Personal blog on investing and financial musings.

Category: Retirement

Dividend Investing

Dividend investing puts a focus on building a portfolio with high quality companies that are paying a regularly growing dividend. The focus is on the cash flow from the dividend rather than stock appreciation. The goal is to create passive income from which one can live off.

In times of dislocation in the markets, the cash flow from dividends can be reinvested in the markets at low prices, it can also act as a psychological stress reliever when you see your portfolio decrease in value.

What are dividends?

A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders.

Wikipedia

A cash dividend is the most common type of dividend, public companies usually pay dividends on a fixed schedule, but may declare a special dividend at any time.

The dividend yield is the ratio of the company’s share price that it pays out in dividends each year. A company with a stock price of $50 and an annual dividend of $2.00 will have a 4.0% dividend yield.

Retirement and the 4% Rule

At some point you start thinking about retiring. You worked hard and have a nice retirement portfolio, now you want to enjoy your time and live life to their fullest. How much can you afford to withdraw from your portfolio each year?

If you spend too much you risk depleting your portfolio, if you spend too little you may not enjoy the retirement you wanted.

The most common advice given to retirees for managing spending and investing during their retirement years is the 4% rule. The rule is based on a 1998 financial study at Trinity University which examined annual withdrawals from a mixed portfolio of stocks and bonds. The study found that a max withdrawal rate of 4% during the first year and then adjusted annually for inflation, was unlikely to deplete the portfolio during a payout period of 30 years.

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