How to Live Off Dividends in Your Retirement Guide 2020

1. The Hard Truths About Retirement

Lee quit his job 5 years ago. Today, he is 63. 

Lee started saving for retirement when he got his first job in a Japanese engineering company. His plan was to retire at 61, but eventually managed to invest enough to retire early, at 58. 

I leaned forward (pushed my cold drink aside) asking him: “How’d you managed to plan all these?”

“Not really, I didn’t have a plan for an exact amount I needed for retirement. But I calculated we should have enough for both of us (and my wife). And my daughter is about to finish university… I was 54 at the time and you know life expectancy (in Singapore) is 84 years. Tell you, it’s not easy. I need 30 years of expenses, including inflation.” Lee said. 

“And as long as I had more than this amount, I think we’re quite safe.” Lee added.

At the height of his career, Lee earns about $210,000 annually. But unlike many of his peers who were earning his income, he saved and invested. 

The point here is this. Lee knew annuities and CPF weren’t enough for him. These provided only the basic spending needs in Singapore. He knew he had to make some adjustments. Later on, he also sold off his car to financing living his dream. 

“You see, my wife stopped working since our daughter was born. Now we’re both enjoying our retirement together.” Lee said.

Well, these days, he played more golf, and goes fishing with his “kaki” (buddies). Lee is living comfortably, happily in retirement.

You know, Lee is a very close friend of mine. He’s very thrifty, and doesn’t buy the expensive cars or collects the Rolexes. We met in an investing conference years ago. Once in a while, we’d ask each other out for lunch or kopi (coffee) to catch up.

Here’s the thing right, many people like Lee share a dream to live off passive income for retirement, but frankly, is achieved by a few. 

I’m going to share this from Lee — It’s going to be hard if you don’t know how to invest for a retirement ahead…

The Biggest Danger You Need to Know

Straits Times ran an article on retirement: “To retire in 20 years and live on $3,000 monthly, you need $1.3 million… if you want to increase your spending power to $5,000 a month, OCBC says you will need $2 million.”

Of course, you can rely on retirement packages funded by income generators — annuities from insurance and CPF. But they simply aren’t enough. 

“If you are a professional in your early 50s who has been working hard for over two decades… you should have close to $500,000, if not more, in your Ordinary and Special accounts.” as Straits Times reports.

Now I’m not saying retirement packages aren’t good. They help provide you with the basics — just enough to spend for food, groceries, transport. That’s it. There’s only so much they can do for you.

And that’s just the tip of the iceberg. You see, you’ve to deal with one of the biggest dangers of retirement today — Inflation. And to retire in one of the most expensive cities in the world, you’ve got to protect your wealth from inflation, for the next 30 years or more. That’s a long, long time.

“You know Willie, interest rates are going down these days. I tell you, I walked into the bank branch the other day to roll over my fixed deposits. I was shocked. Even my bonds and fixed deposits aren’t giving me enough.” Lee said to me, concerned.

But Lee is smart. He knows inflation will crush the future purchasing power of his bank account today.

You see, you need something more than retirement packages. Rather than worry about money and security, the key thing is to prepare yourself for it. You need an extra income which not only protects your money from inflation, but grows your wealth over time.

It’s best to use a wealth defense strategy to protect against inflation. And to live an income-rich retirement. 

But buying government bonds and fixed deposits aren’t going to give you the protection against inflation. Nor provide you with the extra income you need. 

Let’s embrace it. Interest rates are going to zero. And many countries in Europe, even Japan, have experienced negative yields in their economy. The uncertainty here is going to make things a lot tougher. We’re indeed living in a different world today. 

Even the US is talking about their interest rates going below zero. 

Here’s something which I learnt about finance. When governments pay for large fiscal programs, they print a lot of money. This grows the supply of money, leading to inflation. And the unnerving thing is it becomes the silent killer that chips away the value of your dollar.

When that happens, even Singapore government bonds aren’t staying at 2.5% for long. It’s going to go lower.

2. The Ultimate Wealth Defense for Your Retirement — Dividends

If you’re like Lee who worries about inflation and the risks it presents on your retirement money, you’re not alone. 

You might also be worried about the inevitable, future crises — like the global financial crisis, or recent Covid-19 pandemic — wrecking your investments.

If you’re thinking about this, then the immediate decision is to have a dividend investing strategy. Let me tell you. This is the “Ultimate Wealth Defense”. Because it’s not only simple and safe to use, but it unlocks predictable, generous cash flows for yourself.

Many people have used this strategy to build and protect their wealth for retirement. And you know what? It even made people huge fortunes in stocks too.

And what you’re about to hear might surprise you. So, here’s a true story about Mr. Ronald Read, who amassed $8 million, working as a Vermont-based janitor and gas station attendant. He lived a very modest life, was the first in his family to graduate from high school, then served in the military during WWII. After the war, he found a job as a janitor at JC Penney, married a woman and had 2 children.

What blew my mind was this. Mr. Read had no college degree, worked his entire life in a humble job, yet was still able to create a fortune. He never spent excessively. 

When he died at the age of 92, he bequeathed a large part of his fortune to a library and hospital. Even his family was shocked by his massive wealth.

“He only invested in what he knew and what paid dividends. That was important to him…” a close friend who knew Mr. Read.   

You see, I’ve tried all kinds of investing strategies (and racked up huge losses) before — high tech growth investing, ‘special situations’, small-cap investing. But, so far this dividend investing strategy gives the best wealth defense.

It’s the strategy I’m using for my mom’s retirement too.

Ok, so picture this. The reason why dividend investing is an incredible strategy for your money is this — It’s a lot like planting a seed in the ground. Once you give it fresh sunlight, water and air, the seeds automatically take root and start growing.

You don’t have to do anything more with it. You carry on with your normal day and let the force of nature do its work. Over time, this seed is going to turn into a plant, then a tree, then it starts to bear fruits and flowers. 

It’s going to give you share for your children, food for your family and it’s going to grow more and more. Think of it like a money safe protection. It’s going to give you the financial security you need. Not only for yourself, but your family too. 

3. What Truly Matters to Growing Your Wealth

If you’re reading this, chances are you’ve put some money in the stock market. You’ve done some homework — watch CNBC or Yahoo News, monitor stock prices, hop from financial website to another. 

And I know, you want to take it to a more serious level. 

Along the way, I’m sure you’ve met “financial gurus” who promote trading strategies, tips on cryptocurrencies, economists calling the next crisis on the economy. I’ve had my fair share.

So lean closer here. Because this is about to shock you. For 97% of the people who trade stocks, I can tell you, what they’ve been doing all along is a huge distraction.

You see, the problem with “financial gurus”, or what you read on financial media, on CNBC or Yahoo News is totally meaningless. The sole purpose of them pushing information upon you is to make more advertising fees. 

And consuming all this information is wasting time and pulling you away from making the big, safe returns in the stock market. 

The key thing here is this. If you truly want to grow your wealth in stocks, you’ve to accumulate a basket of solid, dividend growers at a fair price.

That’s it. 

The Greatest Way to Invest Through Crisis After Crisis

Here’s something to remember. Have you heard of the Dutch East India Company? It was a publicly-traded company, created in 1602, to trade with Asia. 

You see, the Dutch East India Company sends ships all throughout Asia, buying and selling commodities. And the company was making money with the goods it brought back. It was a huge operation which ran like clockwork.

Now this is what I found interesting. As investors of the Dutch East India Company, you’d get paid dividends when the company brought their ships back to dock. And the company paid dividends for over 180 years.

Can you imagine this? Having all your ships lined up at the dock, waiting to be showered with cash payments from them. From the completed trades of their operations. 

Sure, and it happens all the time. There were dangers of piracy, shipwrecks and diseases. But the operation went so well that it still paid investors really good money.

And these went on for years after years. Investors were paid like almost 20% year after year. I can tell you this, I’m very sure the investors of the Dutch East India Company were a very happy bunch.

I want you to know this. The idea is the same with solid, dividend growers. If you can launch yourself a plan to collect dividends and bring it back safely to dock, it’s going to help you live off on these dividends into retirement. Except what you’d get for ships are electronically-traded stocks.

With that image in mind, onward.

4. What You Need to Know About Solid, Dividend Growers

So, let’s talk about that solid, dividend growers a little bit. Not many people take the time to understand their characteristics. But it’s the first thing you need to know about. Before knowing what’s happening in the economy, what’s going on in the news, or what the government is doing.

I’ll explain. 

A solid, dividend grower is a business which pays you steady and rising dividends. Dividends are paid quarterly or semi-annually, to a company’s shareholders. This is what you get as a check in your letter box. 

But before a business pays you steady and rising dividends, it needs to have durable competitive advantage. This is what Warren Buffett calls — an “economic moat”.

In his letter to shareholders, he explains simply: “What we’re trying to do… is we’re trying to find a business with a wide long-lasting moat around it, surrounding — protecting a terrific economic castle with an honest lord in charge of the castle.”

An economic moat could be a strong brand, secret formula like patents or intellectual property, a high switching cost, or a lowest cost producer. 

And these businesses with a durable competitive advantage, or economic moat are usually the top dog in their own industry. If you track big companies like Johnson & Johnson, Walmart and Microsoft, they have some form of economic moat. 

Think about it. Microsoft’s operating system has been widely used in many offices and homes that it becomes so hard to switch out of it. And their move into cloud computing with their Azure, it deepens the economic moat they have.

Or Walmart with their super huge distribution network allowing it to sell products at very low prices. 

“It’s an Addiction”

Now, what lies behind their durable competitive advantage is this — deep within their economic moat is something you don’t often hear about. And this drives massive profits for businesses. 

It’s very subtle but the effect is very strong.

And this is what leads me to an important point here. Most of the truly solid, dividend growers sell habit-forming products or services. If you noticed carefully, the best-performing stocks over the past 50 years sell habit-forming products or services. This is valuable somewhat, when you’re picking solid, dividend growers. 

These businesses get customers to use their stuff again and again. And customers will fork out money to buy what these businesses are selling.

The customers become “addicted”.

Think about Apple. Their products — iPhones, iMacs, Apple Watches, AirPods, iPads are widely used by customers globally. And every minute someone steps into the glass-paned apple shop, you get a new “Apple convert”. They buy one of their popular smartphones or iPads. And it doesn’t stop there, its products will get you into their ecosystem — iTunes, which makes it hard for you to switch to their competitors.

Or early office workers who frequently drop by Starbucks for their morning coffee. It becomes a habit. It’s not surprising how high Starbucks has gone up since they IPO in 1992. 

Major payment companies like Visa and Mastercard are part of this group. People think tech stocks don’t pay good dividends. That’s not true. These companies pay rising dividends year after year. When you pay for your groceries, look at the 2 most popular logos on your credit card — Visa and Mastercard. 

Of course, you can’t forget traditional drug companies like Abbott Labs, Merck and Pfizer. These are huge, growing businesses whose products customers are buying over and over again. 

People also love going to fast food chains. Processed sugar and chemicals found in food leave customers wanting more. This is why McDonald’s have been so successful over the past decades. 

Now if you’d realized, these companies make things you use or eat every day. It could be food, payment services, groceries, home furniture. You don’t have to spend time looking deeply into the latest cancer research, or the next “Software-as-a-Service” technology in the market. 

You see, the thing about spotting consumer habits is when people get hooked to a product or service. Or simply “forced” to use it due to regulations or licenses. It could be sticking to a particular brand, or a customer finding it hard to switch services. This creates repeat businesses.

And once people get used to a product or service, companies can increase their price. This deepens the economic moat, increasing a business’s durable competitive advantage. And companies make more money sustainably this way — or what you call sustainable earnings power. 

This gives you higher sales growth, fatter profit margins. All good for your investments.

Companies also don’t have to change their products often. Once Microsoft made a homerun on its operating system software, it didn’t have to change it. The same goes for other solid, dividend growers like Coca-Cola, McDonald’s and Starbucks.

More money can be spent on advertising, distribution or building more factories to increase volumes. All these goes to increasing a business’s return on investment (ROI).

The excess profits can be used to reward shareholders through more dividends, more share buybacks. 

That’s how you get your rising dividends year after year.

When you buy a solid, dividend grower, it means more dividends for you. And you don’t have to worry about dividends getting cut. 

Solid, Dividend Growers Can Grow Bigger Safely

Just because businesses are large and stable, doesn’t mean they stop growing. It’s a deadly logical lie. 

In fact, if you spot solid, dividend growers, with a durable competitive advantage, they’ll help you to grow your wealth sustainably year after year. 

Look at how some of the top dividend growers performed in the past 10 years: 

• Apple (Ticker: AAPL) — +1,025% gain
• Starbucks (Ticker: SBUX) — +682% gain
• Visa (Ticker: V) — +891% gain
• Mastercard (Ticker: MA) — +1,115% gain
• Abbott Laboratories (Ticker: ABT) — +223% gain
• McDonald’s (Ticker: MCD) — +235% gain
• Merck (Ticker: MRK) — +134% gain
• Pfizer (Ticker: PFE) — +208% gain

Don’t you think these are pretty good returns? You get even more after you include their dividends paid to you over the years.

Solid, Dividend Growers Move with the World

I’ll let you in on an open secret. Even the Covid-19 pandemic is not going to stop this — The world is increasingly interconnected. 

We have to embrace it. Companies too.

Big, growing businesses don’t just sell to the US or to a small country like Singapore. Many of them are looking across borders like Europe and Africa. Even going into China and India, where the combined population is 10 times larger than the US. 

I live in Singapore, but I also see young people in China and India having more spending power. They want to enjoy high-quality products and services too — medicine, food, technology, beer, cigarettes in the future.

Solid, dividend growers think globally. 

No one could have imagined a trillion-dollar company 30 years ago. 

But look at how big Apple is today? It hit a trillion-dollar market cap just 2 years ago.

And for me, I’m confident these solid, dividend growers can continue to grow bigger. 

It’s certainly not hard to spot them, and you don’t need to be a genius doing so.

5. Your Dividends Don’t Lie

“Hold on a sec…” You might think… “If I’m looking at businesses with a durable competitive advantage, why don’t I simply pick huge growth stocks that invest all their earnings year after year to get an even bigger ROI?”

Yes, you can. By looking at solid, dividend growers alone, you could miss out on the next Amazon, or the next Facebook.

Here’s the thing. For every winner like Amazon, there are more than 10,000 failed companies. It’s not that easy. Trying to find the next Facebook may cause you to lose more money in the long run.

And it’s highly unlikely you’ll be able to consistently spot these companies at the beginning. You need to spend a lot of time doing research. More often, you’ll have sweat and grunt, spending hours after hours trying to read the many pages of data. And if these companies don’t turn profitable, you could get wiped out on a single stock.

These companies are very vulnerable to market disruptions early on. Think about the many competitors fighting to be the top. If there’s no sustainable business models, companies could fail very fast.

Look at GoPro Inc, Blackberry and Nokia. You see some of these well-known tech names falling from the top of the world, to the ground flat.

Well, if you choose to invest in them, you need to own a few hundred of them to diversify your risks. That’s a lot of time needed to watch your investments. Better to spend time on your hobbies, travelling, play golf or look after your newly born grandchild. 

Wall Street fund managers who pick these stocks hire a team of analysts to analyze them — dig deep into financial reports, getting on management calls, flying to factories to “kick the tires”. 

It wouldn’t be possible for the average investor to do all that.

Even then, paying expensive fees to get fund managers to invest for you is hard. Because most of them struggle too, and often fail trying to bet on the next big winner.

What separates solid, dividend growers from huge growth stocks like Facebook and Amazon is this — rising dividends is a hallmark of financial excellence. 

This is common sense. Before a decision to raise dividends, management must believe there’s prospects for higher earnings in the future. Having to face their Board of Directors, no manager will stick their heads to raise dividends if they feel poorly about its company’s future prospects.

By sending you a regular check for dividends, it tells you the business has sustainable earnings power with a strong financial health. 

As far as my 10 years of investing experience, I see it’s way easier and safer to pick solid, dividend growers instead.

6. The Surest Way to Get High Stock Market Returns in Retirement

Let’s face it. Who doesn’t like to achieve high returns in the stock market?

The thing is, there are many ways you can profit from stocks. But only a handful of ways to achieve it consistently and safely. 

And dividends are the key to it.

What I found out about solid, dividend growers might surprise you. A study by well-known investment research firm, Ned Davis Research analyzed the returns of different types of stocks in the S&P 500 benchmark from 1972 to 2019.

In the study shown, each stock is classified into 6 different categories. You’d notice that categories with Dividend Payer and Dividend Growers & Initiators produced the highest returns.