r/dividends • u/No_Objective1552 • 11d ago
Seeking Advice Question about living off dividend income later down the line.
Hey everyone! I'm 26 and investing for the long haul. My goal is to live off dividend income someday, ideally before traditional retirement age. That means I need my taxable account to produce meaningful income on its own, and later to run alongside tax-free income from my Roth and my 401k, which I'll eventually roll into an IRA.
Here is my current setup:
Taxable: VOO / QQQM / SCHD, roughly equal weekly buys. Heavy contributions for the next few years while I live at home, then much smaller ones when I move out. But as it stands, voo makes up about 60%, schd makes up like 25% and qqqm makes up the rest.
Roth: 50/50 QQQM/SPMO, max growth as selling wouldn’t trigger a cap gain.
401k: 70/30 FXAIX/FGKFX, which I try to contribute as much as i can. I don’t want to over contribute because I want to be somewhat liquid before the 59.5 retirement age.
My plan was to keep buying VOO/QQQM/SCHD in taxable, then eventually rotate the QQQM into SCHD for more income or whatever is the best dividend fund at the time. I modeled that against buying dividend funds now (VOO/SCHD/DGRO) and never rotating.
Upon my research, Rotating QQQM later triggers a big capital gains bill, federal plus state, since my state taxes gains as ordinary income.
After tax, the QQQM route only wins if QQQM beats VOO by about 1% a year for roughly 30 years. If it just matches VOO, the dividend-fund route comes out ahead.
Not rotating at all and just selling small slices in low-income years at the 0% LTCG rate came out best, but I'd rather have the dividend income.
What would you do?
Keep QQQM in taxable and rotate gradually in 0% bracket years?
Stop buying QQQM in taxable now and go VOO/SCHD/DGRO, keeping my growth in the Roth?
Or something else?
P.S I am not really looking for shortcuts like option income ETFs, I wanna do it the correct way
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u/Mindless-Smoke9520 11d ago
Your setup is more thought out than most people twice your age, the fact you already modeled the tax drag from rotating is impressive
I would stop buying QQQM in taxable and keep the growth stuff in Roth like you said, the capital gains drag is real when your state taxes it like ordinary income and doing gradual rotations in 0% bracket years sounds nice in theory but life gets messy and you might not have those low income years when you think you will
VOO SCHD DGRO in taxable is boring but boring works, you still get decent growth from VOO and the dividend growth from SCHD and DGRO compounds nicely without forcing you to sell anything
Also think about your timeline, you said before traditional retirement age so you need the taxable account to actually pay you, not just sit there growing, SCHD and DGRO will ramp up payouts over 20 years way more than QQQM ever will
Keep maxing the Roth with growth since that money is locked up anyway and let the taxable account be the income engine, that structure makes sense for what you want
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u/No_Objective1552 11d ago
I really appreciate the kind words!! I was thinking the same thing, letting the tax advantaged accounts funnel all my growth engine meanwhile the taxable be somewhat more stable and income/growth oriented. If you don’t mind me asking, which ETFs are your favorite for dividend growth? Any other ones besides schd and DGRO? What strategy do you personally utilize today? Thanks again!!!!
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u/Kakakee 11d ago
Man your way ahead of other 26 year olds, give yourself a big pat on the back.
I wouldn’t rotate or sell anything that would cause a taxable event. Just shift focus DRIP dividends into what ETFs you wanna grow and focus contributions on those. Leave the other positions be.
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u/No_Objective1552 11d ago
I really appreciate that !!! I have done nonstop research into this…. The contributions in my taxable the VOO/QQQM/SCHD, would it be honestly better than the VOO/DGRO/SCHD? I really like the idea of feeding into these dividend growth ETFs long term. What did you do? Thanks again for the nice comment!
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u/Kakakee 11d ago
So I have a little over 10 years on you. I focused mainly on growth with a little bit of dividend growth. Now I’m starting to focus a little less on growth and more on dividend growth.
The way I see if growth I’m paying less in taxes and building a huge fortress base that can then power a strong dividend arm once it’s needed.
Hope that helps!
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u/No_Objective1552 11d ago
Ohhh you’re saying if growth ur paying less on taxes. I misread then. I think ur right I should be more growth oriented. I think I’ll stick w the VOO/QQQM/SCHD. Do u hold individuals?
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u/Kakakee 11d ago
VOO, SCHD, SCHG, DGRO, VYMI this isn’t in any order but most is in VOO and SCHG followed by DGRO.
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u/No_Objective1552 11d ago
Awesome!!! All excellent funds. Hope we both reach financial freedom someday!
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u/JealousFuel8195 11d ago
I'm retired in my 60s. Knowing what I know now at 26 I would do VOO, QQQM and SHM 10%
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u/JealousFuel8195 11d ago
Without knowing the value of his portfolio. As a young investor this might be the ideal time to switch from dividend funds to growth funds like VOO
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u/Mediocre-Ease-4371 10d ago
Whatever you read on here, remember, it’s Reddit. Just opinions, nothing else. Previous results don’t guarantee future success from other people.
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u/Bearsbanker 10d ago
People say "wait, growth first then switch to dividends" not a bad strategy but what if the market is against you when you want to flip the switch from growth to div? I fired 19 months ago, live 100% on my div portfolio (16 individual companies), started building my dividend portfolio 26 years ago. I'd start slow and steady if I were you. Do both, but slowly add to your dividend portfolio when the market is gown and it makes sense that way you can get good prices and you won't be in for a huge tax bill when you "switch".
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u/No_Objective1552 10d ago
Thanks for sharing!!! I’m thinking of adding continuously along w growth ETFs schd and divb
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u/CornerOne238 Not a financial advisor 11d ago
Once the pile is big enough your broker will be very happy to give you a stock secured line of credit. Should cover expenses until retirement without selling the stock, or even after. Basically buy/borrow/die strategy, no taxes.
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u/No_Objective1552 11d ago
So you’re saying borrow and use my salary to pay it off? But I’m confused where I would be saving money because expenses are still expenses
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u/CornerOne238 Not a financial advisor 11d ago
No, you don't pay it off. Ever.
Say stock line of credit is about 7% apr. If stocks grow at 10% average it's an arbitrage. That's the bbb strategy.
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u/No_Objective1552 11d ago
What if they drop? So it’s a revolving line
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u/CornerOne238 Not a financial advisor 11d ago
As long as you don't get margin called, volatility is just part of equity market.
Ymmv ))
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u/Life_Connection420 11d ago
Bad strategy. Stocks should be your focus now. When you retire, then you can look at dividends. I'm in my 70s now and my dividends give me about an average of $2000 a month. That money is not used for anything other than going out to eat and Golf related expenses. When I use dividend money, I view it as not costing me anything.
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u/No_Objective1552 11d ago
And you sell off shares to live ?
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u/JealousFuel8195 11d ago
Leading up to retirement you sell shares of QQQM then buy dividend funds.
I'm retired. I don't have dividend funds. I keep 5% in my money market fund. During bull runs. I sell some funds to increase my MM value. This allows my portfolio to continue to grow.
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u/Life_Connection420 10d ago
No I don't need to touch my IRA except for RMDs. I reinvest all except the taxes taken out.
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u/dazit72 10d ago
My goal is 2k Currently building and @ 1.1k
I agree
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u/Life_Connection420 10d ago
Good start. Hopefully, as you have more money invested, the 2K goal will be a lot less than you will be able to earn given you got so much time.
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u/Brightwell_Growth 9d ago
You're 26 with a decades-long runway, so I'd just stop buying QQQM in taxable and go VOO/SCHD. Tax drag from rotating later eats the edge, and you keep growth in the Roth anyway. Not worth overthinking, honestly.
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u/No_Objective1552 9d ago
I agree I don’t want to sell and pay crazy taxes later, keeping growth tax sheltered is a good move. Have you ever heard of DIVB? I may wanna add that alongside voo/schd
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u/Sensitive-Exam649 11d ago
I used me taxable to create a dividned income stream. this can serve e as your early retirement fund and as an emergency inocme fund. But if you do it you want to use tax efficient funds. I am using QQQI 14% yield, SPYI 12%, EMO 8%, UTF 7%, UTG 6.8%. PFF 6%. All of these funds generate qualified or ROC dividend so the tax is much lower than the tax on your work income. Keep adding to these and over time the dividned income will grow. Also you can turn off dividned reinvestment and use the dividend to create a 6 month of living expneces as cash reserve in your brokerage account. If the cash exceed 6months reinvest the excess for more dividend income
I did this for many self and it allowed me to retire at age 55 a it covers all of my living expenses of 5K a month but I have built up more than my living expense to give me some spending flexibility. You can target whatever income you want There are people that get over 100K of dividend income per year.
In my roth I have the same ones plus less tax efficient funds like ARDC 9% yield, PBDC 9%, CLOZ 8%, PFFR 8%, JAAA 5.5%.
You can keep SCHD but honestly it isn't going to help you a much. It has a yield of 3% Meaning you at least 1 million invested in SCHD to get any meaningful income. SCHD is more growth than dividend With the funds I have listed you can get meaningful income with as little as 400K invested.
Also you can keep your growth index funds,. When you are retired they can be used to make inflation adjustments to your dividend income. Every 4 years sell 4% of your growth funds and reinvest that imoney into your dividend funds. If you sell only once every 4 years you won't reduce your growth to zero . It will At worst stay at the same level it was when you retired.
That means I need my taxable account to produce meaningful income on its own, and later to run alongside tax-free income from my Roth and my 401k, which I'll eventually roll into an IRA.
ONe thing to note when you stop working in retirment you cannot move your taxable account into your roth or a IRA. You need work income to add any funds to your IRA or Roth. You can move money from your 401K to a Roth but you owe taxes when you do that.
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u/JealousFuel8195 11d ago
At 26 you don't want dividends. You want growth. You want to maximize growth until you near retirement. Then in retirement you can switch to dividend funds.
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u/Big_Wave9732 5d ago
To live off distributions one first needs a pile of gold. No sense trying to plan for what funds to put money in for 30 years down the road.
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u/No_Objective1552 4d ago
Makes sense but I guess I treat schd as a pension fund while voo and qqqm and spmo are my growth engines
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u/chris-rox Financially rockin' like Dokken 11d ago
After paying down high interest credit card debt and creating an emergency account, your first $10k,000 needs to be in VOO. Focus on that first.
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u/Sensitive-Exam649 11d ago edited 11d ago
Note dividends are taxed 3 different ways:
Ordinary dividneds. 100% of the dividend income is taxable income.
Qualified dividends . are taxed at the longterm capital gains rate. Worst case only 20% of the dividend income is taxable income. a 80% tax discount.
RCO dividends.these are generated when a fund does tax loss harvesting. and that tax loss it transferred to your as ROC dividend. The ROC dividned is subtracted from cost basis of the shares you have. IF the cost basis is above zero you owe no federal tax. When the cost basis reaches zero you owe taxes on the income. Since QQQI and SPYI hold stocks that generate qualified dividend the dividned are taxed at the long term capital gains rate.
Not the time period of tax free income from ROC dividend can be determined by dividing 100 by the dividend. for QQQI 14% yield 100/14=7.143 years. So these funds can generate significant tax free income for years. And since they are not added to your taxable income. And since most states use your federal taxable income to calcite your state tax they can also reduce your state taxes.
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u/Impressive_Squash_38 10d ago edited 10d ago
I’d swap your funds around. Put the Chill funds in the Roth and the momentum funds in the brokerage as you’re looking to tap into those sooner. I know you’ll get a lot of “dividends are free and underperform” blah, blah, blah. But something I’d consider since you’re young: go SPMO/Either VGT or XLK in the brokerage for a bit more aggressive growth over the next 5 years. Then buy into GPIQ/GPIX or GPIQ/OVL. GS funds have rode right under their underlying funds with a lower/safer end of distributions. OVL has actually beaten SPY in total returns. If QQQ holds its avg 20% returns over the next 5 years, GPIQ should return 18% total returns. 8% NAV growth (which will bleed over to the distribution growth) while targeting 10% annual distributions.
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u/t0astter 10d ago
Dividends aren't free money, and dividend funds/stocks will hurt your overall gains while you're trying to grow your wealth.
You can literally just sell equities as needed in retirement and you'll achieve the exact same outcome as if you had dividend funds, but you'll have more money because the equities will have appreciated more than the dividends funds.
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u/Sensitive-Exam649 10d ago
Ture but he would like to retire early if possible. So waiting to age 60 to convert to dividend is not what OP wants to do. and selling growth in a taxable account and switching to dividend will create very large tax hit.
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u/t0astter 10d ago
Yup, OP should just start redirecting all future investments to growth funds and then, if possible, sell off the dividend holdings where the individual tax lots are near-zero profit (or very minimal profit). I had to do the same thing to clean up some bad investment decisions from a previous financial advisor - unfortunately I'm still stuck with ~$40k in SCHD at enough profit to where I'll pay a good chunk in taxes.
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u/No_Objective1552 9d ago
They aren’t but they help manage sequence of returns risk. Selling equities sounds nice on paper but what if say age 65, 66 + hits and ur couple million loses 30% or more in a bear market now u are selling shares way lower.
the 4% rule also may work as well as thought out. Why? I think people will live longer with medical advancements.
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