Along the logic of saving up x amount of dollars and living off the interest, couldn't one just buy up all dividend-paying stocks and reinvest in more stock until you're at a point where the dividend income is substantial enough to live off of?

And please point out obvious and not so obvious flaws in this idea. Assume I am ignoring quality of the company and even buying the ones with dangerously high yields.

Dividends can change with time, its certainly reasonable, but its more risky, and you probably don't want to have too much risk when you are at retirement age.

your principle is sound if you are comfortable with the company fundamentals. it is possible for "big" companies to disappear as some seem to be on the verge of doing....

One of the problems is the juicy dividends typically come with hefty share price.

For instance, ge announced a dividend of .31 in feb 09 with a share price of around 12 at the time. =2.6 percent.

1,000,000/12 = 83,333 shares = $25,833 (now take away taxes!)

so for a company who has had a century of staying power (safe, or is it!) you would have significant exposure (your million of GE would have been worth 4 million a year ago!) for a paltry 2.6 percent!

Dividends are the driving force in the market that gives you inflation protection over the lifetime of the investment (higher inflation = higher dividends by default) and give you gains or break evens in down market years. they are not to retire on.

a much better strategy is to buy muni bonds....tax free and you can score 4-6 percent

The only flaw in your plan is trying to use the dividends to build your bankroll. You'll never get there that way. You realistically need at least $1M and preferably more. So the plan needs a way for you to come up with the starting capital that doesn't involve waiting 50-60 years for it to build up.

That being said you are probably not maximizing your potential return with this strategy but personally I like it because I'm lazy.

I know a few people who have done this. but generally, it wasn't by design. What ends up happening is that companies offer their employees the option to purchased stock at a 10-15% discount through an employee stock purchase plan. Over time, they accumulate a TON of stock -- $1 million worth +++ . So I know a couple of employees who worked for utility companies -- who currently generate a decent amount of money trhough dividends and a decent amount of money from their pension.

Not a bad strategy... but I mean, like any strategy -- investing in these companies is all about investing in good companies... it would be really no different than investing in a great company and slowly selling bit by bit.

one of the reasons that people like company with dividends is that they are taxed lower than regular income or say interest income.

Also, muni bonds are tax free, but if you pick good companies, you have the possibility of appreciation in stock price. of course it always comes down to making investments in excellent companies at reasonable prices.

You don't even need to worry about picking companies. I would prefer it but for someone who doesn't know what they are doing there are various dividend ETFs, RIET / Income Trust ETFs, and also a bunch of private income trusts that offer some pretty high returns.

true.

dividend paying companies can lose value, get taken over by non-dividend paying ones

Buying dividend payers blindly (like indexing) has beaten non dividend paying indexing and S&P 500 over time.

far too many downsides to even consider as rationale long term plan

Have any of you read any of derek fosters books like "stop working"?
He essential goes throough with op's plan successfully retiring at 32(around there) and it took nowhere NEAR 1m

I haven't read his book but I heard him on an interview. He is living off $35k a year. That isn't much of a retirement. Basically he gets to sit at home and wait to die.

Funny thing about Derek Foster is that he went back on what he preached in his books and sold off most of his portfolio!

http://forums.canadianbusiness.com/t...17256&tstart=0

I personally right now am doing the dividend re-investment thing, but only until I can build up enough capital to invest in ETF's properly. The dividend paying stocks with their own DRIPS are fantastic if you are just starting out and have less than say 25K capital in my opinion... If you don't have a lot of capital then the fees just completely eat you up... with the DRIPS there are no fees so it works.

sick buuuuuuump i know

anyone want to elaborate on the downsides? i actually decided to go ahead with this plan a few months ago so i'd like to know how i can expect to get raped in the future

If you are diversified well, there actually aren't a lot of downsides. There is a lot of evidence that dividend payers are less risky and return more than non-dividend paying stocks.

One potential downside is that if you are doing this outside of a 401k/IRA you are paying taxes on the dividends which is theoretically sub-optimal. It would be better if the company would reinvest it's earnings wisely for you or engage in share repurchase. In practice, companies have often been poor stewards of capital.

The plan doesn't seem bad to me or anything, but it does seem odd to somehow compartmentalize your returns into dividends. It doesn’t really matter if your returns come from interest, dividends, or capital appreciation. Why are you so focused on dividends specifically? This basically shuts you out of small caps. It seems like it makes more sense to think of an entire portfolio than to be fixated on dividends.

One advantage I see with dividends, is that you get income even when the market is doing terrible.
Lets say you are living exclusively off your portfolio, and the big recession happens.

If you are raising money by selling stock, you now have to sell at terrible prices,
which means you end up selling a much larger portion of the portfolio to make ends meet, than you were planning on.

The majority of big dividend paying companies did not cut their dividend even in 2008/2009,
so if you were living off a dividend paying portfolio, you just made it through the crisis with no damage to the portfolio.

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I agree that it's a bit random, but do think that only buying dividend paying stocks increases the odds that you don't end up with total crap companies in your portfolio. If a company is a paying a dividend it is presumably being able to generate a relative stable cash flow, and it shows that management does care to some degree about share holders since it allows money leaving the company.

Go for it, OP. Continue to report back in every two years and let us know what's going on.

This has been proven to be a successful long-term investment strategy.

Getting 4-6% dividends is better than to get 2% for bonds , and if you buy in panic times and reduce your stocks when anyone is happy it should not be too bad.

And i love also lazy investments with a longer timeframe.

+1