Wednesday, June 18, 2025

Most great investors are frugal

I am a big fan of frugality. I believe that frugality is all about the most efficient use of scarce resources. This could mean thinking outside the box in how to be resourceful and get more out of less, without sacrificing quality.

Frugality to me is very well connected with the concept of intelligent investing. In intelligent investing, you are getting a future stream of future cashflows at a bargain price today. This simple concept has made a lot of people very rich. 

You want to avoid overpaying for things. This thought process is applicable whether we are talking about socks or stocks.

I recently stumbled upon a passage from the 2024 Markel Annual report, about the concept of frugality and super-investors. 

Frugality

My friend and accomplished investor, Shelby Davis, once told me about a study of great investors. It sought to identify the principles, qualities, educational backgrounds, training, demographics, or other characteristics linked to future investment performance. The study only found one common characteristic among great investors: they were all frugal. 

We agree. 

That’s why we manage your capital at extraordinarily low costs. The returns we earn flow through to the company's value with minimal friction, which also compounds. Another unheralded, but incredibly important, component of our resilience is the frugality of our tax efficiency. The ability to select securities and hold businesses over long periods defers tax liabilities and compounds your company's value.


Now that I think about it, I could think of several prominent super-investors and business people who are frugal.

The first one is no other but Warren Buffett. He still lives in the same house that he bought in 1958 for $31,500, despite the fact that he is worth north of $100 Billion, and has been one of the world's richest people for over three decades. 

He focuses on what gives him value, and doesn't really focus on ostentatious consumption. 

He doesn't need to buy Gucci bags, or expensive sports cars to appear rich to others. He doesn't care what others think of his wealth. He enjoys it the way he wants, which is what matters to him. He cares about his inner scorecard, and donating as much as possible to charitable causes. 

Buffett also has simple tastes when it comes to food, clothing and cars. He drives a Cadillac that was bought at a discount because it was slightly dented. Big deal, it still took him from point A to point B.

He does care about the most efficient use of resources at Berkshire Hathaway and his life. When he invests money, he makes sure that he can attain a certain annualized rate of return. He asks his businesses to reinvest everything that could be reinvested at this minimum rate of return, and to send back as dividends anything that they cannot reinvest at a good rate of return. He can then reinvest it.

He is also very careful about how he spends his time. He focuses on talking to people he admires, who are in his circle. He also spends time reading and learning, while spending as little time as possible on useless endeavours.

This frugality is all about intelligent and optimal use of the limited resources we have in this world. It is a mindset that drives your entire being. This mindset has helped Buffett be rational in an otherwise irrational world, and take bets that have paid off hugely. He has been able to structure deals and tax scenarios in a creative way so as to reduce tax drag for example. It's all about understanding trade-offs, opportunity costs and decisions that lead to the most optimal outcome all else being equal.

For example, he has sold companies where he didn't believe in the prospects anymore, and paid tax because the forward returns were not as exciting. But he would hold on to other investments while the increase their profits and capital gains, therefore failing to recognize capital gains. His deal to sell Procter & Gamble stock for Duracell business, helped Berkshire defer recognition of capital gains taxes. That's a good example of frugality helping you in deferring taxes. Deferring tax liabilities compounds your value over the long term.

He does understand the power of compounding, which is a magnificent force. The young Buffett often presented compound annual growth tables to his partners, calling them "The Joys of Compounding". The young Buffett understood that each dollar he spent in his early 20s is equivalent to $100 or more by his 70s, assuming a 10% annualized rate of return. In reality, he has outperformed this, but he has been very careful with that. He understands the risk of ruin, and wants to avoid losing money because each dollar today has a very high future value. An example of this thought is his business venture in the 1950s, where he bought a Sinclair gas station. He did lose 20% of his net worth on this venture, which didn't pan out. He does calculate the opportunity cost miss in the tens of billions of dollars on it.

Buffett has done well because he always focused on the best opportunities for his money. His frugality helped him buy great investments at a bargain price, and then patiently compound his fortune for decades. He never cut corners however, which is expensive in the long run. He also always treated his partners and investors ethically and honestly.  He treats his employees fairly as well. For example, his salary at Berkshire Hathaway has been $100,000/year for at least three decades per Berkshire's filings with the SEC. This is a bargain price for one of the world's best capital allocators. He does like to spend time with like-minded individuals he could learn from and whose company he enjoyes. All of this is a great use of time, as that knowledge and relationship builds like compound interest.

But one of my favorite examples of efficient use of resources is the float that Berkshire Hathaway generates from  insurance operations. Float is money received in insurance premiums from customers. Over time, the amount received in premiums is slightly higher than amount the payouts given to customers. That float is stable, and in effect a low cost pool of money that Berkshire could invest at a good rate of return. This in effect provides some leverage to Berkshire that further turbocharges returns. On the other hand one could argue that the deferred capital gains taxes on long-term holdings like Coca-Cola are another type of float, that compounding quietly for Berkshire.

Many rich people understand the compounding aspect and future value, which helps them define and understand opportunity cost. It prevents them from making unnecessary and frivolous outflows of money.

For example, the Shelby Davis that was quotes above managed to turn $50,000 investment in 1947 into a fortunre worth close to $900 Million by the time of his death in 1994. 

He did that through investment in insurance companies that were very cheap at the time. Many had single digit P/E ratios and had high dividend yields. Insurers grew their earnings at a rapid pace. In 1950, insurance companies sold for 4x earnings; 10 years later, they sold for 15x to 20x earnings and their earnings had quadrupled. He refused to overpay for stocks.

He took loans to further magnify his buying power, whose interest rates were much lower than the generous dividends they paid (which grew too). That's an example of understanding the current environment, and taking risks where the benefits outweighted the risks. While I am not a fan of using leverage, if you know what you are doing, it could magnify returns.

Since he had a seat on the New York Stock Exchange, he had access to lower margin rates and could buy more shares on margin because the regulator – the SEC, gave firms more leeway to borrow money than it gave individuals. He utilized the maximum allowable amount of margin (slightly over 50%). The interest payments on his margin were tax deductible (another savings). He did not leverage himself by 5x or 10x. He used a sensible amount of leverage that did not drastically increase his risk, yet significantly increased his returns.

But he didn't really trade in and out of stocks. He bought, and then held for many years, if not decades.

There's a fascinating anecdote about Shelby Davis, written by his grandson Christopher:

Christopher recalls working summers as a teenager at the elder Davis' insurance brokerage firm. The pair were coming back from a meeting of the New York Society of Insurance Analysts, and it was lunchtime. He had forgotten his wallet and asked his grandfather for a dollar to buy a hot dog from a street vendor. The elder Davis replied, "Do you realize that if you took that dollar and invested it at 15%, when you're my age that dollar would be worth $1,000?"

"I learned three lessons from that," says Christopher Davis. "The power of compound interest, the importance of not overpaying and not to forget my wallet."


That's a great summary of opportunity costs and trade-offs in one anecdote really. 

Another example is Jack Bogle, the man who saved investors billions of dollars in fees, as he popularized low cost mutual funds for the masses. He correctly saw that most of Wall Street adds zero value. However, it does cost ordinary investors a lot in fees each year. Those fees also tend to compound too, working against the balances of ordinary investors. The higher the fees, the less money ordinary investors have working for them. The lower the fees, the more money ordinary investors have working for them. Fees matter.

My other example is Sam Walton, the founder of Wal Mart stores. His frugality was on display in the mid 1980s, when he was spotted driving an ordinary Ford truck. This was not a vehicle that a billionaire was supposed to be driving. But Sam Walton didn't care. All he needed was a truck to have his dogs in, not a Rolls Royce.

This mindset helped him use resources efficiently on a scale, to eventually overcome other more powerful retail adversaries. For example, he managed to focus on fast selling items at his stores to the point where he would receive the cash for the items from customers, before the invoice to his supplier was due. This in effect created float for him, that could help further expand operations.

My last example is Ingvar Kamprad, thee founder of Ikea. He was worth $60 billion at the time of his death in 2018. I read an article about him, which discussed some of his frugal habits. For example, he drove a 1993 Volvo for about two decades. He flew coach, and purchased clother from flea markets. My favorite one was that he got his haircut when he traveled to cheaper countries. It makes sense that a haircut will cost more in Amsterdam than say Vietnam.

This may sound weird to the ordinary person out there. To me it shows a person who understand the value of each kroner (the Swedish currency). If you are careful with one kroner, you would be careful with billions of kroner. His frugality mindset had him go in overdrive in his effort to cut taxes on his company, and also to obtain tax residency that was the most advantageous to him. This saved tens of billions in income and estate taxes over his lifetime. Definitely a great example of how taking care of the little money you have at the beginning gives you the training to be able to take care of the money that comes later with compounding...

Unfortunately, most individuals today do not think this way. To the average person out there, being a millionaire translates to spending a million dollars. This is the opposite of having a million dollars.

Instead, that million dollars (or more) is a tool to help you live life on your own terms, aka own your freedom. Money gives options in life, which can help you design the life to your values.

The point is that those small trade-offs and opportunity costs compound over time. Over time as well, those frugal trade-offs become second nature as well.

The proverbial "latte factor" is a great example of this tendency of intelligent frugality. 

A $5 spent on coffee does not seem like a big amount on it's own. However, if you do this every day, over the course of an year, that translates to $1,830. If you do this over the course of a lifetime, and if you add in a reasonable return of 7%/year, that little habit could turn to hundreds of thousands of dollars over a 40 year time span.

It's $365,332.25 to be exact, but who's counting?

That doesn't mean not to enjoy your coffee, if it is really THAT IMPORTANT to you.

It is more of an example of a mindset that weighs each decision carefully, thinking through trade-offs, and understanding the opportunity cost of that decision. 

If you do that over a lifetime, the end results will follow.

That mindset of efficient use of resources that is trained on a small decision, is easily usable with large decisions as well.

A few questions that have been helpful for me are listed below:

Should I buy the largest house just because I was approved for the largest mortgage, or should I perhaps buy a more economical house that fits my needs? Or perhaps, should I rent for a few more years at a place with a lower cost of living? (remore jobs can help tremendously there, especially with geographic arbitrage of working remotely in a HCOL JOB but living in a LCOL area)

Should I buy an expensive shiny new car right after college or should I use a more economical car that does the same job?

Should I go to a college that I could afford with working or should I take high loans at an expensive college?

What steps can I make to minimize tax drag and commissions/fees on my investments? What investment strategy would provide the best outcomes for me in the long run?

Should I invest in a quality company at 50 times forward earnings and a dividend yield of 0.50% or should I invest in a quality company at 20 times forward earnings and a dividend yield of 2%?


All of this makes perfect sense to me.

It doesn't matter how much money I earn, but how much I get to keep, and how much I end up having compounding for me. 

There are lessons in personal finance, and getting the first dollar to work for me, while keeping as much as I can working for me. There are also lessons in finding the right stewards for my capital. These frugal type individuals build wealth. If you can identify such an individual early on, you can theoretically do well. Provided you hang on for the ride of course.

Frugality helps build wealth. It then helps compound and keep it.

Most great investors are frugal indeed.

Monday, June 16, 2025

Seven Dividend Growth Companies Raising Dividends Last Week

I review the list of dividend increases each week, as part of my monitoring process. I follow this process in order to monitor existing investments and to potentially identify companies for further research. I focus on quality companies with consistent cashflows, which can be purchased at attractive valuations, which I can then buy and hold forever. These are the types of long-term investments that can deliver rising dividends for decades, while also delivering dependable returns in the process.

This exercise also shows the data points I use in my quick evaluation of a company. This helps me determine if I want to proceed in analyzing a company for potential investment or not. Typically, a promising fundamental development, such as increasing earnings, a sustainable payout ratio and a track record of consistent dividend increases would place a company on my list for further research. I review the growth in earnings and dividends over the past decade, in order to evaluate the likelihood of them continuing their steady march upwards. I also look at valuation together with fundamental performance. 

If a company is attractively valued, that's definitely great and increases the chances of it becoming a part of my portfolio, if my analysis doesn't raise any red flags. Even if the company seems overvalued today, I would still review it, in order to be ready to act if it ever becomes cheaper.

Over the past week, there were seven companies that have managed to increase dividends for at least a decade, AND also increased dividends last week. The companies include: 


Casey's General Stores, Inc. (CASY) operates convenience stores under the Casey's and Casey’s General Store names. Its stores offer pizza, donuts, breakfast items, and sandwiches; and tobacco and nicotine products. 

The company increased quarterly dividends by 14% to $0.57/share. This is the 26th consecutive annual dividend increase for this dividend champion. Over the past decade the company has managed to increase dividends at an annualized rate of 9.60%.

The company managed to grow earnings from $5.79/share in 2016 to $14.72/share in 2025.

The company is expected to earn $15.93/share in 2026.

The stock sells for 31.80 times forward earnings and yields 0.40%.


Caterpillar Inc. (CAT) manufactures and sells construction and mining equipment, off-highway diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives in the United States and internationally.

The company raised quarterly dividend by 7.10% to $1.51/share. This is the 31st consecutive annual dividend increase for this dividend aristocrat. Over the past decade, the company has managed to increase dividends at an annualized rate of 7.25%. 

Between 2015 and 2024, the company managed to grow earnings from $4.23/share to $22.17/share.

The company is expected to earn $18.70/share in 2025.

The stock sells for 19.30 times forward earnings and yields 1.56%.



HEICO Corporation (HEI) designs, manufactures, and sells aerospace, defense, and electronic related products and services in the United States and internationally. It operates in two segments Flight Support Group (FSG) and Electronic Technologies Group (ETG).

The company raised its semi-annual dividend by 9.10% to $0.12/share. This is the 18th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 13.10%.

Between 2015 and 2024, the company managed to grow earnings from $1.02/share to $3.71/share.

The company is expected to earn $4.58/share in 2025.

The stock sells for 66.40 times forward earnings and yields 0.08%


National Fuel Gas Company (NFG) operates as a diversified energy company. It operates through four segments: Exploration and Production, Pipeline and Storage, Gathering, and Utility.

The company raised quarterly dividends by 3.90% to $0.535/share. This dividend king has increased its annual dividend for 55 straight years. During the past decade the company has managed to increase dividends at an annualized rate of 2.95%.

Between 2015 and 2024 the company managed to grow earnings from a loss of $4.50 to a profit of $0.84/share. 

The company is expected to earn $6.90/share in 2025. It's trend in earnings per share is not very consistent, but a little volatile.

The stock sells for 12.19 times forward earnings and yields 2.45%.


Target Corporation (TGT) operates as a general merchandise retailer in the United States.

The company raised quarterly dividends by 1.80% to $1.14/share. This is the 54th consecutive year of annual dividend increases for this dividend king. Over the past decade it has managed to grow dividends at an annualized rate of 7.97%. 

Between 2015 and 2024, the company has managed to grow earnings from $5.36/share to $8.89/share.

The company is expected to earn $7.36/share in 2025.

The stock sells for 13.50 times forward earnings and yields 4.51%.


Realty Income (O) is a Real Estate Investment Trust which invests in triple-net properties in the US and Europe.

The REIT raised its monthly dividends to $0.2690/share. This is a 2.28% increase over the dividend paid during the same time last year. Realty Income is a dividend aristocrat which has increased dividends every single years since its IPO in 1994. Over the past decade, Realty Income has managed to grow dividends at an annualized rate of 3.96%.

The company managed to grow FFO from $2.77/share in 2015 to $4.01/share in 2024.

Realty Income is expected to generate $4.26/share in FFO in 2025.

The REIT sells for 13.60 times forward FFO and yields 5.50%.


W. R. Berkley Corporation (WRB), an insurance holding company, operates as a commercial line writer worldwide. The company operates in two segments, Insurance, and Reinsurance & Monoline Excess. 

The company raised quarterly dividends by 12.50% to $0.09/share. This is the 24st consecutive annual dividend increase for this dividend achiever. Over the past decade, the company managed to grow dividends at an annualized rate of 9.39%.

Between 2015 and 2024 the company managed to grow earnings from $1.20/share to $4.39/share.

The company is expected to generate $4.31/share in 2025.

The stock sells for 17.11 times forward earnings and yields 1.45%.


Thursday, June 12, 2025

Average and Median Net Worth by Age

Do you ever wonder how your net worth compares to others in your age group? Do you ever wonder if you are ahead or behind? Do you also ever wonder how to build wealth?

Well I recently obtained a table that shows the average and median net worth by age. The table was compiled using data from the Federal Reserve survey of consumer finances.


Let's describe what some of those terms mean,

In statistics, the median is the middle number in a sorted list of numbers. It represents the point where half of the values are above and half are below. Essentially, it's the midpoint of a dataset. 

"Average" typically refers to the arithmetic mean, which is calculated by adding all the numbers in a set and then dividing that sum by the total number of values in the set.

The fun part is that an average can be pulled up by outliers. For example, if I am a 94 year old with a net worth of $0 and I am joined by Warren Buffett, whose net worth is $152 Billion, the average net worth is going to be $76 Billion between the two of us.

If Buffett is joined by several folks in their 90s however, the mid point is going to be $293,322. This means that half of those in their 90s will have a net worth below $293,322, while the other half will have a net worth above $293,322.

The fascinating part is how a few wealthy folks (the outliers) can really pull the average net worth numbers up. However it is somewhat saddening that the median net worth figures are so low for the US population.

Most folks in the US simply do not have a high net worth to begin with. 

This is due to a combination of low income, high cost of living and emergencies that could sink finances in an instant. 

On the other hand, many folks in their 70s, 80s, 90s have pension and/or Social Security income, which has a "value" but is not really reflective in this statement of net worth.

For younger folks, it is understandable that their net worth would be low in their 20s or even 30s. That's when you are starting in your careers, and building out your worth from a low point. For many, they also have to overcome the negative burden of student loans as well.

I will be honest with you, when I read this table, I see it as an inspiration to build wealth.

I see it as an inspiration to convert a portion of paycheck on a regular basis into a portfolio of dividend growth stocks.

The initial grind is hard, as you need to invest in your human capital first, and then start to monetize that with your first job after college.

As a younger person, your biggest asset is time.

Assuming a 7% real total return annualized, a dollar invested in your 20s would turn to almost $30 in 50 years. 

But that same dollar would only turn to almost $2 in a decade.

It would turn to almost $4 in two decades.

It would turn to $7.50 in three decades.

It would turn to almost $15 in four decades.

Remember those are "real" dollars, as in "inflation adjusted".

As for taxes, there are handy retirement accounts to defer or eliminate them (Roth IRA).


If you manage income and expenses well, you can probably afford to have a decent savings rate right off the bat. If you can live like a college student, even after your first job for a few years at least, you can soak up a lot in savings. Those can be a nice emergency fund to fall back on in case things happen. It can also be a nice nest egg that would compound for a long period of time for you too.

As a general rule, the earlier you start investing, the more time you have to compound those investments. 

The latter you start investing ,the less time you have to compound those investments.

So it's important to start early, as this story demonstrates.

Your savings rate matters a lot. To get to it one needs to manage BOTH income AND expenses. A high income alone won't help you if you spend all of it. Being super frugal alone on a low income also won't help you because you have less to work with, and certain fixed costs are unavoidable. Hence you need to manage BOTH.  Your savings rate matters.

The best game in town is to generate a good salary/income in a lower cost of living area. For example, making $250,000 in New York City or Silicon Valley may sound great, until you pay half of it on rent. On the other hand, while earning $100,000 in Saint Louis may sound like a lower income than the coasts, you may be able to save more as your rent/housing may be lower too. The major expense categories include housing, food, transportation + taxes as well.

Getting to your first $100,000 is the hardest, as it requires being smart with your money.

A higher savings rate can help you reach your goals and objectives faster. A lower savings rate can mean that it takes you longer to reach your goals and objectives. The math behind early retirement is simple.

If you save 70% of your income, invest in dividend paying companies yielding 3% and growing earnings, dividends and share prices at a real rate of 4% per year, you will be able to retire in approximately 10 years.

If you only save 50% of income, you will be able to retire in 17 years.

At a 40% savings rate, it takes 21 - 22 years to reach the dividend crossover point. The dividend crossover point is the point at which your dividends exceed expenses.

If you only manage to save 30% per year, you will be able to retire in 27 years.



This chart shows how long it would take for the investment income to exceed the amount of spending, given the return, the dividend growth, dividend reinvestment and savings assumptions.

For example if you earn $10,000/month, and you spend $5,000/month, you would be able to save and invest $5,000/month. This is a 50% savings rate. At the conservative return assumptions above, you would be able to retire in about 17 years. That’s when the portfolio would be generating $5,000/month in dividends.

The savings rate is very important. Getting to the right savings rate means focusing on managing BOTH spending AND income. That’s the fuel before we even discuss the investment strategy.

You can view the spreadsheet behind the calculations from this link. You can download it, and play with your own assumptions.

I assume a “real salary” that does merely keep up with inflation, and investment returns that are also “real” and therefore are after inflation. I also am ignoring the effect of taxes on investment income, since everyone’s taxes are different, and I didn’t want to complicate too much this simple truth. More complications are probably going to confuse people, rather than make it clear for them. I am also assuming that this investment income is the only income to provide the essentials for a basic retirement income. In most situations, a person would have pension income and social security income or even some part time job income to rely upon, when they retire. For those who strive to retire early, it is quite possible that they will exclusively rely on the income produced from their investments.

Also note that as with other models, there is linearity assumed in terms of savings rate each month, investment returns each month etc. In reality, real life does tend to be lumpier. While a model has its limitations, it still tends to showcase and illustrate a mental model rather well.

Accumulating income generating assets takes time. But once you reach a certain inflection point, the power of compounding starts doing the heavy lifting for you. 

The power of compounding is fascinating. The human mind cannot really comprehend it easily. But if you did the right thing early on, and accumulated wealth wisely, your future self would be happy for it. Your family would be taken care of too.

Today we learned about the key ingredients that would help you build wealth. It is a simple function of how much you save (As a percentage of income), your holding period and your rate of return (dividend yield + dividend growth).

Once you get the basics covered, all it takes is to invest consistently, and let the power of compounding do the heavy lifting for you.

Monday, June 9, 2025

Two Dividend Achievers Increasing Dividends Last Week

I review the list of dividend increases every week as part of my monitoring process. This exercise helps me stay in shape, and abreast on what's happening accross the dividend growth investing universe. 

I typically focus on companies that have managed to grow dividends for at least a decade. This requirement weeds out a lot of dividend growth hopefuls that never quite make it to the finish line either due to business model and/or state of the economy.

Over the past week, there were two companies that raised dividends to shareholders. Both companies have managed to increase dividends for at least a decade: 

Oil-Dri Corporation of America (ODC) develops, manufactures, and markets sorbent products in the United States and internationally. It operates in two segments, Retail and Wholesale Products Group, and Business to Business Products Group. 

The company increased its quarterly dividends by 16.10% to $0.18/share. This marks the 22nd consecutive year of dividend growth for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 4.48%.

Between 2015 and 2024, the company managed to grow earnings from $0.80/share to $2.72/share.

The company is expected to earn $3.13/share in 2025.

The stock sells for 16.12 times earnings and yields 1.31%.


UnitedHealth Group Incorporated (UNH) operates as a health care company in the United States and internationally. The company operates through four segments: UnitedHealthcare, Optum Health, Optum Insight, and Optum Rx.

The company raised its quarterly dividend by 5.20% to $2.21/share. This is the 16th year of consecutive annual dividend increases for this dividend achiever. It's also the slowest raise in the quarterly dividend ever. Over the past decade, the company has managed to raise its dividend at an annualized rate of 18.80%.

Between 2015 and 2024, the company has managed to grow earnings from $6.10/share to $15.64/share.

The company is expected to earn $22.59/share in 2025.

The stock sells for 13.10 times forward earnings and yields 2.91%,


Relevant Articles:

- Four Dividend Growth Companies Increasing Dividends Last Week




Thursday, June 5, 2025

Warren Buffett on Living Off Dividends In Retirement

I am a big fan of Warren Buffett, the Oracle of Omaha. His letters to shareholders are an excellent resource for students of value investing. I've studied his strategy, investments and his work, and believe that Warren Buffett is a Dividend Growth Investor in disguise.

I am also a big fan of Dividend Growth Investing. The goal of every Dividend Growth Investor is to generate enough in dividend income to pay for their expenses in retirement. To get there you save and invest consistently in quality dividend growth companies that sell at attractive valuations. The next step is to keep at it, and also patiently let the power of compounding do the heavy lifting for you. It takes time to build this portfolio, brick by brick, but once you reach critical mass, the power of compounding is very visible. With dividend growth on top of regular dividend reinvestment and regular investment and after giving it some time, that dividend income and net worth goes in turbocharged mode.

I like the concept of Dividend Growth Investing when it comes to investing for retirement. The investor builds a diversified portfolio by investing regularly, reinvests those dividends until their dividend income covers expenses. At that point, they can retire. 

I recently saw an interesting video clip of Warren Buffett, which discussed how he would invest if he were retired.

You can read the transcript below:

"Warren Buffett: If I were retired, I had a million-dollar portfolio of stocks paying me $30,000 a year in dividends. my children were grown and the house was paid off, I wouldn’t worry too much about having a lot of cash around."




I love this video because it is short and to the point. 

A million dollar portfolio could be built today to generate $30,000 in annual dividend income quite easily. If history is any guide, that income would likely grow at or above the rate of inflation over time, thus preserving the purchasing power of that income. In addition, as the dividend grow, it's very likely that the value of the portfolio would grow over time as well. This in effect would also help protect purchasing power of principal as well.

The concept of living off dividends in retirement is a very powerful one. It's also very simple. When the amount of dividend income generated by your portfolio covers your expenses, you can retire. I use the rule of 3% to determine how much money I need to accumulate to cover expenses. This means that I need to have roughly 33 times the amount of money accumulated for each dollar I plan to spend in retirement. In other words, if I spend $30,000/year, I need roughly $1 Million invested at 3%. If I need $100,000/year, I need to accumulate around $3.3 Million in income generating assets.

Getting to the million dollar portfolio of course requires time, patience, perseverance and consistency. I would think that a long-term investor can get there in a reasonable amount of time. Getting there is a function of the the dividend yield, dividend growth, amount invested and time you invest for (assuming of course that the investor keeps costs low in the process as well).

For example, someone who invests $30,000/year in a portfolio of dividend growth stocks yielding 3% and growing dividends at 6%/year annualized, would be able to generate about $30,000 in annual dividend income withing 15 years or so. If that investor keeps investing for 22 years, the total amount of dividend income would reach $60,000/year. You may like this spreadsheet to play with assumption.

However, if they can only invest roughly $1,250/month, it would take about 22 years to reach $30,000 in annual dividend income. At a 3% average dividend yield, this translates into a portfolio worth $1 Million.

The other part I liked about the video is the discussion around owning your home and being in a phase of life where your children are grown up and on their own. 

At a certain point in life you may either have your house paid off, and/or you are ready to downsize, which reduces housing costs. That in itself reduces amount of investable assets that are needed to produce income for you. If your housing cost is $30,000/year on top of every other expense you have, you need an additional $1 Million in retirement assets (dividend stocks/401k etc). But if you can reduce that amount to say $15,000, then you need less in retirement assets to support this part of your budget.

If your kids are grown up and on their own, that further reduces ongoing costs as well. Of course, the retired couple may have higher discretionary expenses related to travel, and helping out with grandchildren or helping children as well. But the necessary costs have definitely been reduced, as discretionary costs could be reduced somewhat more easily than necessary ones. You need to eat even during a recession, but that trip to Paris could wait another season or another year.

Of course, the other thing to consider is other income sources in retirement. If you plan to retire at the traditional age in your early 60s, you may also be eligible for social security in the US or a traditional pension plan. If you spend $30,000/year in retirement, but also generate $1,000/month in Social Security, you actually need only $18,000/year in dividends to cover the shortfall. That means that you only need $600,000 portfolio, rather than thee $1 Million one. Of course, if you do not plan to start your Social Security until the age of 70 or you plan to retire much earlier, then you would likely need that full $1 Million in income producing assets, before you can retire early.



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