Living off Dividends for early retirement

[adean22]

Good Morning

This may have already been covered but I cant find a thread, if it has please point me to a thread covering this.

I'm in my mid 20's and have ended up in a comfortable financial position and I'm able to max out my ISA allowance each year + a bit more. For the money that will be held in the ISA I'm weighing up investing in stocks with good dividends so that when I'm 50/55 ill have a good amount of passive income to retire early. Has anyone done this or any advice on if this is a good or bad idea?

If its a bad idea what would I be best doing with the savings

Thanks

[dingg]

You're mid twenties, risk on until you're nearly at retirement age ,growth then protection (risk off )as you get nearer to stopping earning from a job.

[limpsfield]

dingg said:

You're mid twenties, risk on until you're nearly at retirement age ,growth then protection (risk off )as you get nearer to stopping earning from a job.

I'd agree with this.

I am 57 and have been investing in some higher dividend payers since I was a about 40-ish, but the bulk of my investments are in S&P and NASDAQ ETFs. The latter have massively outperformed the former in terms of growth.

The risk is that dividends get stopped or reduced or the share price drops drastically reducing your capital pot.

As ever there is no black or white when it comes to investing for the future but I would absolutely be leaning towards growth at your stage - and I still do.

I still like the challenge of finding good divi payers that can grow. But I am usually better off buying a tracker.

I'll give a couple of examples. I bought Imperial Brands IMB in May of this year for divi and growth. It's up 17% including the divi.I bought an index tracker around the same time for the S&P and that's up around 25%

Both great returns, but shoulda bought the tracker.

Of course, there will always be the odd outlier that massively over performs but I think most of us are better of just tracking the overall market of choice, which for me has been the US for some time.

[lizardbrain]

I think the most important decision to think about is what percentage of your net worth is invested in equities. IMO it's less important what type of equities you're invested in. I would just pick a world tracker

[98elise]

adean22 said:

Good Morning

This may have already been covered but I cant find a thread, if it has please point me to a thread covering this.

I'm in my mid 20's and have ended up in a comfortable financial position and I'm able to max out my ISA allowance each year + a bit more. For the money that will be held in the ISA I'm weighing up investing in stocks with good dividends so that when I'm 50/55 ill have a good amount of passive income to retire early. Has anyone done this or any advice on if this is a good or bad idea?

If its a bad idea what would I be best doing with the savings

Thanks

You don't need to invest in dividend paying stocks now (if thats what you want at 50). Invest in whatever you think will give you good growth over 30 years, then when you retire adjust the portfolio to what you want in retirement.

I've made my best gains in global/tech funds.

[Hustle_]

Conventionally, in your early life you want accumulation / growth. Your income is from elsewhere. Later on, when you need income, you sell those down and buy income.

Sure you can take and re-invest dividends to achieve a compounding effect but historically growth stocks have been much better performers than dividend stocks even when dividends are considered.

[adean22]

Thanks all for the reply's. I guess that makes sense, focus on growth and then reinvest into dividends when I require an income source from the investment .

I guess investing in the S&P 500 or the FTSE100 would be a good choice then?

[Tyndall]

Bung it in something like Vanguard LifeStrategy 100 and forget about it.

[Hustle_]

Tyndall said:

Bung it in something like Vanguard LifeStrategy 100 and forget about it.

Basically what I'm doing. It's global with a bit of a UK tilt.

[bennno]

adean22 said:

Thanks all for the reply's. I guess that makes sense, focus on growth and then reinvest into dividends when I require an income source from the investment .

I guess investing in the S&P 500 or the FTSE100 would be a good choice then?

Are you maximising your tax efficient payment in to pensions? Especially so if employed and employer is offering to match contributions.

[WayOutWest]

Agree with above comments, go global equity index trackers for the bulk of your working life. And shift more into dividend/income payers and more bonds from age 50 upwards if that approach appeals to you. Don't forget you can always move your workplace pension(s) into a SIPP so make use of that as well as ISAs.
Whenever I change employer I transfer everything over to SIPP. You can track all your dividends/income in most decent SIPP providers to see how much natural yield you are getting and see how close you are to it potentially covering your living expenses. Use ISAs to bridge the gap to 57 if you are going to retire any earlier than that.

[98elise]

Tyndall said:

Bung it in something like Vanguard LifeStrategy 100 and forget about it.

Agree, LS100 is a fund I've been in for a long time.

[adean22]

bennno said:

Are you maximising your tax efficient payment in to pensions? Especially so if employed and employer is offering to match contributions.

I am yeah, my employer doesn't match contributions. I'm contributing into a SIPP and then i get the standard tax relief applied automatically, then at end of tax year ill apply for the additional rate of tax relief.

[adean22]

WayOutWest said:

Agree with above comments, go global equity index trackers for the bulk of your working life. And shift more into dividend/income payers and more bonds from age 50 upwards if that approach appeals to you. Don't forget you can always move your workplace pension(s) into a SIPP so make use of that as well as ISAs.
Whenever I change employer I transfer everything over to SIPP. You can track all your dividends/income in most decent SIPP providers to see how much natural yield you are getting and see how close you are to it potentially covering your living expenses. Use ISAs to bridge the gap to 57 if you are going to retire any earlier than that.

Didn't know I could transfer an old pension into a SIPP. iv got a pension from an employer I was with for a few years so I may look at doing that, at least it then gives me the choice of what to invest my pension in.

[98elise]

adean22 said:

WayOutWest said:

Agree with above comments, go global equity index trackers for the bulk of your working life. And shift more into dividend/income payers and more bonds from age 50 upwards if that approach appeals to you. Don't forget you can always move your workplace pension(s) into a SIPP so make use of that as well as ISAs.
Whenever I change employer I transfer everything over to SIPP. You can track all your dividends/income in most decent SIPP providers to see how much natural yield you are getting and see how close you are to it potentially covering your living expenses. Use ISAs to bridge the gap to 57 if you are going to retire any earlier than that.

Didn't know I could transfer an old pension into a SIPP. iv got a pension from an employer I was with for a few years so I may look at doing that, at least it then gives me the choice of what to invest my pension in.

Its the best thing to do IMO. I combined 3 smaller pensions into a single large HL SIPP. Made things much easier to have even a single pot and full control.

[fat80b]

WayOutWest said:

Agree with above comments, go global equity index trackers for the bulk of your working life. And shift more into dividend/income payers and more bonds from age 50 upwards if that approach appeals to you. Don't forget you can always move your workplace pension(s) into a SIPP so make use of that as well as ISAs.
Whenever I change employer I transfer everything over to SIPP. You can track all your dividends/income in most decent SIPP providers to see how much natural yield you are getting and see how close you are to it potentially covering your living expenses. Use ISAs to bridge the gap to 57 if you are going to retire any earlier than that.

Also agree, and this is pretty much my plan.

For the OP though, if you really do want to go down the dividend route - check out this guy on YT



He is doing what you originally asked and is mostly in dividend payers (plus a few premium bonds) and he posts his performance on YT every month. His returns are therefore visible to all going back ~15 years or so and it shows what kind of pot / strategy is required to get to his monthly numbers.

[LeoSayer]

If you're investing for 30 years then ignoring companies that don't currently pay dividends may mean that you miss a lot of returns, particularly from high growth companies.

For example, Amazon and Netflix don't pay dividends because they continually reinvest in their own business.

[p1stonhead]

Hustle_ said:

Tyndall said:

Bung it in something like Vanguard LifeStrategy 100 and forget about it.

Basically what I'm doing. It's global with a bit of a UK tilt.

Personally I go for FTE Global All Cap.

Its less UK weighted. I think Lifestrategy is something like 20% UK based which is a lot considering the size of our market.

[drmotorsport]

I've tried dividend investing with real money a few years back following Motley Fool strategies and it was interesting if a little time consuming wading through p/e ratios and company histories etc. I modeled that vs plain passive tracker buying the market and in my little not very long term trial the trackers won. This was with an eye to mvoe out of my existing trackers into divi shares after retirement for the divi income and maybe a little growth using a 4% FIRE withdrawal rule. Some useful points are that high dividend paying companies generally are mature businesses and have finished their growth phase, the younger you are the more time you have for growth and can allow more risk - the fastest growing companies generally reinvest their cash rather than distribute it to shareholders.

[Panamax]

LeoSayer said:

If you're investing for 30 years then ignoring companies that don't currently pay dividends may mean that you miss a lot of returns, particularly from high growth companies.

^^ This. In the tax free ISA wrapper it doesn't matter one jot whether you're getting "income" or "gains" because it's all tax free. All you care about is the overall return.