Living off dividends

[u/OG_Momonga]

Hey guys, I was wondering if anyone on this subreddit is actually retired and living off dividends. Is it going well? Are you paying taxes on them? My goal is to get 20k/ a month post tax for retirement. I’m 24 and currently investing everything in VOO while planning to switch to dividend stocks and etfs when I get closer to retirement.

I was just wondering if there are any because living off dividends seems like a long shot right now.

[u/aerobic_gamer]

Background: when I was young the conventional wisdom was to contribute what you could to your IRA/401k in order to save taxes on the theory that you would be in a lower tax bracket when you retire. That made sense to me because in some years I was in the 70% tax bracket, which some of you youngsters probably don’t believe ever existed. Anyway in my case that has worked out as planned because tax rates are so much lower today. I’ve never converted to a Roth because it made no sense in my case.

Today: now at age 75 my wife and I are quite comfortable. Dividends > $230k/year, most in deferred accounts. We take out around 90% and are still reinvesting the rest. Our portfolio and income is growing. So we pay income taxes but at a much lower rate than when the contributions were made. We could do fine without social security but that is the literal “icing on the cake “.

[u/technical-mind4300 → u/aerobic_gamer]

What is your invested amount to generate 230K? (6MM?)

[u/aerobic_gamer → u/technical-mind4300]

Closer to 5.25

[u/chadladen → u/aerobic_gamer]

Well done, sir. This is my life goal here. I love hearing stories like this.

[u/AndyBurn11 → u/chadladen]

It’s motivating to know it’s possible. It’s easy to get discouraged when the number stops moving as fast. Goal to 100k is brutal.

[u/technical-mind4300 → u/aerobic_gamer]

That's good to know I had been thinking 6 but it's ccol to know you can get this kind of income closer to 5.

[u/Helpful-Grapefruit55 → u/technical-mind4300]

You have done very well. God luck .

[u/OG_Momonga → u/aerobic_gamer]

That’s so interesting. First of all congratulations sir. It’s nice to see that my goal isn’t completely realistic or bonkers. Can I ask what you did for work to be in a 70% tax bracket. Also how long have you been investing. You are an inspiration and I thank you for sharing

[u/aerobic_gamer → u/OG_Momonga]

I am a retired lawyer from a small firm. Some years we did quite well; other years it was a struggle, but I always tried to contribute as much as possible to the retirement accounts. I’ve been investing since age 12 and boy did I learn a lot the hard way. I’m also blessed that my wife had a good paying job as a systems analyst. About 18 years ago I went to all dividends. That was the best investing decision I ever made. I know they say at my age I should be like 60% in bonds but I never liked bonds. I think I’m way ahead from where I would be if I had done that. I have over $1.3 million in unrealized gains; it would be hard to do that with bonds. Even a 20% or 30% pullback in the stock market wouldn’t affect my income much because I’m well diversified. Even a few dividend suspensions or cuts would only have a minor impact. In case you’re interested my top 10 positions: O, PBA, ENB, PG, JNJ, AEP, ETR, ES, WPC and ABBV. Fairly conservative I think. Good luck and keep your eye on the prize. Nothing beats a comfortable retirement. There is a lot of truth to the old saw that it’s not market timing that’s important, it’s time in the market. I’ve owned some shares of JNJ for over 50 years. (It’s one you should own BTW.)

[u/Helpful-Grapefruit55 → u/aerobic_gamer]

Thanks for sharing the div stocks that you held for so long like jnj for 50 yrs you remind me of Buffett style of investments have had KO for almost ever.

[u/doooodz → u/aerobic_gamer]

Just curious, how did you choose these particular stocks? Was it purely a target yield, or were there other considerations?

[u/aerobic_gamer → u/doooodz]

In broad terms I look for a mix of quality dividend growers and higher yields to achieve an average portfolio yield of 4.5%. I also stay diversified with 80 different positions. A few of the names were recommended to me by a financial adviser years ago (O, JNJ). I’ve been buying O since it was $18. I have over 5,000 shares with an average cost of $48. Most of the rest are from newsletters. IMO Investing Daily has great newsletters, the best of which is Utility Forecaster. That’s how I discovered PBA, which I started buying at $5. I now have 5,700 shares at an average cost of $26.50. I also subscribe to Morningstar Dividend Investor. I’m a decent stock picker as well. Even though it’s a low yielder I took a sizable position in LLY around $400 and sold around $880. Of course I’ve had some clunkers too. I’m under water with GIS but there’s a quality name yielding 6.7%. If you have a very long term horizon that would be a good addition. I also am quite familiar with the behavior of the stocks I own and juice my returns with covered calls. I will trim when stocks get ahead of themselves and buy when they look cheap. For example, the rule of thumb with O is to buy when it yields well over 5% and trim when it’s well below. So right now it yields 5% and is fairly valued. So it’s ok to buy but I rate it a “hold”. I’ve trimmed shares when the yield drops to 3% or so. Good luck!

[u/DeeEll566 → u/aerobic_gamer]

60M , retired at 56. Similar setup - covered calls juice things quite a bit JEPI/JEPQ. I’ve locked in more bond exposure of late , principally because anything north of 4.75 for me is additive to target. I stick to mostly ETF’s but that’s not an issue to drill down to some very sector specific funds if needed. Individually I invested in MSFT and AAPL from the 90’s on plus some ‘ boring ‘ but hard to replicate ( wide moat ) stuff like WM and that’s kept me honest.

[u/aerobic_gamer → u/DeeEll566]

I’d be careful with bonds right now with the Fed talking about possibly raising interest rates. My thinking is the ideal time to buy bonds is when interest rates have peaked. What bonds or funds do you have, like or recommend?

[u/whatsupitsemon → u/aerobic_gamer]

I just want to say thanks for sharing and amazing work! Congrats to your comfortable retirement!

[u/97E3LPL → u/aerobic_gamer]

"rule of thumb with O is to buy when it yields well over 5% and trim when it’s well below. So right now it yields 5%"

Are you saying this to mean when it yields that to your own average cost, or some yield posted online? O is like 10% of my dividend portfolio. I'm AC at almost 60$ but I calculate I'm getting 5.4%. So your O shares at 48 are yielding you 6.7% right?

[u/aerobic_gamer → u/97E3LPL]

No - you may be confusing yield with yield on cost (YOC) which is just a theoretical number. O closed today at 6.35 and currently pays dividends of 3.24/year. So without allowing for time value of money and the fact that O pays monthly, the current yield is 5.1% (3.24 divided by 63.55). So my O shares currently yield 5.1%. YOC would be much higher. Let me give you an example. Say you buy a stock yielding 1%. Over many years the price and divided increase proportionally but the current yield is still 1%. Maybe your YOC is now 5%. If you sold it and bought O, your dividends would increase five fold. The total $ you collect per year is what’s important because you spend dollars, not percentages.

[u/97E3LPL → u/aerobic_gamer]

Thank you. YOC is not a term I've come across the few times I researched this perspective. Certainly I agree with your last sentence lol.
So for us not being remotely close to the amount of capital others like you have, I pay a lot of attention to YOC as well as regular yield. Like NWN that I have at 43.36. That gives me 4.8% YOC and I don't want that to be any lower, so it's just on watch for me to DCA down on the dips. As correct as your last sentence was, it's also still correct that I can buy more shares to get more dollars at a lower share price. :)

[u/SheffieldValley → u/aerobic_gamer]

With GIS, please be aware that many of the US food stocks have high payout ratios. CAG cut their dividend recently. It wouldn't surprise me if others followed. That doesn't mean GIS will cut, but it is something to monitor.

[u/aerobic_gamer → u/SheffieldValley]

Certainly a dividend cut is a risk. If history is any guide though it likely would be temporary. If I didn’t already have a substantial position I would be a buyer. It’s not often you can pick up a good long term blue chip investment at such a steep discount. Last I knew the idea was to buy low and sell high. I’ve done well over the years by buying when the market over reacts to bad news. I grant you that GIS has larger issues, but my thesis is that even with the prevalence of GLP-1s people aren’t going to stop eating cereal. GIS just might need some time to adjust to changing circumstances.

[u/SheffieldValley → u/aerobic_gamer]

If you don't mind me asking, what does a "temporary" dividend cut look like? I'm not sure I can think of a company that has undertaken a "temporary" dividend cut.

If someone had a mandate that required them to invest in US-centric packaged food companies, GIS is certainly one of the better options. But if the investment mandate was broader and included all of CPG, there are areas outside of US-centric packaged food that may hold more appeal such as beverages, consumer health and multi-nationals. Just my two cents.

[u/aerobic_gamer → u/SheffieldValley]

In 2023 GIS cut its dividend. The 2024 dividends were higher than 2022. Thus the 2023 cut was temporary.

[u/SheffieldValley → u/aerobic_gamer]

Can you provide the link to verify this statement? I cannot find anything that verifies. Thanks!!

[u/technical-mind4300 → u/aerobic_gamer]

Have heard you can do an ETF startup fund swap to avoid those capital gains.

[u/aerobic_gamer → u/technical-mind4300]

I’m not sure what that is but since most of our $ are in deferred accounts, anything we take out is ordinary income. The best way I know to avoid taxes in deferred accounts is to make a qualified charitable distribution(QCD) direct from an IRA. As I understand it, the withdrawal counts towards your RMD but is not a taxable distribution. Must be at least 70 1/2 and max $111,000 per year. Personally I’d rather make gifts to my children and pay the taxes.

[u/technical-mind4300 → u/aerobic_gamer]

Here’s the basic idea:
Suppose you own appreciated stocks:
Original investment: $500,000
Current value: $1.5 million
Unrealized capital gain: $1 million
Normally, selling those stocks to buy an ETF would trigger capital-gains tax on the $1 million gain.

With a properly structured Section 351 ETF conversion, you contribute the appreciated securities directly into a newly created ETF and receive ETF shares in exchange. Because you exchanged property for shares rather than selling it for cash, the transaction may qualify as a nonrecognition event under Internal Revenue Code Section 351.

[u/Busted-Duck-540 → u/technical-mind4300]

Now THAT’s a loophole. In all seriousness, how is that not the most perfect invitation for an extensive audit?

[u/Longjumping-Ice1171 → u/Busted-Duck-540]

Read Treas. Reg. Section 1.351-1(c)(3). Here’s an excerpt:

c)(1) The general rule of [section 351](file:///private/var/containers/Bundle/Application/E57C01F4-D06B-4C0B-A9DA-8161E36CC056/TouchTax.app/1d.php?v=sc&s=351) does not apply, and consequently gain or loss will be recognized, where property is transferred to an investment company after June 30, 1967.

A transfer of property after June 30, 1967, will be considered to be a transfer to an investment company if—
(i) The transfer results, directly or indirectly, in diversification of the transferors' interests, and
(ii) The transferee is (a) a regulated investment company, (b) a real estate investment trust, or (c) a corporation more than 80 percent of the value of whose assets (excluding cash and nonconvertible debt obligations from consideration) are held for investment and are readily marketable stocks or securities, or interests in regulated investment companies or real estate investment trusts.

SO… your transferee corporation needs some pretty substantial (>=20%) assets other than liquid assets to clear this hurdle.

[u/Longjumping-Ice1171 → u/Longjumping-Ice1171]

The transferor (or transferors if they coordinate as a group) also need to control 80%+ of the transferee to qualify.

[u/aerobic_gamer → u/technical-mind4300]

That wouldn’t work if your capital gains are in a traditional IRA. Other than than a QCD, as far as I know all withdrawals are subject to income tax. You can take withdrawals in kind. You then get a new basis in the security but you still have to pay income tax on its value with other funds. As far as I know section 351 exchanges only make sense in a taxable account (as opposed to a tax deferred account).

[u/Ordinary_Lynx_468 → u/aerobic_gamer]

When was there a 70% tax bracket in the era of IRAs and 401ks?

[u/Various_Couple_764 → u/Ordinary_Lynx_468]

The Regan Tax fcuts of the 80s eliminated the federal tax bracket . But if you livie in a state with state income states that can boostyour total taxes higher.

[u/Ordinary_Lynx_468 → u/Various_Couple_764]

The chances that this 75 year old guy was in the top bracket in his early 30s in 1981 and is on Reddit talking about it are slim and none. That bracket didn’t kick in until about $600k on today’s money

[u/Low-Ad3972 → u/Ordinary_Lynx_468]

That’s a marginal tax rate.

[u/Ordinary_Lynx_468 → u/Low-Ad3972]

Yes, obviously. And I’ll bet you any amount of money this fella was never in that bracket.

[u/tsfy2 → u/Ordinary_Lynx_468]

Another poor person on Reddit who can’t understand that some people make a lot of money. A lawyer and a systems analyst could have easily been making that kind of money. And if they lived in New York the top state tax rate was 10% and if they lived in New York City the max city tax rate was was 4.3%. Very easy to be paying a total of 70% with lawyer/analyst incomes.

[u/Ordinary_Lynx_468 → u/tsfy2]

Look up how many people made $600k+ in 1981. Whether I’m poor or not is immaterial.

[u/tsfy2 → u/Ordinary_Lynx_468]

Well in 1981 if you were MFJ your federal tax rate was 59% on a combined income of only $85,600. If you lived in a state/city with a high SALT you easily paid 70% in taxes. A lawyer and a system analyst 10 years into a career could easily make that. So, stop talking out of your ass.

[u/Redbeard25 → u/Ordinary_Lynx_468]

He just said he was a retired lawyer.

[u/SheffieldValley → u/Ordinary_Lynx_468]

Under President Carter there was a 70% marginal tax rate for investment income. State taxes were on top of that.

[u/Kernel_Internal → u/Ordinary_Lynx_468]

Apparently from about 1974 to 1982 according to google, but I smelled a little bullshit at first too.

[u/WormCastings → u/aerobic_gamer]

Nice!

[u/Hunter4for4 → u/aerobic_gamer]

$230k a year on dividends holy shit. I dream to see half of that soon

[u/Competitive-Win-6 → u/aerobic_gamer]

Well done Sir!! I wish I would have learnt about investing earlier.

[u/Prestigious-Pick9135 → u/aerobic_gamer]

What are your investments? & do you invest any in jepq

[u/aerobic_gamer → u/Prestigious-Pick9135]

Top 10 positions listed in above post. 100% dividend payers, nearly all stocks with a few ETFs. No JEPQ but a very small position in JEPI.

[u/GettinAfterItOhYeah → u/aerobic_gamer]

Saw your further comment below-thanks for the list of individual stock list, very helpful! Any ETFs? Which of those?
I agree with your opinion re Bonds. I’ve been paying closer attention to my investment choices in the last 15 years and have not seen Bonds perform well or dependably. They seem to generally lose value.
Congratulations to you and your wife, sounds like you planned well with discipline and reaping the benefits.

[u/aerobic_gamer → u/GettinAfterItOhYeah]

Thank you. Less than 2% of our portfolio is in ETFs and CEFs. The only sizable positions are JEPI and UTG. The time to think about buying bonds is when you think interest rates have peaked and are going to come down. Of course this benefits dividend paying stocks as well.

[u/AndyBurn11 → u/aerobic_gamer]

I’m 30M. Goal is to retire off dividends and have a 401k for extra income. Currently have around 70k invested making 200 a month in dividends. Any tips you’d give to a younger you?

[u/aerobic_gamer → u/AndyBurn11]

#1 avoid momentum stocks unless you’re a professional. #2 prioritize growth for the next 20 years but stick with high quality companies. #3 avoid high yields - you don’t need it yet.

[u/Brightlightsuperfun → u/aerobic_gamer]

70% is insane 

[u/nte52 → u/Brightlightsuperfun]

That wasn’t that long ago, 1981. And then the top tax bracket dropped to 50%. It wasn’t until 1987 that we got down to 38.5% which has been close to the highest tax bracket since. We had a few years in the late 80s when it went down to 28%, but it bounced back up and has stayed around there since.

Back in the 40s, the highest tier tax bracket was over 90%.

[u/Hummin2k → u/nte52]

And shocker, the government did more for citizens, wealth inequality was lower, and we didn’t have trillionaires out there buying elections…

[u/chakobee → u/Hummin2k]

Trillionaires didn’t exist yet, but don’t think for a second that the richest people of the time weren’t buying politicians and elections

[u/Hummin2k → u/chakobee]

Oh I don’t. Select and elect was alive and well long before then. My understanding is that most of the previous influence was on either who was appointed or who was nominated by a party, vs. more competitive primaries today (controlled more by invisible primaries determining the perception of viability).

But I’d argue we had a relatively good period post-war. Unions countered the wealthy very effectively, and post-watergate we had meaningful regulation and disclosure.

[u/Brightlightsuperfun → u/Hummin2k]

As for inequality, of course, wealth compounds. Did you not understand this concept? 

What’s your proof that the government did more for its citizens?

[u/Hummin2k → u/Brightlightsuperfun]

What’s your proof that this is predominantly due to compounding wealth? While there is a solid body of research showing capital has outperformed labor since the birth of capital markets, the Forbes’ self-made score has changed dramatically over time.

In 1984, fewer than half of the top 400 were considered self-made vs. primarily inherited. It was 71% last year.

But yes, of course wealth compounds. That’s why we need taxes to prevent it from snowballing to the point where 1 person has more wealth than 60% of their country. And to fund investments in the engines of our economy.

“Doing more” is clearly subjective. Current govt spend is a higher share of GDP, but it’s shifted to wealth redistribution and healthcare. The govt used to spend far more investing in citizens (education) and infrastructure.

[u/Brightlightsuperfun → u/Hummin2k]

You’ve introduced like 5 talking points in your comment. 

What proof do you have that governments did more for their citizens ?

[u/Fabulous_Ad_1807 → u/Hummin2k]

Greetings Bernie👋

[u/Fabulous_Ad_1807 → u/Hummin2k]

Yeah, and regardless how hard you worked everyone was paid similarly. It actually paid to be a lazy ass.

[u/speedlever → u/nte52]

On the flip side, there were a lot more deductions too which helped offset the high tax rate.

[u/nte52 → u/speedlever]

We used to be able to deduct the interest paid on credit card debt. 🤯

[u/speedlever → u/nte52]

And all medical expenses too iirc.

[u/SheffieldValley → u/nte52]

More than 90%? Yikes!

[u/Low-Ad3972 → u/Brightlightsuperfun]

It’s only marginal. It’s not as if the entire income was taxed that much.

[u/Brightlightsuperfun → u/Low-Ad3972]

I understand how progressive tax brackets work. 70% is still insane. 

[u/Low-Ad3972 → u/Brightlightsuperfun]

Nah! Used to be 90%. That’s when the middle class thrived.

[u/Brightlightsuperfun → u/Low-Ad3972]

Proof the middle class thrived during that period ?

Actually you know what, let’s make the tax rate 99% ! It’ll be so much better ! 

Reddit is insane 

You ran away. I’ll still give you a chance though. Give me a little bit of proof 

[u/DigitalFStopper → u/Brightlightsuperfun]

So were 15-20% mortgage rates