The million dollar dividend portfolio for retirement

A few days ago, I posted an inspiring quote on Twitter. I stated that if you have a portfolio worth $1 million, you can easily expect to generate $30,000 in annual dividend income. I also mentioned that annual dividends would likely grow at 6%/year, which is higher than the raises received from most jobs.

This statement infuriated a lot of people out there. It was also well received by a lot of people too.

Based on reading the responses, I came to the conclusion that there are two camps of thought.

The first one consisted of individuals who are not millionaires, and do not see themselves as someone who will ever achieve financial independence. This is why they produced the most bitter responses. I felt sad for them, because I believe that anyone can reach financial independence if they are willing to live below their means, work to increase their income and cut expenses, and invest money intelligently with a long-term mindset. While everyone gets their fair share of disappointments and setbacks in life, we can at least control our reaction to these unfortunate events, and at least try to improve our financial situation. This group saw the million dollar figure, immediately became scared of what seems like an insurmountable amount of money, and concluded that it is impossible to reach it in the first place. The second group on the other hand immediately grasped the concept at hand, and understood the process to get to their goals and objectives.

The second type of responses were from individuals who were either financially independent, or had a plan in action to reach financial independence. These individuals understand the simple mechanics behind achieving financial independence, and were using the tools within their disposal to get there. These common sense tools include saving money in order to invest in assets, and hold those assets for the long-term. Some examples include buying income producing assets such as dividend stocks, real estate, index funds, businesses, which also grow wealth over time. These individuals are go-getters, who try to learn as much as possible, and improve themselves, in order to improve their lives. This group saw the million dollar figure, and immediately asked themselves how they can get there. The participants in this group knows that they should not despise the days of small beginnings. These investors know how to break down a large goal into small manageable tasks, and to conquer it along the way.

Perhaps the first group did not understand that building wealth is dependent on four simple wealth-building tools within their disposal:

1) The amount of money they save regularly, by living within their means. This includes cutting expenses, while increasing income. The math behind early retirement is simple.

2) The types of investments they select for building wealth. This could include dividend growth stocks, rental real estate, business ownership or index funds.

3) Their holding period. Being a buy and hold investor is probably the best option for most out there. By managing your behavior and investing regularly, you are following a plan and not reacting to the ups and downs of the economy. Staying the course is smarter than active trading, and results in lower costs in terms of taxes and commissions.

4) Another important tool is to educate yourself about investments all the time, while taking a firm control of your money. No one cares more about your family’s financial situation than you. This is why it is important to invest in your own financial education, avoid expensive middlemen that cost you money. It may also make a lot of sense to minimize tax liabilities by investing through tax-deferred accounts.

It is fascinating that a million-dollar portfolio can generate $30,000 in annual dividend income. A 3% yield is fairly easy to obtain today, whether you focus on building out your own portfolio one company at a time, or whether you go the ETF route. If history is of any guidance, dividend income is expected to grow faster than inflation over time. A carefully selected and diversified portfolio of dividend growth stocks can reasonably be expected to grow distributions at an annualized rate of 6%/year over time. If you are still in the accumulation phase and you can reinvest those distributions, you can easily grow portfolio dividends at a double digit percentage rate annually. By adding more money to the portfolio regularly, you are further turbocharging your dividend machine.

The nice thing about being a dividend investor is that dividend payments are more stable than share prices. It is easier to estimate future dividend payments, than to forecast what share prices will do. This is why retirees love the recurring nature of dividend payments. Dividends are more stable than share prices, which makes them an ideal source of income for my retirement. Plus, dividends represent a return on your investment, and help you avoid focusing on short-term stock price fluctuations. In essence, I am being paid to hold on to my shares when I receive dividends. In other words, dividends represent a return on investment, as well as a return of investment.

Getting to the coveted dividend crossover point, which is the point at which your dividend income covers your expenses is the ultimate goal of every investor out there. Getting to the point is a function of:

1) Amount of money you invest every month
2) The dividend income and yield you receive when you invest your money
3) The annual dividend growth for your portfolio
4) The amount of time you let your portfolio to compound for
5) Keeping your investment and tax costs to the bone

Notice that I am a firm believer in regular investing whenever I have money to invest. It makes to sense to me to even think about timing the market. I have learned that the sooner I invest in income producing assets, the sooner I can start earning dividends. While the amount of time to get to your financial independence will vary, I do believe getting there is a function of patience and perseverance.

Once you get there, you have control over your time and schedule. You can decide to continue working, to change careers, or to retire and watch Disney + all day. This is your life and your time, and you will be in charge of it. After all, you have worked hard to get there, and have done something that most people are not willing to even try.

The best part is that once you generate a healthy chunk of dividends, and you choose to stop working for money, you are joining the investor class. As an investor you are in a unique position to make money without needing to do much work, and you are getting hefty tax breaks in the process. You can do this from work, in your pajamas if you choose to.

As a result, for married couple that files jointly in the US, who earns up to $100,000 in qualified dividend income, they would owe zero in taxes to the Federal Government. Plus, they would owe zero taxes for FICA. They may owe state and local taxes. This is the best part about being financially independent however – they are location independent as well. They do not need to be in a certain place in order to generate money. A financially independent investor can travel the world, and still receive their dividends deposited neatly into their brokerage accounts. If you just move across state lines to one of the states that do not tax income, you won’t owe any taxes on income.

When you work in the accumulation phase, you end up paying high marginal tax rates to the Federal and State Governments, and you have to change employers if you want to work from a state with no income taxes. Plus, you would have to pay FICA, and you would have expenses related to
commuting and dressing in appropriate attire. Working is expensive because it ties you down to a certain area, and it sucks up most of your productive time in the week. You have less time to spend with your family, which is why you may end up outsourcing tasks to daycares, house cleaners etc.

This is the mindset I have always had about wealth building in general. I have always tried to get to the coveted financial independence spot, and have tried to accumulate all sorts of knowledge and experience to get me there. While it took a while to get to financial independence, the journey has definitely been exciting. Rather than be bitter about others successes, I have embraced them and tried to learn from them. Rather than be scared of the lofty goal of achieving financial independence, I have tried to break down the goal into smaller components and smaller targets, that are easier to accomplish. I have also focused my attention on building a system of achieving my goals, through meticulous savings, investing and patience, while also enjoying the journey along the way.

It is ironic that when I was first starting out, I was infuriating people because my first dividends were about 20 cents/month. I was scoffed at as insignificant. Nowadays, people are infuriated because the amount of dividend income seem high, and they do not believe in themselves enough to think how to get to their financial independence. It is easier to be dismissive of accomplishments, rather than try and figure out for your self how you can get there. Perhaps the lesson for me is that no matter what you do, you should do things to achieve your goals and objectives, and not try to appease everyone. Having an inner scorecard definitely helps. And that helps in the wealth building phase, because you can save much more when you don't spend money on luxury cars, expensive clothes and McMansions, in order to look better to others.

So in order to get to the financial independence, it is important to get started. Then enjoy the journey!

Relevant Articles:

- How to retire in 10 years with dividend stocks
- What are your investment goals?
- The Initial Grind Is The Hardest
- Use these tools within your control to get rich
- The Dividend Crossover Point