Can I Plan my Retirement With Dividend as the Source of Income?

Planning your retirement with income from dividend isn’t a wrong choice, but the goal to maximize dividend can be a catastrophe. Let me explain my personal experience on the aspect of income from dividend to help you plan your retirement from dividend income the right way.

But before we move towards retirement planning, let me share my views on retirement planning as a whole.

What is Financial Freedom?

If your monthly expense is less than or equal to the passive income generated from your investments, you have achieved financial freedom.

The passive income can be in the form of rent, dividend, or anything where you don’t work to earn a living.

So retirement is achieving financial freedom. Income from investing in stock and earning a Dividend can be a form of attaining financial freedom.

You can read all about financial freedom in my other article here, but today I will focus only on dividend as the source of income to achieve financial freedom or in other words, plan the retirement.

Why is Retirement Planning the Worst Option To Consider?

Yes I know it sounds quite contradictory to common knowledge one may hear from financial advisors. I have a different viewpoint which is different from common financial planners recommendations — the main reason why I don’t advise on financial planning.

The answer lies in fact – Why one considers retirement?

Because whatever he is working on, he doesn’t enjoy. The people who are working for weekends are the ones who want to consider retirement.

For me, retirement is like a nightmare.

What will I do if I have nothing to work on when I wake up in the morning?

Sundays are boring for me, and it is one of the reasons I write about investments on Sunday. The reason they are boring is that I love doing what I do from Monday to Saturday.

If 5 to 6 days of what you are doing isn’t something you enjoy, you will focus on retirement. I blog about doing what you love at IMTips.

So, I will like to write an article, code, and invest in a company on the day I am about to die. May not be for money but because I love it.

So instead of planning your retirement, I will suggest you start doing what you love and find a way to earn a living out of it.

Still, we are an investor community. So instead of planning a retirement, take the income from dividend to do something other than working for money.

So let’s begin …

Dividend is a Double-Edged Sword

If one is planning his retirement with dividend as the primary source of income, the aim is to maximize dividend. It is the wrong objective for investment and can lead to a disaster.

Let me share how.

As an investor, you will be tempted to invest in companies with the highest dividend yields.

Warren Buffett’s company has never paid a dividend. The reason is, instead of paying the dividend, they can invest the same amount to generate better returns for the shareholders.

In India, a company that doesn’t pay a dividend isn’t considered a right choice for investment.

So every good company pays a dividend even when they have a huge debt that can be paid off instead of paying out the dividend.

L&T is one such example I will like to share. As on September 15, 2019, at the current price of ₹1,363, it has a debt to equity ratio of 1.97 and dividend yield of 1.32%. Instead of paying off the debt, the company pays a good amount of dividend.

I don’t understand such acts. So I try to avoid investing in such companies.

Moreover, I found this in a WhatsApp group. Companies with the highest dividend with last year performance on a total return basis

So, the dividend is a double edge sword. It can provide you with money in your bank account but can also mean a lack of returns.

The Right Approach With Dividend

The best approach to dividend for me is – Maximise Returns, Dividend Will Follow

So invest in the right stock at the right price, and as the share price appreciates, the dividend amount will look handsome.

Let’s take an example from my portfolio of investment in Pidilite. At the Current Price: 1,378 the dividend yield is a meager 0.47%. But with my invested amount at close to ₹700, the dividend yield on my invested amount is 1%.

As the earnings or EPS of the company increases, they will share more dividend. The dividend yield may or may not increase based on the share price, but in absolute terms, the dividend will increase handsomely.

So I will re-iterate Maximise Returns, Dividend Will Follow

How Much Corpus I need to Retire With Dividend Income?

Finally, the most important question of all. What is the amount one needs to plan retirement with dividend or instead work without worrying for money?

The answer is 100x.

Let me explain what I mean by 100x.

Typically in India, the great multibagger companies have a dividend yield of 1%.

So if your yearly expense is ₹5Lakhs, typically the corpus should be 100x of ₹5L aka ₹5Crore. So with ₹5Crore as the amount invested in the stock market, it can generate an annual dividend of close to ₹5L.

If your annual expense is lower, the corpus amount will reduce. If your yearly spending is higher, the corpus amount will increase.

But wait …

What if one doesn’t have the amount and still want to retire on dividend income.

Let me share how …

How to Generate The Large Corpus Needed for Dividend

The solution is to start investing early.

At the age of 30, if you are thinking about retirement and want to generate ₹5L as income from the dividend.

So if you invest ₹10L as the one-time investment and if it can generate a return of 22% for the next 20 years, your corpus will be above 5Cr.

So at the age of 50, it can generate a dividend income of ₹5L.

Yes, I agree, 22% returns for the next 20 years is tough.

However, one should consider that we invested only once a lumpsum amount of ₹10L. One can top-up the invested with an additional amount in the coming years or can even consider an additional SIP investment along with the one time invested amount.

The other option is to increase the tenure from 20 years to 25 or 30 years.

Final Thoughts

The options are endless if one is willing to take that first step.

What are your views on dividend as a source of full-time? Share your opinions in the comments below.