Can I achieve early retirement using dividend investments?

If you want to skip past all the details of the article, the answer is yes and no. If you start young, say 25, you can probably retire by 40 using this strategy. For me, it is already too late as my earliest retirement date is around 49 if I adopt dividend investments.

Let’s first look at how dividend investment can help us to retire early.

The main objective of any early retirement plan is to develop income streams so that they can be used to pay off our monthly expenses. The point when it happens is the date we can retire. In this case, the income stream will be from the dividends that I received as a result of investing into dividend paying stocks.

On average, a good dividend investor can yield 3-5% on his or her investment. Hence, if you require 3k per month to live, you need about $750,000. Of course, most people, including me, doesn’t have that kind of money lying around. So, what I can do is to invest smaller amounts over a longer period of time to let compounding and reinvestment do their thing.

So let assume I invest 1k every month in dividend stocks, that has a 5% annual dividend. I also assume that your annual dividend will grow by 6%, which is very generous. Using this calculation, my dividend portfolio will generate at least 3k per month after 15 years. Total investment made will be $180,000.

For those interested, here is the link to the spreadsheet: dividend investment calculator

On the surface, this looks pretty good but let me highlight a few risk that might derail this plan.

  • The numbers are very sensitive to the assumed dividend yield and dividend growth rates. For example, if we assume that dividend yield fell from 5% to 3%, the period we need goes from 180 months to 228 months. i.e. 4 more years.  If there is a double whammy, say dividend yield and dividend growth rates both drop to 3%, we need more than 25 years to achieve 3k per month.
  • The long investment period, be it 180 or 228 months, means a greater risk because we need to maintain that kind of investment returns for a longer period of time. It takes a lot of disclipine and careful analysis to make sure we don’t buy any bad apples during this 15 to 19 years. Long investment period also means we are more prone to big shifts in business landscape that might result in good dividend stocks weaken by new competitors.
  • Rate of inflation will catch up with me. By the time I reach 3k in monthly dividend returns, I might actually need 4 to 5k due to inflation. That is what happens when your investment period is long. All sorts of economic forces come into play and  I cannot predict whether my inital budget is still valid.

Due to the above, I am not a big fan of dividend investments. I rather try my fortunes at new alternate investments that yield higher returns. These new investments might be more risky but I don’t believe they are riskier than any of our current tools including dividend investments. As long as I do my due diligence, I will have a higher shot at early retirement by investing in new and undervalued asset classes.

(For those interested, you can see how I calculate the returns of website investment which can allow me to retire much earlier)

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