For me, retirement is still quite far away, but the intention is to grow my investment assets by then to a point where I could live comfortably on stock dividends. So let’s play with the idea that you have €x to invest and you want to invest it in dividend-paying companies and live off the dividend income. The goal is a minimum of €60k in gross dividends annually, so that about €3,500 remains as net monthly income. Other income is not taken into account here.
The portfolio would only be adjusted once or twice a year, so the stocks should be stable enough that there’s no need to track share prices…
How much wealth is needed (my own estimate is around 1.2 million) to reach that, and how would you structure your own stock portfolio?
Without commenting on the portfolio and the stocks themselves, I think 3500€ net as a retiree is an absolutely insane amount because, at that stage, fixed expenses are presumably quite low. At least 2000€/month of that would be left for luxuries, whereas I barely have 200€ left from the same amount when you have a mortgage, a car loan, and the costs of two children and a detached house.
If the goal is to live on dividends alone and consistently receive €60k per year (+presumably adjusted for inflation over time), the portfolio size should be closer to €2 million to ensure you can weather even the bad dividend years. Dividends are not constant; they often fluctuate cyclically, and at worst, these cycles can coincide, leading to several bad years in a row.
In an ideal scenario, the portfolio would consist of profitable companies that steadily increase their dividends and maintain a solid financial standing. This would make the dividend stream relatively steady and predictable (and growing, which is crucial due to inflation). Personally, I would build a “dividend portfolio” diversified across high-quality, successful companies from various sectors and countries.
Based on those criteria, I would look for dividend-paying ETFs. Less stress than owning individual stocks. ETFs focused on dividend aristocrats could be one option.
Indeed, €3,500 in dividends in hand is a lot. It is also worth taking into account the future pension. Everyone will still get some pension on top of that. At least €1,000/month in national pension, if no earnings-related pension has been accrued.
Well, if you plan on spending a lot of time abroad, in the worst-case scenario, the pension could be cut off entirely. And the plan is indeed to “retire” before the official retirement age, so initially, there might not be any other income…
My current mandatory bachelor expenses for my post-rush years are about 950 euros a month (mortgage + maintenance fee, bills, and groceries), which would easily drop to even under 750 euros before age 60, once the mortgage is paid off. Perhaps around €1,800/month net would be plenty for me to live on in my home country, with treats and experiences, without a pension, despite inflation.
Currently, my annual dividends are only a bit over 3,000 euros, but we’ll see how high I can get that over the next 20 years. The dividends would come from large companies on the Helsinki Stock Exchange (e.g., Sampo, Nordea, and Elisa), in which I am currently growing my holdings at a rapid pace.
My current planned scenario is that in 20 years, I’ll reduce my workload at age 60 and perhaps leave the workforce entirely at age 65—meaning 3–5 years before the official retirement age—but I might still change my mind and/or the size of my portfolio might change; in the end, everything is still wide open. I might even be dead before the plans are realized.
My retirement portfolio includes many companies that pay low dividends (under 2%, even 0). The tax rate rises unnecessarily high if there are many high-dividend stocks.
Examples of such companies for a retirement portfolio that you don’t need to keep a constant eye on:
Berkshire
Markel
Fairfax
Investor
Byggmästaren
An accumulating ETF is certainly a much more tax-efficient way to invest than dividend-paying stocks. By doing so, compound interest has plenty of time to accumulate quite nicely before you withdraw any funds from the investments.
I still have over 30 years of working life left, and there is plenty of time for my thoughts to change many times over. If I were to live off dividends, I would have an insane number of positions. There would be more room for error in my choices, and I suppose there could be crises in the future that can’t be anticipated yet.
A portfolio could look something like this, for example:
If I were building a retirement portfolio out of dividend companies, I would hardly choose a single company with significant operations in Finland. If demographic trends continue in the same vein, the population here will decrease, and along with it, corporate earnings. On top of that, with the scares about the Gulf Stream stopping, I don’t feel like basing my retirement on the domestic market. It would even be worth selling the flat, investing the money, and moving into a rental. Let others deal with property maintenance and renovations.
I would probably put the money into some dividend aristocrat ETF. As I understand it, they have performed quite well, even if you go for the dividend-distributing version.
Well, in my opinion, it should be a third of investment assets in stocks (1/3 property and 1/3 low-cost funds or ETFs). Essential would be diversification across time, sectors, and geography. Any stock is good if the timing is right. I recommend active monitoring and portfolio management. A sound piece of advice is that you shouldn’t catch falling knives. Additionally, in the words of Buffett: buy the news & sell the news. The target return for the portfolio is at least 10% if managed even slightly actively. So 100k =) 10k pension and 200 =) 20k€ etc.
Target return is a dangerous concept in the stock market. If you plan your retirement according to a 10% target but a period comes when the market only yields, say, an average of 5% per year for several years in a row, or a long bear market occurs, then what do you do? The market gives what it gives; it cannot be forced to provide the kind of return you want. You can only manage risks through diversification, but you cannot manage returns on the equity side.
Without goals, there are no returns… Being active means trading and goal-oriented research & effort. I don’t believe in buy-and-hold in the long run nowadays with that kind of long-term return target. Dividends alone won’t easily yield 10% either.
If it absolutely has to be a dividend portfolio, then a portfolio built from investment companies like this would also be my choice.
A boring, cost-effective, and especially tax-efficient accumulating ETF/index fund portfolio would likely yield the best end result.
In an index portfolio, dividend taxes and potential capital gains taxes don’t slow down the accumulation, and even in retirement, you end up paying less tax than with a dividend portfolio. You can also more easily withdraw exactly the right amount monthly from an index portfolio. The Equity Savings Account (OST) exists, of course, but it’s only suitable for Helsinki dividend stocks, and a retirement portfolio shouldn’t be built solely on Helsinki.
Ultimately, an index portfolio is also the most stress-free option for retirement. Individual companies always need to be monitored because risks can grow and materialize in a way that the investor must be able to react to. Many probably considered Nokian Tyres and Fortum to be safe and stable dividend stocks, but look what happened.
Furthermore, if you try to select stocks based on dividend yield rather than just chasing the best total return, beating the index through stock picking becomes even more difficult.
Stocks should be diversified across multiple sectors and should have good prospects for growing dividends over the next 20 years. It would be best to invest the majority outside the domestic market; on the other hand, dividend yields in Finland are high. I can’t say much about foreign stocks, but here are some domestic ones from a few sectors:
Financials: nordea, sampo, alexandria
Healthcare: orion
Materials: huhtamaki, upm
Cons.disc: tyres, alma media
Energy: neste
Utilities: fortum
Exactly. Additionally, the stock market reacts quickly and in advance — usually, you don’t have time to react to unexpected problems before the share price has already dropped. Especially if you focus on dividends, you are easily “too late.” A portfolio diversified into only a few companies needs to be monitored quite closely if you intend to live off the dividends from those companies.
I’ve been thinking the same thing, and it’s certainly very challenging to aim for multiple targets at once: you want a good dividend yield, the dividend should grow over time, performance should be steady to avoid “zero years,” and at the same time, the company should invest in the future, which reduces current and near-term dividends. Then, instead of increasing the dividend, companies might start prioritizing share buybacks.
And on top of that, focusing on dividends easily excludes highly successful but growing companies from the portfolio. For example, Berkshire Hathaway or Alphabet (i.e., Google).
It indeed becomes much harder than just trying to find good companies whose total return over time would be as high as possible. There is plenty of challenge in that alone.
Hate to be a killjoy, but for me, that €3,500 net isn’t enough for anything, and I’m fairly certain that when free time increases through either retirement or financial independence, costs will rise even further. A retiree has time to travel, eat out daily, and perhaps buy a nicer summer cottage.
So, ideally, one should have about 1.5 million euros in investment assets relative to current price levels to be able to live off investment returns.
Americans use the 4% rule as a benchmark for how much money can be withdrawn from investments annually. In other words, you could safely withdraw 40k a year from a million-dollar portfolio (with an annual inflation adjustment on top of that).
This has been studied using historical data, and it’s been found that with higher percentages, there is a risk of running out of money during a severe bear market.
That 4% might sound small—if you are a better-than-average (= index) investor and/or can tighten your belt during lean times, you can certainly withdraw at a higher percentage. But that’s the ballpark you’re looking at if the intention is to live through your entire retirement solely on investment returns.
