Using Dividends For Passive Income In Retirement

A Dividend Money Treewritten by Hank Coleman

My father-in-law was a bank executive for over thirty years at a large regional bank in the United States, and he amassed quite a bit of his company’s stock through options over his career. Now, in addition to his pension, he also has quarterly dividends that support him in retirement. That is the beauty of dividends. They are truly a passive income investment in most cases, and they can often help you to get more out of your finite investment resources than other options allowing you to more efficiently save for retirement.

How Much Do You Need?

I used to watch the share price of my father-in-law’s bank like a hawk. It gave me something great to talk to him about when the conversation lagged around the dinner table. I was amazed after a particularly brutal quarter of share price decline when he told me that he did not care because he was not interested in selling his shares. He only wanted the dividend and the security that the payments brought him in retirement. How much do you need in dividend paying stocks to simply live off the dividends during retirement?

Here is a simple example to give you an idea. Let’s say that you originally were earning $50,000 per year. Most financial experts recommend that you need investments that either produce an income or allow you draw them down slowly and provide you with 80% of your pre-retirement income. So, in our example, you would need $40,000 per year or $3,333 per month in retirement. If you owned dividends yielding 5% annually, you would need a nest egg of $800,000 to produce that amount of income. I know that the number sounds big at first glance but please stick with me. It gets better.

Dividends Help You Catch Up With Retirement Savings

One of the best advantages of dividend stocks is that most some have an average annual yield of 5%, most with a dividend yield of 3% to 4%, which is considerably more than government bonds and most other fixed income securities. For example, if you needed to generate $3,333 per month in income from a portfolio of 10-year US Treasuries which currently yield on 2% annually, you would need a portfolio of $2 million to produce that income level. Having dividend paying stocks that yield 5% or better each year just saved you from the need to save $1.2 million over the course of your lifetime. And, of course, things do not look much better when you look at Canadian government 10-year bonds yielding under 2% too, and inflation continues to eat away at fixed income  gains as well. You do not have to take a considerable amount of risk with very high yielding dividend stocks in order to out perform Treasuries. Consistent blue chip dividend paying companies can save you a bundle and significantly reduce your retirement nest egg costs.

How To Get Going If You Are Behind


Okay, so things aren’t quite as bad as they seemed when I first started telling you the numbers. You need to save and invest $800,000 in dividend paying stock instead of $2 million for low earning treasuries in order to earn the passive income needed in retirement to replace your working salary. But, how are you going to get to that magical $800,000 number? Talking about large numbers like this tend to make people’s heads spin, but does not need to be that way. It can be done. Nest egg totals such as this can be reached. Here are a few tips to help you get there.

  • Start as early as possible – Time is the best thing that you have on your side when starting to invest. Starting early allows you do harness the power of compounding interest and dividends.
  • Pay yourself first – Make it a point to set aside money specifically for dividend stocks in your budget and make that a top priority before you pay for other items from your budget.
  • Make your dividend investing automatic – DRIPs are an excellent way to consistently invest each month a specific dollar amount on a set day of the month or even multiple days of each month.
  • Reinvest your dividends – One of the best ways to continue growing the number of shares that you own is by reinvesting the dividends. Historically, reinvested dividends contribute a healthy portion of the stock market’s historic return.
  • Continue to add to your positions – This almost goes without saying, but you should continue to look for new dividend paying stock to invest in when the opportunity arises.

Using these methods will give you the best opportunity to reach the nest egg value that you need in retirement in order to produce passive income through your dividends. While some of these final numbers may seem daunting at first, it can be achieved through diligent planning, sticking to your plan, and continuing to invest to build your dividend paying nest egg.

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22 thoughts on “Using Dividends For Passive Income In Retirement”

  1. This is the ideal way to go…I love the story about your f-i-l’s bank stock. Great illustration of an important point.

    I found when practicing financial planning that getting to the point that you didn’t have to sell down investments to maintain income required a monster nest egg. While it’s ideal, it was difficult to get a client to the point that they could go dividend only without any draw-down.

  2. The only problem with the equation is that the average yield of stocks in no where near 5% currently. The average yield of stocks in the DJIA is 2.85% and S&P stocks are even worse at…2%, the same as 10 year US Treasuries. Even so, I still like the approach of amassing a basket of dividend yielding stocks to help finance your retirement.

  3. I am not sure where you see that most stocks yield 5%. In a lot of stocks that do yield that much can’t sustain that dividend. I like this strategy, and would add that while you need to purchase the stocks the dividend of good companies go up every year or close to it, and you only have to buy the stock once. A stock I buy now may contribute a lot more to my retirement income than it does now.

    • Poor Student – I understand your point, and “most” was a poor choice of words. But, you also can’t lump companies who are yielding above the average as not being able to sustain their high rates. You have companies such as At&T, Nucor, Sysco, and others who are members of the Dividend Aristocrats who have not only maintained their dividends but raised them for the past 25 consecutive years.

    • Poor Student Agreed – see my “Editor’s Note” below. I would be inclined to go 3.5% on the yield measure. However I will tell you it’s a lot easier to get higher yielding stocks in Canada, especially back in the day when Income Trusts were in full bloom – still have a few of those. 😉


  4. Money Infant & Poor Student – You are both right. Using the word “most” was definitely a poor choice. While the the average yield for the S&P 500 as a whole is currnetly right above the 2% mark, there are still some good choices in the index to get you to that 5% mark without betting the farm to get there. There continue to be blue-chip names such as Altria Group, AT&T, Verizon, and others who have consistantly yielded 5% to investors.

  5. And not to forget dividends have a much lower tax rate here in the US than earned income! I don’t think it will last long, but enjoy while it does!

  6. Editor’s Note:

    Sorry guys, I missed the word “most” when I quickly proof-read the article. I’ve changed that word to “some” and, added “most with a dividend yield of 3% to 4%.” It’s grayed out so you can see the change. Hank is that cool with you?

    Here in Canada, dividend yields are generally higher than in the U.S. For example my current portfolio with blue-chip stocks, three high yield stocks, and bond ETFs returns me a yield (not return) of 4.6% per year. You would have a hard time achieving that in the U.S. without taking extra risk.

    I agree with Hank’s premise, dividend stocks are yielding currently higher returns than fixed income securities. Five years from now that might be a different scenario, when interest rates increase and bonds have higher yields.

    However the other point is that dividend stocks over the long term also give you capital appreciation on top of yield. They are great long-term investments for accumulating wealth 🙂


  7. You see this is why I keep coming back. I feel like I learned a bunch and made or saved money in the future. It’s post like these that get me set for financial moves.

    • Jai That’s great! 🙂

      Also be sure to check out that post I wrote on Dividend Income In Retirement (Related Posts section in the post). It’s a great continuation of Hank’s article here!

  8. Good stuff!

    You’ve got one guy right here who definitely plans to live off dividends in retirement, and hopefully by 40 years old. I’m ahead of schedule so far.

    I would agree with posters above. Targeting a 3.5% entry yield, like Ninja said, would be a good starting point. That’s where a lot of the “bread and butter” dividend growth stocks reside, who have a decent entry yield of 3%+ and dividend growth of 7%+ annually. That’s the sweet spot right there.

    Best wishes!

  9. Mantra Thanx for dropping by. 😉 I assure you that you are WAY ahead of schedule!

    I really like the 3.5% to 5% dividend yield area as well. These tend to be the safest and more established companies. I do have a few high yield stocks with 6% to 8% yield, but they are definitely not your typical “set-it-and-forget-it” types of companies. But a few high yield stocks thrown in for good measure, although there is a risk, helps to pull up the overall yield… 😉

    Wanna wade into a YOC debate? just kidding!


  10. Great stuff Hank! (and Ninja!)

    I hope to create a passive income stream of about $30,000 for retirement, that will supplement my pension from work.

    I’m counting on a portfolio yield of about 4%, which should be close to my withdrawal rate. My portfolio yield, in my Canadian stocks, is about 4.2% now. So, hopefully I can live off the pension and dividends, and not drawn down any capital. Dare to dream? 🙂

    I think this could actually happen.

    I totally agree with a) paying yourself first and b) taking advantage of DRIPs and reinvestments as much as possible.

    Money that makes money, makes more money 😉

    Keep up the great work. Will tweet!

    • MOA Great stuff! As our dividend yields are slightly higher here in Canada than the U.S. you won’t have to worry too much about the 4% withdrawal rate. In fact you will probably be able to draw down slightly more than 4% (from dividend income) while keeping the original capital (shares) intact!

      Don’t forget those nice monthly bond distributions as well 🙂

      Andrew Hallam and the Passive Income Earner bring that point to the forefront, that your portfolio is only as good as the income it generates… 😉


  11. In the USA we have funds from Vanguard etc that are dividend stock funds. Do you have something similar in Canada and if so can you give examples?

  12. I am investing in dividend stocks because it is the best source of passive income. You don’t need to do anything, just buy it then you can get dividends when the company wants to give to its shareholders.

    I buy little by little, and I will hold it for a long time.

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