3) Dividend Growth Stocks can Help Ensure a Safe Retirement no Matter How Long You Live
Perhaps the biggest reason most people invest is to ensure a good standard of living in retirement. Dividend growth stocks can certainly help with that goal (1). For example, many people are familiar with the 4% drawdown rule, which says that you should sell 4% of your portfolio during retirement to live off.
This rule was the brainchild of William Bengen, who in a 1994 study determined that a 60% stock, 40% bond portfolio could support a 4% withdrawal in perpetuity. Or to put it another way, if you were to just own a S&P 500 index ETF and a broad bond ETF, then selling 4% of the portfolio each year would offset the annual asset sales with portfolio growth and ensure that you never run out of money, no matter how long you live.
However, a 2008 study by Jack Gardner found that, if you were to only stick to the 100 highest-yielding dividend stocks in the S&P 500, the long-term outperformance of this portfolio would actually allow you to increase your annual portfolio withdrawal to 5% and still maintain the portfolio in perpetuity. His findings were so impressive that even Mr. Bengen endorsed his conclusion, that a higher-yielding dividend growth portfolio could indeed allow you a better standard of living during retirement.
Of course, the true Holy Grail of financial and retirement planning is to hopefully build up enough of a portfolio so that one can live off just one’s dividends. That way you never have to sell a single share to cover expenses, and you truly can be free of any concerns about short-term price fluctuations.
Academic studies have shown that a good long-term rule of thumb for total returns (which include dividend reinvestment) is yield + dividend growth. In other words, all you have to do to achieve long-term wealth and income is to consistently save and invest in a high-quality diversified dividend growth portfolio that yields around 4% and grows the dividends by 6% per year.
10% CAGR Total Return Portfolio (4% yield + 6% dividend growth)
| Monthly Investment | Time Horizon | Portfolio Value | Annual Dividends |
| $1,000 | 50 Years | $15,363,592.49 | $614,543.70 |
| $2,000 | 40 Years | $11,684,443.42 | $467,377.74 |
| $3,000 | 30 Years | $6,513,963.39 | $260,558.53 |
Source: Dave Ramsey Investment Calculator
Of course, the earlier you can put your money to work for you, the more glorious the effects of hyper-compounding become, as you can see in the above table. But the point is that dividend growth investing is an almost infinitely flexible investing style that can be tailored to almost anyone’s needs, risk tolerances, and time frames.
And best of all, as the staggering annual dividend sums above show, not just can dividend growth investing help you achieve your financial independence, completely from dividends alone, but if you are diligent, consistent, and disciplined enough in your investing approach, you can achieve dividend streams that you can live off (if you start early enough).
The remainder can be reinvested back into the portfolio, ensuring exponentially more income over time and potentially creating a multi-generational perpetual income trust you can pass on to your children and grandchildren.
Dividend stocks also have retirement appeal because they have exhibited lower volatility over time. As seen below, dividend-paying stocks (blue line) have almost always had a lower three-year standard deviation than non-dividend payers (gray line) since 1927. Focusing on stocks that score high for Dividend Safety can further reduce volatility, help avoid dividend cuts, and provide a safe, growing income stream.
