Is it possible to live off dividends in retirement?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over hundreds million views in recent years.

In the answers below I focused on the following topics and issues:

•  Can people realistically live off dividends in retirement?
• Why are sustainable stocks and ETFs gaining traction and interest?
• What drives private business owners?
• What are the biggest mistakes that small business owners make?
• Was Shark Tank Judge Kevin O’Leary, who I will be interviewing next week on November 2, a skilled businessman or just lucky?

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Is it possible to live off dividends in retirement?

Source: Quora

The simple answer is yes, but remember:

1. Dividends aren’t a free-lunch. Below is a graph of the S&P500 vs Vanguard’s dividend index. You can see that the total returns, including dividends, are about the same. Therefore, the S&P500 capital returns were higher, but the dividends were lower:

2. What happens when a company pays dividends? Money is paid out to investors.

That money could have been used to grow the business. Some of the stock market’s best performing stocks, such as Amazon, don’t pay dividends.

The Nasdaq as an index hasn’t paid much dividends, but has beaten the S&P500, because of the model the big technology firms have.

Likewise, the UK =’s FTSE100 index has had dividend yields as high as 4.5%-5% during some of the years in the last decade.

Yet the capital appreciation has been weak.

3. Therefore, as a result of the last two points, you have two options:

• Live off dividend ETFs directly. In other words, if you have $1m and the dividend ETFs pay 4.5%, you can live off $45,000, or $40,000 to be conservative and factor in inflation
• Or you can live off a combination of dividends and capital appreciation. The 4% rule of retirement shows that it is possible to have a long retirement, but selling off 4% of your portfolio. So, let’s say that in a given year the S&P500 is giving 1.5% dividends per year, you would need too sell around 2.5% per year.

Either way, it won’t make a huge difference. I personally would live off a combination of dividends and selling a small amount every year.

What is more important is making sure that you have enough tucked away to begin with, you don’t spend too much of your portfolio every year and you don’t panic if markets crash.

Why are sustainable ETFs on the rise?

Source: Quora

The main two reasons people are more interested in these investments is:

1. They are genuinely more concerned about the environment
2. They aren’t that concerned but think they either want to hedge their bets in case things get bad, or they assume that the ETFs will go up in price, as more people buy them. We also saw this with technology. Many people bought tech stocks due to assuming that we will continue to use more technology. This included some investors who don’t use technology very much.

They have certainly performed very well since I started to talk about them a few years ago.

However, we have to remember a few things:

1. It is a misconception that investors aren’t pricing in climate risks. Paper after paper has shown that they do. Some big oil companies have good p/e ratios but are performing badly in terms of stock price movements. This doesn’t just affect the stock markets. The paper below found that if properties are in danger from climate change in the next 100 years, there is typically a 4% discount on price and that discount increases to 7% if the danger is in the next 50 years:

2. Now that prices have increased a lot more, and the environmental risk appears priced into assets, people might simply see ESG investing as a hedge. In other words:

• If the environment ends up being worse than expected, ESG stocks and ETFs are likely to rise
• If the environment ends not being as big an issue as expected in the decades to come, and the most severe disasters are avoided, then ESG stocks and ETFs might well underperform the general market.
• As investors are currently pricing in climate risk, if the environment is about as good/bad as expected in a few decades, it isn’t guaranteed that ESG investments will outperform.

With that being said, this won’t go away. A few days ago I heard Bill Gates and others predict that the next trillion-dollar company could be in climate technology.

We could also see firms that are transitioning, albeit slowly, away from fossil fuels, do better than expected.

People forget that some of the so-called big oil companies are now more like energy companies, and renewable project investment is now huge.

What drives entrepreneurs?

Source: Quora

Different things drive different people. However, I have noticed some commonalities.

People who start their own business, no matter how ambitious they are, often want more freedom.

The ability to be able to work when you want, as opposed to the 9–5, is often even more important than money for founders.

That doesn’t mean that money isn’t a big driver. Often it is, especially in the early days. However, freedom often trumps money in the medium term.

If that wasn’t the case, fewer people would start their own business, because it is common to make less in the early years versus having a job.

In addition to that, there is a big difference between what tends to drive successful founders versus those who don’t make it.

One of those is external vs internal reasons for success.

Some insecure founders, especially younger ones, want external validity. They want to:

• Impress others with success and their lifestyle
• Show off on social media
• Just buy lots of stuff
• Sometimes the above is to shove their success in the face of those who doubted them. So, this is partially an internal emotional reason, even if the behavior itself shows itself externally.

Sometimes it works, especially the last reason, because it can drive people on. However, long-term success is more likely to come from internal drivers.

If you are driven by internal things, you are more likely to not want to show off and prove others wrong, and instead help others, have a higher cause, or just impress yourself with your own achievements.

Somebody who is trying to impress external forces will eventually lose motivation in the long term.

That person who started a business to drive a flash car around the streets, and put it on Instagram, will eventually tire of it once a certain amount of material success is achieved.

If your dream was to live in a $2million house with a flash car, and you achieve that, then what next?

In comparison, the person who is trying to make as much money as possible to help the fight against cancer is less likely to tire.

Likewise, the truly top sports stars never tire of breaking records, as they are doing something which drives them internally.

What do you think are the top mistakes that small businesses make?

Source: Quora

The biggest mistakes i have seen are (in no particular order)

1. Selling time for money and being location dependent. For example, being a gym trainer in one area isn’t as robust as being an online trainer with global clients. If something happens to that local area, it could be curtains
2. Not having experience in the area you start the business in.
3. Failing to focus equally on costs and expenditures. Linked to that is not controlling cashflow.
4. Thinking good ideas are useful. Well executed ideas are key
5. Not investing privately to diversify wealth once success has been achieved
6. Becoming complacent once success is achieved.
7. A lack of focus on potential black swan events like lockdowns as a result of a virus. Many previously successful businesses go bust during unexpected events.
8. Not focusing on the long-term. Many businesses, for instance, focus on big upfront paydays over recurrent income streams, but the later builds a business.
9. Only having one product is dangerous for most firms, like being dependent on just one location.
10. Not hiring right.

There are many others too, so the above isn’t an extensive list.

Basically, the keys are often experience, execution and controlling risks relative to potential rewards.

Is Kevin O’Leary skilled, or just lucky?

Source: Quora

Eric Schmidt recently admitted that luck played a huge role in his success.

He didn’t come from a super-wealthy background, but he had options few others had.

For example, he lived as a son of an expat in Italy, in an era where fewer people traveled, never mind lived overseas.

Warren Buffett and Bill Gates have also admitted that luck played a part in their success.

If Buffett was born hundreds of years ago, his skills wouldn’t have been needed.

Even if he was born in say Nepal, today, his skills wouldn’t be needed as much as they are in a developed country.

However, luck isn’t the only factor here. The reasons are:

1. Almost everybody gets good luck and bad luck
2. Few people take advantage of luck. Studies have shown that between 30%-50% of lottery winners and second-generation rich go broke. About 70% of former elite athletes do as well. So, even if luck plays a role, somebody still needs to take advantage of it, and not get complacent
3. People who take more chances, and risks, have a greater chance to become wealthy. You do make your own luck up to a point.

One of the best quotes here is from Mark Cuban, a fellow judge on Shark Tank.

Cuban said if he was born again, with the same skills, he can’t guarantee he would become a billionaire as that takes luck.

But a millionaire to multi-millionaire? No problem. This brings me to O’Leary.

He is clearly a skilled businessperson and I don’t think it is fair to assume that he has received any more luck than many other people.

He didn’t come from a rich background, and I don’t believe his siblings have become especially wealthy.

The analogy I would make is this. I have met some people from developing and poor countries who come out with statements like “people who are born in countries like the UK, US or other developed places are lucky. All they need to do is invest 10%-20% of their paycheques and they will be wealthy at 60 or 65”.

And that is true. It is something O’Leary himself speaks about.

If you invest productively 10%-20% of whatever you make, as a middle-earner in a high-income country, you will be worth $1.5m or so in today’s money at retirement.

Yet knowing and doing are different things. So, is that millionaire teacher or nurse living in the US or Switzerland lucky that they were born where they are?

Of course. That doesn’t mean they also didn’t take action.