Living Off the Dividend Income

“The only thing I like about stocks is they’re not bonds.” …..Tom Hancock

Are you worried about your retirement earning? Do you feel your retirement earning will fail to beat inflation? Do you fear that you have to compromise your post retirement life style? We worries a lot but do little to seek solution seriously. Here I have a story to tell, a story known to many but followed by very few. The story offers a solution to our retirement earning.

Few years ago I had met one middle age gentleman in an investment workshop. The workshop was all about retirement funding. During the lunch break the participants were discussing various retirement options & also proposing their postulates. The middle age gentleman eating besides me was quit and not participating actively in the discussion. Out of curiosity I asked him about his retirement planning. With a smile he said he was retired and living off on dividend. He further added that he was pursuing wildlife photography once his dormant hobby actively now after retirement.

I was baffled that day, the gentleman must be joking I thought. How could it be possible that a man in his fifties, doing nothing but photographing in wild? Probably he could have inherited plenty of wealth to live the current life. Too many questions came to my mind which remains unanswered at that time.

My gradual friendship and subsequent meeting with him taught me my life’s greatest financial lesson. It was he who taught me practically the concept of income generating assets. And years later I read similar ideas form Robert Kyiosaki’s Rich Dad, Poor Dad.

Recently on a Sunday morning over a cup of tea he narrated me his story of retirement funding. By profession my gentlemen friend was a software engineer. Unlike other he had no engineering degree. He was a science graduate with physics major. His keen interest in computer programming took him to a bridge course in programming. He said he was lucky to ride the software boom of nineties and his programming skill took him to higher echelon of career. To him opportunities and bit of hard work of his early days of career helped him to accumulate fair sum of money.

I was getting impatient; I was not interested about his personal history. Probably he understood my gesture but he continued as before. He told me about his father who was a small time businessman, and how he used to buy houses from his business surplus. When my friend was in college his father had four rent paying houses and one scooter to his credit besides his ongoing business. Whole of my friend’s education & his sister wedding expenses were financed from the rent income of the houses.

As per him this how he learnt the power of income generating assets and getting rich slowly. He said he had set two goals during the beginning of his career in Bangalore. First, he would be with his parents when they grow old, and second one was that he needs to set a mechanism to generate a steady cash flow to fulfill his first goal.

He told me that unlike his father he had no time to create and maintain income generating real estate assets. His few years of investment activities and his accumulate learning led him believe that dividend from companies could be a good source of income and if well managed one could live on it. When I asked why stock? His best reason was that unlike the interest from bonds, stock dividends tend to grow over time. More importantly to him, the dividend growth has historically outpaced inflation. For him stock fit his bill with a long timeline. Based on these facts he created a portfolio strictly on a set of parameters for living on dividend-income.

I summarised the parameters which helped him to generate living from stocks dividend. Following highlights are few of them.

·         Create a portfolio of at least 10-15 dividend paying stocks/companies.

·         Build the portfolio over a period which may extend to five years. Because long time frame gives opportunities to buy the stock at near the bottom of its PE band.

·         Best suited stocks to the portfolio are companies which historically paying a consistently growing dividend.

·         Don't just go by which stock has the highest dividend yield.

·         Be suspicious of a company that has cut its dividend.

·         Buy companies which have clear growing business prospect for years to come.

·        Prefer low debt or no debt companies with strong brand image, immense pricing power, and honest and transparent management.

·        Take into account other quantitative figure like ROE, ROCE, Dividend covered ratio etc.

                           

To illustrate his point my gentleman friend acquaints me with one of his holding that was ITC Ltd. As per him he had accumulated 1000 shares of ITC by the beginning of the year 2000. And his total cost of investment was about Rs.7 lakhs in the stock. I was surprised when I came to learn that he had received Rs.1.57 lakh as dividend for FY12-13 from ITC Ltd. alone

  When I did the mathematics, I found that his return from ITC dividend [i.e. (dividend / purchase price)*100] for the FY12-13 year was baffling 22.5 %. Further, total cash flow from the dividend over the 14 years was more than Rs.9 lakhs. In addition to above, if we factor in all the bonus and one stock split for the period 2000 to 2013, the purchased 1000 quantity (FV-10)  of stock is now 30,000 units (FV-1), and whose market valuation is about Rs.95 Lakhs (i.e. current MP Rs.315/-).

The gentleman did not disclose me dividends from other stocks of his portfolio. Nor I had the courage to poke into his confidential data though I would have like to listen from him. Whilst returning home from the tea one famous line came to my mind was “Stock is for the next generation” and I added to that “Dividend is for this generation”.

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