I am a long-term dividend growth investor. My focus is primarily on stocks and ETFs that pay a dividend that yields between 3 and 4 percent. I prefer value companies that not just pay a steady dividend but also increase the dividend each year. Some of my favorites are the Dividend Aristocrats. These are companies that have increased dividends over the past 30 years. For more details about dividend investing look at my post Dividend Income Investing.
Over the years I have purchased shares in Coca-Cola, Exxon Mobil, Proctor & Gamble, Home Depot, ATT, and numerous dividend-paying ETFs. My hope is that all combined I could earn enough dividends to pay for my monthly expenses. For example, if I had a million-dollar portfolio then I could earn nearly 35 to 40 thousand a year in just dividends. If I needed more then I could use the 4% rule and sell shares to cover what is left of my budget.
The 4% rule is used by a lot of financial people to determine how much you can draw down a portfolio on a yearly basis. It is not a hard rule. To keep it simple if you want the portfolio to last 30 years you can use 4%. The math works like this. You can withdraw 4% of your portfolio each year adjusted for inflation . Meaning if you had 1 million in retirement savings you can liquidate and spend 4% or $40,000 each year.
Back in 2021 the rule was changed to be higher than 4%. Researchers applied historical data and it was found that a significant percentage of people’s money survived the 30 years and continued to grow. Due to recent inflation some have adjusted the percentage downward. Currently, different analysts are suggesting withdrawal rates between 3 – 5%. Each person’s situation is different I suggest you try different rates to determine what works best for you. Here is a great calculator if you would like to give it a try. Four Percent Calculator
Let me give you a real-time example. I currently need about $5,000 a month to live. With a 1 million portfolio I would only need another $1,500 each month. That is if I only earn $3,500 monthly in dividends. Meaning I would need to liquidate around $18,000 each year or $1,500 monthly. This would be 1.8% instead of 4%. If you apply this low percentage, the money will never run out and would increase and you would leave a huge inheritance to your children. Actually, I could withdraw more like 3% and still never run out of money. I am not a big spender, so it is easy for me to live on a budget. At times I must push myself to spend more and enjoy myself.
My goal is to add more dividend-paying stocks to my portfolio over time. I typically collect cash and try to pick up the stocks or ETFs at discounted prices. Which has gotten a bit easier due to the bear market. My hope is after another 7 years or so I will have a million in my portfolio and can completely retire. Another useful rule is the rule of 72. If you divide 72 by the number of years you want something to double then you can get the interest rate. In my case, I would need a yearly return of 10.28% for my current portfolio of just over $500k to double. At which time I would have enough to live off my dividends and I would only need to liquidate a small amount each year.
In order to make accurate calculations it is important to have a clear understanding of your monthly expenses. I use a spreadsheet that I adjust every quarter to determine what my expenses are. I mentioned $5,000 a month but this is a rounded amount to keep things simple. The more accurate amount is $4,939. I strongly encourage you to figure out what you need monthly and use it in your calculations. If you want to learn more here is a video I did on the 4% percent rule and budgeting.
At this point, I am not discussing how options trading will impact my plans. I feel it is important to have a good understanding of income investing before jumping into options trading. A lot of people prefer to stick to this kind of plan and never add options trading. Sticking to just income investing is perfectly fine. However, I have found a way to sell options and significantly improve when and how I can retire. Also, I have been able to do this with safe strategies that limit my risk. If you want to learn the safest strategy take a look at Lesson 2 – Getting started Trading Options (Sell a Covered Call). Lesson 2 walks you through the best way to get started. In short, jump in and sell your first Covered Call.
Thanks for tuning in!
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