{"id":92132,"date":"2011-07-13T04:00:25","date_gmt":"2011-07-13T11:00:25","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=92132"},"modified":"2020-12-12T17:50:41","modified_gmt":"2020-12-13T01:50:41","slug":"can-you-live-on-dividends-alone","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/can-you-live-on-dividends-alone\/","title":{"rendered":"Slowly get rich with dividends: Living on dividends alone?"},"content":{"rendered":"
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A few weeks ago, I attended the Morningstar Investment Conference and took in the insights and predictions of all kinds of mutual fund managers and financial experts. On the whole, these folks weren’t too optimistic about earning exceptional returns on any kind of investment. Bonds and cash have paltry yields, and stocks aren’t as cheap as they were a couple of years ago. I think the collective investment advice of the event could be summed up by a line from Tom Hancock of money-management firm GMO, who said, \u201cThe only thing I like about stocks is they’re not bonds.\u201d<\/b><\/p>\n
During the opening session, Pimco co-chief investment officer and bond fund manager Bill Gross bemoaned the low rates on Treasuries<\/a>. He also argued that investors shouldn’t expect 10% returns from stocks. But at the end of his talk, Gross suggested investors look for a solid, inflation-beating return from companies that pay steady dividends \u2014 companies such as Coca-Cola, Proctor & Gamble, Johnson & Johnson, Southern Company, and Duke Energy. (Full disclosure: I own shares of Johnson & Johnson, and when children pass me in the street they scream, \u201cGross!\u201d)<\/p>\n Bill Gross was singing a tune similar to what has been wafting from the pages my Rule Your Retirement<\/i><\/a> newsletter over the past few months: Stocks are not priced for exceptional returns over the next decade, and in a sideways market, dividends play an even bigger role in your portfolio.<\/b><\/p>\n As I listened to Gross, I wondered what would happen at the extreme: What if stocks didn’t gain a penny and all we received was dividends? I fired up Excel and found some fascinating figures.<\/p>\n First off, let’s recap the benefits of stock dividends.<\/p>\n Unlike the interest from bonds, dividends tend to grow over time<\/a>, historically at a rate that exceeds inflation. For most investors, the smart strategy is to use those dividends to buy more shares of stock, so that they’ll receive even more dividends, so they can buy even more stocks, and so on. In a previous post, I likened dividend-paying stocks to money-growing trees that produce a little more financial fruit each year. If you buy more trees with that cash crop, you reap even more fiscal flora. Given long enough time, you could have a whole greenhouse producing the green stuff.<\/p>\n To illustrate how this can pay off over the long term, let’s move from stalks to stocks and assume you own 1,000 shares of a stock that trades for $100, for a total investment of $100,000. (Note that this is just a hypothetical illustration; very, very few people should have so much money in one stock; also, the same principles apply to a mutual fund that pays dividends, even if you invest just $100.) The stock has a 3% dividend yield, so over the past year you received $3 per share, or a total of $3,000 in dividends.<\/p>\n Unfortunately, the price of this stock doesn’t move much over the next decade. In fact, it doesn’t move at all. Here’s what such an investment would look like after 10 and 20 years, if the dividend increases 6% a year but the stock price doesn’t budge.<\/p>\n<\/span>Benefits of Stock Dividends<\/span><\/h2>\n