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May 26, 2014


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Great points. I also think dividend investing can be a great tool for me to be able to retire comfortably.

We are huge fans of dividend investing and we do have some really nice yielding bonds as well. In fact, we never purchased Apple stock until it started paying a dividend. Yeah, we missed out on some of the growth, but it is just one of our rules for investing. Plus, now we have the dividend, the growth and just recently a 7x1 stock split. You just have to look at the strength and safety rating of any company. Some of the highest dividend payers are a little less safe, although Verizon, and AT&T are pretty darn safe and have dandy dividends.

It is our practice as well to only use the income our investments yield and not touch the principle. So far, we've managed that. Our income from dividends and interest is equaling our pension income and soon will probably exceed it.

It looks like you are on a great investing path. The thing I really like about bonds is that, unlike stocks, you get the coupon value back when it matures or is redeemed. My bonds are laddered out from 2014 to 2050, when of course I will be long gone but my children will be around to inherit them.

It sounds like you aren't old enough to receive Social Security yet but that makes a nice addition to your income when you are.

Great article FMF ! Dividends are definitely a tool that should be considered in a well diversified portfolio.

Just keep in mind that a dividend investing strategy will be less tax efficient than a total return strategy if this is done in a taxable account. 100% of the dividend payment will always be taxable. Even if it is a qualified dividend receiving a lower tax rate, still the entire amount will be taxed. If you take a total return approach, you can sell shares when you need income to create your own dividend. The shares you sell will have a cost basis so only a portion of the sell will be taxed. You could even sell shares with a high cost basis at a loss and recognize a loss on your tax returned that would help reduce your taxes.

Also, only about 1/3 of the U.S. stock market pays dividends, so you will also have a less diversified portfolio if you only own dividend stocks.

A total return approach means you can sell shares only when you need the income. With dividends you are forced to receive the income even when you don't need it.

Nothing's changed! The "discipline" argument seems particularly odd to me. If you don't trust management to spend your money effectively on the business, then...why are you holding their stock at all? It's an especially odd argument to make in a time when there is a shortage of capex, not the reverse.


Like you I am taking the path of using dividends plus rental income to create regular cash flow in addition to the earnings from my normal job. As of today that number is about $40K per year ($12K net from rental income, and $28K from dividends).

By picking companies with a record for dividend growth, you can plan for a growth in dividends over time. The criteria for picking companies includes having a strong brand / pricing power over the market, a low coverage ratio of dividend payout to earnings and a track record of growing dividends. You then need to buy enough companies to spread the risk out a bit. Like you, I don't want to worry about the daily fluctuations and am investing in these companies for the future cash flows... it's kind of like what Buffett does, but on a nano-scale.

I am hoping to get my cash flow up to over $100K in the coming years. That, plus continuing to earn, should ensure some more security for me and the family.


Mike --

Great to see a comment from you! Hope all is well!

@Sarah....I disagree. Dividends are form of discipline. Human nature is to be undisciplined. Companies with a history of steadily increasing dividends tend to have better stock performance than non dividend payers. Of course, you can always find exceptions, but they are still the exception.

I found that the older I became, the more market volatility started to bother me. I started thinking, "I'm already in a very good financial position for retirement so is it worthwhile stressing myself out in a bad market period to stay in funds that are heavily in stocks in the hope that I will leave more money to our children."

My thinking also coincided with the start of the great recession at the age of 74. I thought about stocks paying good dividends, but in a falling market they still go down like everything else. That's when I concluded that I would be a lot happier and more contented owning bond investments so I made the move entirely into individual municipal & corporate bonds. By buying them when I did I was also able to get corporate bonds in the 5% - 6% range and municipal bonds in the 4.5% - 5.25% range. Now when the stockmarket has a bad day it doesn't bother me and I'm still keeping my portfolio in an uptrend that satisfies me, as well as lowering my income taxes.


Yes- everything is going well. The baby is close to celebrating her first birthday...

How is your new role going? I'm sure you are making great strides! From what I know about you, I would strongly consider investing in your company.

Old Limey: I thought about investing in bonds for a long time, but finally it did not seem like the best use of capital given my age. Yes, bonds pay a coupon but generally they are tracking the expectation of inflation and interest rates... there is no underlying growth in principle, although it is a protected investment. Given that I am 38 years younger than you, I am looking at investments where the underlying basis will keep up or exceed inflation.


Mike --

A year already? Wow, time flies! Time for #2! :)

The new role is going well. I'll give an update sometime here. For now it's still pretty crazy (but exciting).

Long time no see! I hope you are enjoying fatherhood as much as I did with my first child. She is visiting us from Maui next week and now has two small adopted girls in addition to her daughter that is now 24 and office manager for a high-tech startup in Austin.

You are doing the right thing with your investments, bonds are for old guys like me that prefer steady income to volatile growth.

@FMF- #2 will be in the planning during the next 6-12 months... we'll see.

@Old Limey- I will have to try to swing by again the next time I am in town. Enjoy your time with your granddaughters!

Fatherhood is definitely fun, I can say that this last year has been the best in my life thus far. Crazy, huh?


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