The 7 Stages Of Retiring On Dividend Stocks
Dividend investing is a long-term game. It’s the best way to get rich slowly and eventually generate enough cashflow to cover all of your expenses.
Just because a process works doesn’t mean it will work for everyone. That’s because we operate on emotions rather than logic, and we can get swayed away from dividend investing to pursue growth stocks instead.
Both investments present great opportunities, and you can blend the two together. I’ve broken down the dividend retirement process into 7 stages that are a combination of my own experience on this journey and others who make enough from their dividends to successfully retire.
Stage #1: Excitement
When people hear about retiring early through dividend investing, they’re eager to get started. Even if they don’t want to retire, generating the extra cashflow can result in extra vacations and experiences.
People envision themselves generating the cashflow and think about how their lives would be different. You’ll figure out how much in dividend payments you’ll need to retire. The big promise dividend investing provides is enough to spark the initial investments.
Stage #2: Making $100/Yr From Dividend Investing
Making $100 each year from dividend investing isn’t difficult at all. Assuming you buy dividend stocks that average out to have a 3% dividend yield, you’d only need to invest $3,333.33.
Some people may already have that money in their savings or a job and enough stuff to sell on eBay to reach this goal within 1–3 months.
Stage #3: Some Impatience
As you invest more money into dividend stocks, you’ll hear about high flying stocks like Shopify and wish you got into Shopify early on instead of buying your dividend stocks.
You may hear about other growth companies that are still in the early innings of their growth narratives and decide to divert your funds into those stocks instead of your dividend stocks.
You might fully abandon dividend stocks at this point and return a little later, or you would prefer to allocate some of your monthly investments into growth stocks instead of exclusively dividend stocks. This is my personal preference to this day as I like a mix of solid dividend growth and capital appreciation from growth stocks that don’t pay a dividend.
Stage #4: Having Your First $100+ Month
You were excited about making $100 in a year from dividend investing. It’s not much money, but it’s enough to show some progress.
Now you have your first $100 month, and you’re over the moon. You want this $100 month to become more consistent, so you invest in additional dividend stocks.
If you have your first $100 month, chances are you have at least 3 more months where you’ll make $100. That’s because most dividend stocks pay quarterly dividends, so if you make $100 in 1 month from one of your positions, you’ve got 3 more payments where that came from.
To reach this point, you’ve had to learn more about dividend investing. You’ve continued to invest into dividend stocks each month, but you’re starting to see the power of compounding. You’ve reinvested the dividend payments and seen companies raise their dividend payments. Instead of making $26.50 each quarter from your 10 Broadcom shares back in 2019, you’re now making $32.50 each quarter from those same 10 Broadcom shares in 2020…all without doing anything extra.
Reinvesting the dividend would have helped even more…and it’s all on autopilot.
Stage #5: More Impatience
You realize once again that if you invested in a stock like Tesla last year that you’d have a lot more money. You’re happy to have some $100 months here and there, but you also understand it will take considerable work and money to have $1,000 months, let alone retire from dividend investing.
Growth stocks open the doors to increased capital appreciation than dividend stocks, and they may tempt you again.
You already have solid momentum building for your dividend stocks, so figure out how you want to allocate your money for the next few months and see what happens. Maybe you shift more towards growth at this time. Perhaps you take some of the dividend payments this month and invest the proceeds into growth stocks rather than reinvesting into the dividend stocks.
That way, you don’t have to sell your dividend stocks, and zero commissions makes it easier to take the dividend proceeds and invest them into other stocks.
You still invest in dividend stocks at this time but want to mix in some growth stocks too.
Stage #6: Your First $1,000 Month
After years of continuously investing your hard earned money and waiting for compounding to do its magic, you’ve reached an incredible milestone.
You’ve had your first $1,000 month as a dividend investor. Now you’re committed.
That $1,000 is enough to cover many expenses. For some people, it’s the majority of their monthly rent or mortgage…if not all of it.
You may have some growth stocks in your portfolio that don’t pay dividends, but now you’re fully committed to dividend investing.
You know that $1,000 payment will be roughly $1,080 payment next year because of the 5% annual dividend growth rate and the 3% dividend yield. You’ll likely have a spreadsheet at this point tracking all of your dividend payments which you may have also created during Stage 4.
And that’s if you don’t do anything. If you invest more money into dividend stocks, you can easily turn that $1,080 payment into an $1,100 payment or something even higher.
When you get your first $1,000 month, you’ve likely got 3 additional months just like that.
Stage 7: Committing Until You Make It
You’ve had your first $1,000 month and now you’re fully going after it. You know you are closing in on the end goal when you combine your current portfolio and monthly contributions with the power of compounding.
You might consider selling some of your growth stocks to buy additional dividend stocks. Now you’re after the yield, and you know you’re closer than you realize. You’re more likely to follow this course of action when performing this action would close the gap and allow you to successfully retire.
At this point, you just follow the course until you make enough in dividend payments to successfully retire. Ironically, once you have enough money to retire, you’ll resist the idea of retiring. Working an extra year or two gives the dividend payments more time to further compound, and you can continue contributing to your portfolio each month (on some months, the reinvestment will be higher than your actual contribution).
Working for an entire decade before retiring or not quitting your job gives the compounding even more time to grow your portfolio. And what are you even going to do when you retire? Perhaps it’s best to hold off for a bit, but you’ll know that you’ve made it and can stop working at any time. That’s the best gift dividend investing can give.