I know at times I may sound like a broken record, but dividends can be a great passive income source. They’re deposited automatically in my brokerage account. By investing in companies that have long track records of raising dividends, you can bet your bottom dollar that my income will only go up over time.
There are many ways to get income from a stock portfolio. One way is to perform a controlled sell off of assets in order to met expenses and maintain a certain lifestyle. For the life of me I don’t understand why a lot of people do this, they must love losing money (Must be wired differently but let me move on!). To get to this point it would involve building a large portfolio over your working years and then drawing down income from the portfolio by selling off stock once you’re retired. Usually the selling would only increase in % terms over time as your expenses rise and as your wealth goes down. So as you age and your expenses keep increasing or stay flat, you are slowly running out of assets with which to meet those responsibilities. This baffles me and I’ll discuss why below. (The Giving Tree)
As a dividend growth investor, I plan not to sell any of my stocks and plan on giving them to my children when I die. By living off only dividend income, my asset base will stay in place and hopefully increase in value over time as the companies paying dividends become more and more valuable.
Sit down and envision your stock portfolio as one large tree. It’s an Apple tree that produces many apples. Think of each branch as a company and each branch produces apples (dividends) at different times of the year. When apples are produced, I can take that apple to expand my garden or provide myself with food (pay bills).
Now let’s compare this to the example above using a safe withdrawal rate and selling off the portfolio slowly. Basically what your doing is selling off your stocks, which would be like chopping off branches whenever you need apples. (The Giving Tree). Instead of just taking the apples from the branch and waiting for another apple to appear, you would be cutting off part of the branch and taking the apple and branch with you. Over time that branch dies and when it dies and disappears you will no longer produce apples from that part of the tree any more. So what do you think happens? You move on to another branch and repeat the process. The problem is that the tree only has so many branches and eventually you are left with a cut up tree that produces nothing! Hence, why you should read the book (The Giving Tree), but please don’t follow that example! HaHa
Since discovering dividend growth investing I have always looked at the Skyy Fund as a tree that produces many apples(dividends) for me. With a well planned dividend growth strategy the apple tree (Skyy Fund) will only get bigger and stronger over time. I want it to produce more apples than me and my wife could ever imagine. That’s the position I want my family to be in and my wife would Love the extra apples!
Live Long & Prosper