Living off of dividend income has long been a dream of mine – literally.
Now, the mechanics of living off of dividend income are easy enough to understand.
You simply accumulate a collection of high-quality dividend growth stocks – like my very own Full-Time Fund – that can, in aggregate, generate enough passive (and growing) dividend income for you to live off of.
The dividend income has to obviously exceed your expenses. All along, I’ve aimed to keep the latter as low as possible, which helped me increase the former. Keeping expenses low meant I had more to invest, but it also meant the threshold – the point at which dividend income exceeded expenses – was easier to meet.
I had a job I strongly disliked, which meant my goal the entire time was to achieve financial independence as soon as possible.
And that’s where I’m at, in my early 30s.
It’s a dream come true. It really is.
However, I’ve now realized that it’s not all about collecting dividend income in your pajamas while you eat cereal at noon – it’s about constantly striving toward your potential as a human being.
Financial independence simply allows you to strive, seek out new challenges, and become a better you.
That’s because financial independence provides for resources (like time, money, and perspective) that typically aren’t readily available when one is forced to work 40-50 hours per week just to pay the bills.
But this article isn’t about that, as I’ve covered that with significant depth over the last few months. Moreover, this article isn’t about the mechanics of living off of dividend income, either, as it’s such a straightforward process of collecting money and then spending it.
I’m rather going to discuss the psychological impact of flipping the switch from constant investment/reinvestment to actually living off of dividend income.
This is a switch I flipped just recently, so I have a pretty fresh view on this experience.
Indeed, I’ve been busy accumulating stock and reinvesting dividend income for almost seven years now. And how wonderfully it’s worked out for me. I wish I could invent a time machine just so I could go back in time to give the me of 2010 a big hug and tell him how awesome it’s all going to be. The me of 2017 owes the me of 2010 a huge thanks.
At no point over that time frame did I ever deviate from the plan. I averaged a net savings rate well over 50% over the entire period, kept on buying stock almost every single month, and never withdrew dividend income from my accounts.
The dividend income stayed in my brokerage accounts, and I reinvested it as soon as I possibly could. I wanted to keep the snowball rolling faster and faster, and compounding works a lot better when I’m not removing pieces from the puzzle.
But I always knew that all of this work was for a purpose, whereby the dividend income would eventually shift from reinvestment to actually paying bills.
This process – in terms of mechanics – is very easy, as I always knew it would be. The ease of it is why willpower is so important throughout the journey – it’s so simple to withdraw dividend income that you have to be mindful about reinvesting it regularly.
So the process of living off of dividend income is straightforward. I simply move dividend income from a brokerage account to my bank. The mechanics of this is just one more thing that makes dividend growth investing so appealing, in my view: I don’t have to worry about selling off stock at whatever market price is prevailing; I don’t have to wait for that to settle and then move over capital.
But whereas the mechanical process of living off of dividend income is easy, the psychological aspect of it is a lot more difficult to understand until you actually experience it.
And I think it’s important to be aware that it might be hard to actually flip that switch, when the time comes.
Going from accumulation to withdrawals means you’re likely changing a perspective (as well as lifestyle) you’ve held firmly to for many years on end, as it takes quite a while to build up the passive income necessary to start paying bills, even if your bills aren’t that significant.
The reason I had to withdraw dividend income this past month is due to a confluence of extraordinary expenses that hit me in March.
First, I had quarterly estimated taxes due. Although my dividend income is such that taxes are a non-issue, the income I derive from my writing is substantial enough to require quarterly estimated taxes.
Second, I invested in a personal training course. Becoming a personal trainer is a new venture that I’m super excited about, and it’s something I’ve hinted at for a while now. It’s just me striving toward my potential while simultaneously helping others. And while I’ve been trying my best to help others in the financial sense for years now, I’m also very interested in helping in a more physical sense.
— Jason Fieber (@JasonFieber) March 23, 2017
So I withdrew the dividend income I earned in March to help offset these two extraordinary (and rather large) expenses.
And it felt… weird.
But it also felt rewarding.
I mean, I’m not used to it. It feels very strange to change gears. I’ve been so headstrong, completely committed to the idea of building out this incredible portfolio of wonderful businesses that could (and likely will) pay me growing passive income for the rest of my life. Doing anything that would work against that idea would be working against my very identity.
And I have built an identity around this. I identify as an “investor” (among many other things). Investing is a huge passion of mine. And withdrawing dividend income means I’m not investing. Taking away capital from the accounts that allow me to continue buying stock is not what Jason, the investor, does.
However, I also acknowledge that investing is just one passion of mine.
Investing isn’t the end-all, be-all of my life. Being obsessed with the continuous acquirement/allocation of capital is unhealthy and one-dimensional. Fortunately, I started to realize that maybe around a year ago. Investing is now just one aspect of an otherwise full life.
Thus, the withdrawal of the dividend income felt very rewarding for a couple reasons.
Namely, it felt so gratifying to actually see this income hit my bank account for the first time ever. It was the manifestation of years of hard work. It’s easy to talk about living off of dividend income in a more abstract sense, but actually seeing the money hit my account like “a paycheck” meant everything I’d been doing for years on end resulted in real-life income coming my way. It wasn’t just money that kept accumulating in an account – it was money actually paying bills. And that felt great.
Furthermore, I was still “investing” the money, just not in stocks.
I was investing the money in my writing (gotta pay to play). And I was investing the money in a personal training program that could further accentuate me and fill me out as a well-rounded person that could be better positioned to help others achieve their dreams. It’s just adding to the skill set. And since the average annual income of a personal trainer is something like $40,000 per year, the certification program could be one of the better investments I’ve ever made.
All in all, withdrawing dividend income wasn’t the negative hit to my psyche that I thought it might be.
I honestly wasn’t sure how it’d feel to flip that switch from reinvestment to withdrawal after so many years. But it actually felt more rewarding and vindicating than anything else.
Of course, I think part of that depends on what you’re using the dividend income for. If I withdrew the money to simply pay for a new television or something, it might not feel as good.
But knowing that I’m using this income to further propel me toward my ultimate potential as a human being makes me feel great. Becoming a better you is basically what I think financial independence is all about, if financial independence itself is even necessary at all.
So if dividend income must be withdrawn, using it for the best possible reason(s) makes me feel incredibly warm and fuzzy about all the hard work I put into accumulating it all in the first place.
The me of 2017 is able to withdraw dividend income and actually pay real-life bills (and make investments beyond stocks) because the me of 2010 started aggressively saving and investing. And I think the me of 2024 is going to wish he could travel back in time to thank the me of 2017 for using the dividend income to become a better version of myself. Maybe I’ll be a personal trainer at that time. Or maybe I’ll be doing something totally different. Either way, a lot of it is possible due to the time and money that the dividend income provides.
When you’re finally ready to actually live off of your dividend income, be aware that the psychological impact is a lot more difficult to forecast than the mechanics of the process. It’s easy to hit that transfer button in theory. But it’s a lot more difficult in real life to come to terms with the change in perspective. It might mark the end of an era. And that could be a little tough to deal with, especially if you lack many other passions/identities beyond “investor”.
However, if you’re doing it for the right reasons, and if you have other passions you’re working on, I think you’ll be incredibly pleased. In that sense, it’s just using one form of compounding (financial) to further compound another area of your life (your potential and personal happiness). You’re actually expanding something you spent years building, rather than simply draining this wonderful accomplishment one dividend at a time.
How about you? Have you started living off of dividend income? Did it feel strange to actually switch from reinvestment to withdrawals? Why or why not?
Thanks for reading.
Image courtesy of: bplanet at FreeDigitalPhotos.net.