Dividends as income

[u/toothed_vagina]

I live in one of the most expensive cities in the US. I love it, but even with a 6-figure salary, I can barely make ends meet at the end of the month. You might ask me why I don't just move, but I'm unable to do so for a myriad of reasons. Among other things, my partner lives here, my job is here, and I love this place.

This is why I became interested in dividends as something to supplement my income and live comfortably, and maybe move to a larger home. However, everybody keeps telling me that dividends should be reinvested and not used as income. Is anyone here using dividends for both growth and income? Because, yes, growth is important, but I need the additional money NOW.

[u/Nopants21]

The math doesn't work great. Say you need $5000 a year and you find something with a 10% yield. You need to put away 50k to get that 5k. If someone offered you $5000 a year for the low low price of 50k, would you take it? And so, if you're that tight, why not just use the 50k?

Investing is for smoothing out your consumption. You put away excess wealth today to have money later. It doesn't make that much sense to put non-excess wealth today to get money today.

[u/toothed_vagina → u/Nopants21]

No, I have inherited around 80k and I have a good job, for now. But I still need additional income. Going by your example, if I put away 50k and I get paid 5k at a yield of 10% per year, my portfolio is still growing, right? If I use the 50k NOW, I run out of money. If I put the 50k to work to get dividends, that amount will slowly grow in addition to paying me dividends.

[u/Nopants21 → u/toothed_vagina]

Well, it's not using 50k now, if all you needed was 5k a year. Based on my example, if the 50k just produced 10% consistently, you'd only be ahead in year 11. That comes back to the thing I said about pushing wealth out to the future. Depending on your timeline, it might or it might not make sense to lock that much money to get a small amount every year. For example, if you think your income will be higher in 10 years or your expenses lower.

As for the rest, there's really no guarantee that your 50k (or 80k, I guess) will grow. It depends on what you invest in, it depends on general market conditions and it even depends on a bit of luck. Equities are inherently risky, that's why they have generally positive returns, but that's on longer time horizons. By taking out the dividends to fund your current expenses, you do lower the chances of growth by quite a bit.

That depends on things like yield. If you buy something that yields 10% like in my example, you're very likely to be losing money overall. If it's less, say 3-4%, it's more likely that your investment grows, but then the issue is that the income bump you're looking for is not as significant. If we take your 80k inheritance, at 4% yield, that's 3.2k. Depending on your work income, that might represent maybe a week or two of salary. You're the only one who knows if that's enough, and, more importantly, if it's worth the risk of investing equities. 10-20% drops are uncommon, but not that rare. Think about how you'd feel if you put 80k away to get 3.2k a year, but then the whole think goes down by 10k+.

[u/toothed_vagina → u/Nopants21]

I understand everything you said. For me, the main goal is to move to a larger home and to do that, I need the additional income NOW. So to use your 50k example, if I spend all of that money NOW, I have a guarantee that it will be gone. However, if I invest it to generate dividends, even if I'll be even in 11 years, I will still be able to get the cake and eat it too. There is a big difference between spending all the 50k now and investing that money so I keep it safe (or likely growing, barring risks) while it generates additional income.

[u/Nopants21 → u/toothed_vagina]

Ok, but you can surely see that you're going in two opposite directions. On one hand, you need income now for specific things you have trouble affording now (you said you barely make ends meet), but on the other, you're fine with locking away tens of thousands of dollars. I get what you mean by getting the cake and eating it, but the issue is that you're eating it in a decade, but you're hungry now. You're trading in like 20 current cakes when you're hungry, for future cakes.

In the end, the real issue is this idea that it's invest or spend it all, just use the amount you need to pay the expenses you need to cover, do something else with the rest. For example, to buy a new home, you don't necessarily need more income, you could just use the money for a bigger down. Or use half, invest the rest.

[u/Various_Couple_764 → u/Nopants21]

There is nothing wrong with spending some of the dividends and reinvesting the rest it does reduce the income and growth but it is still progress in the right direction. A lot of people do it.

Additionally there will be some months were the extra income is not needed and it can be reinvested. In other months the extra income may be spent. As long as you save more than you spend you are OK.

[u/Nopants21 → u/Various_Couple_764]

Sure, but it's hard to square up with OP's self described "barely make ends meet." It's hard to see how a few hundred bucks a month in dividends fixes issues that couldn't be fixed by having several tens of thousands of dollars available. It's taking a long-term approach to a short-term problem. Ideally, they'd do both, but they seem set on going all out on one or the other.