machine, which would produce dependable income for decades.
First, investors should focus on companies which have a long history of paying and raising dividends. I typically look for companies which have increased dividends for at least ten years in a row.

Second, investors should make sure that these companies are trading at attractive valuations. Paying a P/E of over 20 would lead to poor results, as investors in Coca-Cola (KO) and Wal-Mart (WMT) learned a decade ago.

Third, investors should make sure that the company’s dividend is sustainable out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks. For REITs or Master Limited Partnership I look for FFO Payout and DCF Payout Ratios.

Fourth, investors should perform a qualitative analysis of the dividend paying company they consider for purchasing. This analysis should include understanding how the business makes money, growth prospects, competitive landscape, whether the business has any moat, whether the company has any strong brands, which consumers are loyal to and result in pricing power.

Five, investors should try to build a diversified dividend portfolio consisting of at least 30 individual stocks coming from at least ten sectors. Having exposure to internationally based companies is a plus, despite the fact that most dividend growth stocks derive a major part of their profits from outside the US.

Some of the companies which have strong dividend growth and attractive current yields include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. This master limited partnership has raised distributions for 15 years in a row and spots a 10 year distribution growth rate of 10.90%/year. Yield: 5.20% (analysis)

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This tobacco company has raised distributions every year since its spin-off from Altria Group in 2008. Yield: 3.70% (analysis)

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend achiever has raised distributions for 24 years in a row and spots a 10 year distribution growth rate of 8.10%/year. Yield: 3% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. This dividend king has raised distributions for 55 years in a row and spots a 10 year dividend growth rate of 10.90%/year. Yield: 3.20% (analysis)

PepsiCo, Inc. (PEP) engages in the manufacture, marketing, and sale of foods, snacks, and carbonated and non-carbonated beverages worldwide. This dividend aristocrat has raised distributions for 39 years in a row and spots a 10 year dividend growth rate of 13%/year. Yield: 3.30% (analysis)

Enterprise Products Partners L.P. (EPD) provides midstream energy services to producers and consumers of natural gas, NGLs, crude oil, refined products, and petrochemicals in North America. This master limited partnership has raised distributions for 14 years in a row and spots a 10 year distribution growth rate of 8.30%/year. Yield: 4.80% (analysis)

Full Disclaimer: Long all stocks mentioned above

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This article was featured on Carnival of Personal Finance and Carnival of Wealth.


  1. I like your articles very much.
    I miss some comments on the importance of taxes though. In particualar when dealing with the subject of this entry. The tax rate on dividends at 15% like today or at 40+% like in the Reagan times or maybe again in America in the coming years , make a huge difference...

  2. I'm so glad I stumbled across your site. This article is exactly the kind of thing I've been looking for. I recently ditched my financial advisor and whole life insurance and based on some projections I've made, I'll be able to retire in just over 12 years based on this exact strategy. I look forward to reading more from you!

  3. What do you think about BHP?

  4. DGI,

    I love the informational material on here, but I would love to hear about your specific situation more...any recent posts on that (beyond long on a particular stock)?

    or do you keep it separate on purpose?

  5. Anonynoustravis,

    Thanks for stopping by. Please also go back to archives as there are plenty of good material to read on.


    I need to look at it further, in order to analyse BHP.


    I purposefully do not write specifics about myself since I think it would detract people who would not focus on the strategy but the outcome. In other words, If I had a $1 MLN in dividend stocks, people would focus how very few would achieve that level of net worth. If I had $100K and managed to retire just on that, I would have people telling me that it cannot be done. So I focus on strategy on this site, and my thinking process. I think dividend growth investing is applicable for every investor - for those aged one to those aged 101..

    I do sometimes offer little bits of information about myself, but unfortunately I do not feel comfortable discussing my personal situation with the whole world.

    See this post for example:

  6. I'm a big fan of dividends and like your picks. Long time holder of KMP! Great info!


Questions or comments? You can reach out to me at my website address name at gmail dot com.

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