How To Invest $600,000 In 2024 To Live Off Of Dividends Forever (2024)

After several years of sky-high inflation, the cost of living is higher than ever. This is particularly true if you did not already own a home before mortgage interest rates and rents soared over the past few years. As a result, an increasing number of people believe that retirement is an unachievable dream. The average American thinks they need ~$1.2 million to be able to retire and therefore fully expects to be perpetually trapped in 9-5 employment in order to meet their financial needs.

With that being said, I believe that retirement is more achievable than you may think and that achieving a ~$1.2 million nest egg may not be necessary for many. In fact, you may only need half of that number. In this article, I will conduct a thought experiment on how one might go about investing a $600,000 nest egg in order to live off of dividends forever.

Why Live Off Of Dividends Forever?

The standard approach to retirement is to follow the 4% Rule. This approach consists of withdrawing 4% of your starting principal each year plus increases for inflation. Following this approach in a well-diversified portfolio of mostly low-cost index funds (SPY)(VOO) perhaps complemented by some bonds is expected to be able to last for several decades at least. While this approach is certainly simple, it is anything but low-stress and low-risk. This is because withdrawing a fixed amount from a portfolio annually, as suggested by the 4% Rule, carries with it the risk of depleting principal during market downturns. If the market remains suppressed for a prolonged period of time after a fierce crash, investors who planned to follow the 4% Rule may see their retirement hopes and dreams dashed as their savings rapidly dwindle.

In contrast, living off of passive income from dividends provides the comfort of preserving the principal while living off the generated cash flow. As a result, investors who plan to live off of dividends indefinitely do not have to worry much at all about short-term market volatility and can instead simply focus on the quantity and quality of their dividend cash flow.

What Does It Take To Live Off Of Dividends Forever?

That being said, living off of dividends for an indefinite period of time is not simple and therefore necessitates a strategic approach to selecting individual stocks and constructing a properly diversified portfolio. Most importantly, it requires knowing exactly what type of dividend stock to be on the lookout for to add to your portfolio. Here are four key filters to guide your decision-making process when selecting individual positions for a passive income portfolio:

1. Defensive and Durable Business Model: In order to deliver stable and growing dividends year after year over the long term, the business model should be one that is generally secure against technological disruption and also tends to remain at least somewhat profitable during good times and bad. The more stable its cash flows across an economic cycle, the better.

2. Strong Balance Sheet: Additionally, companies with low debt, ample liquidity, and strong credit ratings are less likely to encounter financial distress during economically challenging periods and, therefore, more likely to maintain or grow their dividends over time.

3. Safe and Growing Dividend Payout: In addition to having a defensive and durable business model and a strong balance sheet, a good dividend stock should also cover its dividend comfortably with cash flow. The more capital-intensive and/or cyclical its business model and the weaker its balance sheet, the lower the dividend payout ratio should be for you to feel confident in its ability to keep paying its dividends. Moreover, to fit in a long-term passive income retirement portfolio, a stock should not only offer a safe dividend payout today but also demonstrate potential for consistent dividend growth for years to come, ensuring that the income stream keeps pace with or outpaces inflation over the long-term, thereby preserving your purchasing power.

4. High Enough Current Dividend Yield: Last, but not least, while future growth is essential, a significant current yield is crucial for meeting immediate income needs. After all, without enough passive income from your portfolio today, you are in not much better shape than those who are pursuing the 4% Rule as you will still be forced to sell some of your stocks to meet living expenses, even if the market is crashing.

Can You Live Off Of A $600,000 Portfolio Forever?

Living off a $600,000 portfolio indefinitely is certainly going to be more challenging than simply following the average American's expectation that a nest egg of $1.2 million is necessary to retire. If one follows the 4% rule, a $1.2 million portfolio would cover a $48,000 budget each year, or $4,000 per month. Moreover, according to the Social Security Administration, the average monthly Social Security check is a little bit over $1,700, so the monthly budget is actually a little over $5,700 (~$68,500 per year).

This amount seems quite reasonable when you consider that there are health share programs that provide pretty comprehensive coverage for seniors at a total annual cost of only a few thousand dollars. Add to that various other forms of insurance to guard against very unique circ*mstances (i.e., nursing homes, extremely expensive cancer treatments, etc.) and the long-term average annual healthcare budget likely comes to ~$6,000. Housing costs are likely not too high either ($2,000 per month or less to rent a small home/decent apartment; less if you have already owned a home for a while) if you move to a fairly low-cost-of-living area in the United States or Europe. That leaves $38,500 - or ~$3,200 per month - for food, gas, transportation, and fun, which should be plenty for an individual who is not planning on living in luxurious splendor and is debt-free.

To achieve a similar income stream from a $600,000 portfolio, the portfolio would have to throw off twice the yield (i.e., 8%). That being said, as we already pointed out, $3,200 is probably more than enough for food, gas and transportation, and fun for a single retiree, so they likely do not need to achieve quite an 8% yield from their portfolio. In fact, we think a $2,500 budget is still quite comfortable for these needs, especially given that gas and transportation costs will likely be quite low during a normal work-free routine and retirees tend to eat less, leaving plenty of money for fun, even with a $2,500 monthly budget. Moreover, the more stable sequence of returns that comes from dividends as opposed to long-term stock market appreciation means that not as much of a factor of safety is needed when estimating whether or not a portfolio will be sufficient to support living expenses over the long term. Ultimately, this means that at least $39,600 per year in dividends will be required from your $600,000 portfolio (or a 6.6% yield) in combination with the typical social security check to support a comfortable retirement.

Of course, aiming for such a high yield from a retirement fund and expecting it to last for a long time is not without its challenges and risks. As a result, it is crucial to build a buffer into your planning to guard against potential dividend cuts that may come as a result of poor investment judgment or black swan events as well as unforeseen personal expenses. This means targeting a yield a bit higher than 6.6% and growing on average by at least the long-term inflation target of 2% and then reinvesting the excess cash flow is likely prudent to ensure that your portfolio continues to sufficiently meet living expenses over the long term.

Sample 10-Stock Portfolio

While we generally do not invest in ETFs ourselves and instead invest in a portfolio that consists of several dozen individual stocks (given that we are able to generate better yields and total returns by intelligently selecting individual stocks than by investing in broadly diversified dividend ETFs), for the sake of simplicity, we have included several ETFs in this sample portfolio in order to ensure that it enjoys significant diversification while only consisting of 10 securities. In building this portfolio, we ensured that its expected long-term dividend per share CAGR exceeded 2% in order to help offset the inflationary erosion of purchasing power while also ensuring that the yield comfortably exceeded our 6.6% target (in this case by over 11%). Between the 2%+ expected dividend per share CAGR and the surplus cash flow that this portfolio throws off which can then be reinvested to purchase additional dividend stocks, we expect this portfolio to be able to meet both current and long-term income needs while also offering a high degree of dividend payout sustainability across economic cycles:

1. Enterprise Products Partners L.P. (EPD): EPD's diverse, fully integrated, and highly contracted business model in the midstream energy sector generates very stable cash flows even in the face of macroeconomic volatility. With a strong balance sheet evidenced by its A- credit rating, low leverage ratio, and substantial liquidity, EPD has demonstrated a consistent track record of increasing distributions for over a quarter century. Currently yielding 7.7% and offering inflation-beating growth potential for the foreseeable future, it is an excellent pick for a retirement portfolio.

2. Energy Transfer LP (ET): ET's vast network of midstream assets and a high percentage of EBITDA from contracted assets provide it with a defensive business model. Recent steps to reduce high leverage ratios and maintain an investment-grade credit rating, coupled with a very well-covered and growing 9.2% yield, position ET as a strong passive income investment for the long term.

3. Blackstone Secured Lending (BXSL): BXSL's focus on first-lien senior secured loans, skilled underwriting with the support of its trillion-dollar asset manager parent (BX), and investments in higher EBITDA companies position it well in economic downturns. With strong dividend coverage and recent increases in its regular dividend, BXSL offers a secure income stream that should also continue to grow gradually over the long term, making it an attractive option for income-focused investors while also balancing out our portfolio a bit to profit from periods with rising interest rates.

4. W.P. Carey Inc. (WPC): WPC's shift towards industrial and warehouse properties represents a strategic move towards a more defensive and durable business model that generates very stable long-term cash flows. With a solid balance sheet, including a BBB+ credit rating and CPI-linked leases, WPC's dividend, currently yielding over 5.3%, is well-positioned for stable long-term growth, offering an attractive balance of yield and security for retirees.

5. Realty Income Corporation (O): Known for its consistency as a Dividend Aristocrat, O's diversified property portfolio and focus on triple net leases generate stable cash flow to support its monthly payouts. The company's strong A- credit rating facilitates low-cost financing, supporting its dividend sustainability, which currently yields 5.4% and is likely to continue growing each year for years to come.

   See Also

   5 REITs With Impressive Dividend Growth

6. Cohen & Steers Quality Income Realty Fund (RQI): RQI's diversified real estate investment trust (VNQ) portfolio and attractive yet consistent monthly distribution - even during periods of market turmoil - currently yielding ~8%, make it a very compelling income investment.

7. JPMorgan Equity Premium Income ETF (JEPI): JEPI, with its covered call strategy, offers investors exposure to mega-cap tech stocks like Apple (AAPL) and Microsoft (MSFT) while also still paying out a hefty monthly distribution. This makes it a nice portfolio diversified for investors who desire the stable sequence of returns provided by dividends, but still want to diversify their portfolios to include exposure to mega-cap technology stocks.

8. Virtus InfraCap U.S. Preferred Stock ETF (PFFA): PFFA's focus on high-yielding preferred shares, combined with modest leverage and active management, enables it to pay out a very attractive, sustainable, and defensive 9.6% yield.

9. Atlantica Sustainable Infrastructure plc (AY): AY's focus on renewable energy and stable cash flow profile from long-term power purchase agreements with investment grade counterparties, along with a strong balance sheet, positions it well for sustainable income generation for years to come. Between its current yield of 8.5% and long-term growth potential in the renewable power industry, AY offers investors a compelling combination of attractive current yield, defensive cash flows, and growth potential.

10. Schwab U.S. Dividend Equity ETF (SCHD): Last, but not least, SCHD's focus on dividend growth stocks has resulted in strong long-term total return and dividend growth performance. Although its yield of 3.5% is lower compared to the rest of our portfolio and is well shy of our target yield, its low expense ratio and track record of generating double-digit dividend CAGRs make it a nice complementary holding in our portfolio by increasing our average dividend growth rate to keep our purchasing power growing in line with inflation.

Investor Takeaway

As we demonstrated in this article while living off of dividends forever is certainly not easy, it is quite possible. By focusing on the key tenets of what makes a stock an excellent long-term dividend stock, intelligently diversifying your portfolio, and living somewhat frugally, you can potentially retire with half of the average American's target retirement nest egg. Of course, this was purely a thought exercise - and an oversimplified one at that - so be sure to do your own due diligence and speak with a professional personal financial advisor and/or planner to ensure that whatever plan you are pursuing works for you and your unique goals and circ*mstances.

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Samuel Smith

Samuel Smith is Vice President of Leonberg Capital, he has a diverse background that includes being lead analyst at several highly regarded dividend stock research firms. He is a Professional Engineer and Project Management Professional and holds a B.S. in Civil Engineering & Mathematics from the United States Military Academy at West Point and has a Masters in Engineering.

Samuel leads the investing group High Yield Investor investing group. Samuel teams up with Jussi Askola and Paul R. Drake where they focus on finding the right balance between safety, growth, yield, and value. High Yield Investor offers real-money core, retirement, and international portfolios. The services also features regular trade alert, educational content, and an active chat room of like minded investors. Learn more.