Dividend Stocks In Retirement: The Biggest Lie?

Polarization, man. You can’t escape it. 

If you follow the retail investing world like we do, you know that there are a ton of people who swear by dividend stocks. They’re building their empires with them. One day, they plan to sit on the beach — a pina colada in one hand, daiquiri in the other — doing nothing but living large off of their recurring dividend income. 

We wonder if these folks have ever run the math. Because, while it’s not impossible to retire on the back of dividend income, it’s super hard to do. We’ll run the math in a minute. 

There are also tons of people who have decided to crusade against dividend stocks. The rhetoric between the two groups is almost as bad as our nation’s political discourse. 

You believe in something so you go as extreme as possible with it in response to the people on the other side doing likewise. It gets to a point where all logic and the original validity of each position gets lost in a quest to prove yourself and your stance right. 

As we mentioned yesterday in our primer on dividend stock basics, reality sits somewhere firmly in the middle. Not the truth. Because the truth is you can go wrong with a perfectly good strategy, especially in investing where, no matter your favored approach, you still need to pick the right stocks and ETFs (or whatever). 

Beyond the pointless polarization, here’s what blows The Juice’s mind even more. This isn’t all that complicated. It will take us less than a minute of your time to explain it. 

Consider yesterday’s Verizon (VZ) example from the link above:

In VZ’s case, it looks like this. Divide its annual dividend payment of $2.68 ($0.67) per quarter by its $38.88 stock price X 100 and you get 6.89%. 

So, in real world terms. If you own 100 shares of VZ. At $38.88, it has a value of $3,888. 

6.89% of $3,888 is $268 (after rounding up from $267.88). 

This jibes with that annual dividend payment of $2.68 per share, given that $2.68 times 100 (shares) equals $268. 

That’s how we illustrated dividend yield, using VZ’s, at the time, 6.89% yield. 

A 100-share position in VZ at that yield generates $268 in annual dividend income. 

Follow us from there. 

A 1,000-share position — using the same numbers — has a street value of $38,880 and would throw off $2,673 in annual dividend income. 

A 10,000-share position — using the same numbers — has a street value of $388,800 and would throw off $26,788 in annual dividend income. 

So, you need to own $388,800 worth of VZ to make $26,788 a year in dividend income. Of course, there are factors that can impact this question in one moment and over time, but these are things we’ll consider on another day. But — all else equal — it takes a ton of capital to earn enough dividend income to live off of. 

It would probably be difficult for most people to live off of $26,788 a year. And, mind you, VZ pays a pretty high yield. 

So, while you can generate enough dividend income to live off of — all or in part — it takes time and money. And, unless you were born on third base, it takes significant amounts of both. And, if you have really significant amounts of both, you might not want to mess with this strategy in the first place. 

This strategy is one we love, but it’s not a panacea. It needs to be put in quantitative perspective more often than it is. 

One other point to make. What good is dividend income if the stock paying it keeps dropping in value. VZ isn’t a great illustration of this, but the fact that it’s still a good illustration underscores the point. 

As we wrote this, VZ stock was down 2.75% over the last year. This means if you had a position in VZ over the last year — depending on your timing — you might have on-paper losses. If the stock is a loser, but pays a dividend, the degradation of your capital might not be offset by your dividend payments. 

AT&T (T) is a classic, if not great illustration of this. Retirees and others relied on the stock for its healthy dividend income, even as the stock price stagnated and languished. There were huge, polarized fights over this on the message boards. Probably still are. But the folks who hung on not only had to endure an underperforming stock price at times, but a dividend cut when AT&T spun off WarnerMedia. 

The Bottom Line: We hope this installment of The Juice puts dividend income in perspective, particularly as it pertains to retirement. Don’t believe the people who make it sound too easy. Don’t believe the crowd who writes it off as a dumb strategy. 

Dividend investing and the subsequent income can be a key element in your retirement strategy and retirement income strategies. You just have to keep your expectations in line with reality. 

We’ll further quantify how it can all come together as we continue focusing on retirement in 2024 and beyond.

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