Can we really depend on “Dividend Income “ for Retirement ?
Risks of Living on Dividend Income
“Dividend income” investing has been deep-seated in most of investor’s mind, as ways to achieve Financial Independence and living off dividends in retirement is a dream shared by many.
In today’s environment marked by rising life expectancies, extremely low bond yields, and a 7-year bull market, retirees face challenges on all fronts to build a consistent income stream that will last a lifetime. But the questions is “ Can we really depend on just dividend income for our retirement or is it sustainable ?”.
All incomes are subject to risk and the same apply to dividend pay-out which is not guaranteed. Below two pieces of news prompted me to write this blog post. One may see that with challenging economic situation years ahead, reducing dividend pay-out from companies is just a matter of how much of the cut and not when.
Conglomerate like Keppel and Sembcorp has reduced their dividend pay-out ( hit by oil & gas sector) while Bank is expected to reduce their payout in view of challenging economic facing by China and most of emerging market. REIT and business trust is another sector that showing declining DPU in the recently announced result.
|image credit to businesstimes.com.sg/
|image credit to BusinessTimes.com.sg
Diversify your income stream
Retiree or whoever has achieved Financial independence should realize that depending on one income source will be too risky and a diversified or multiple sources of income is required during retirement.
If an investor goes all-in on dividend stocks for retirement, he would be concentrating completely in one asset class and investment style. Poor diversification of income source will be a disaster during the crisis , one may look for alternative income such as “ annuities, pension fund ( kind of CPF Life ), Bond, short term money market fund (FD ), SG Bond, etc ..“
A retiree and veteran financial blogger ( Uncle CW8888), clearly and continuously explain the importance of having “ multiple income taps “ during retirement based on his own experience.
These two blog links may give you more explanation Link 1 Link 2 about his brilliant concept (tested )!
Otherwise, you may need to also do the “stress test “ on your income received to reduce the margin of error to ensure that we don’t outlive our retirement saving & income. How many percents of dividend income reduction is still a "safe level" for you by not affecting your living in retirement?
Concept explained: “Margin of Error” by Wikipedia
The margin of error is a statistic expressing the amount of random sampling error in a survey's results. It asserts a likelihood (not a certainty) that the result from a sample is close to the number one would get if the whole population had been queried.
The likelihood of a result being "within the margin of error" is itself a probability, commonly 95%, though other values are sometimes used. The larger the margin of error, the less confidence one should have that the poll's reported results are close to the true figures; that is, the figures for the whole population. The margin of error applies whenever a population is incompletely sampled.
The margin of error is usually defined as the "radius" (or half the width) of a confidence interval for a particular statistic from a survey. One example is the per cent of people who prefer product A versus product B. When a single, global margin of error is reported for a survey, it refers to the maximum margin of error for all reported percentages using the full sample from the survey. If the statistic is a percentage, this maximum margin of error can be calculated as the radius of the confidence interval for a reported percentage of 50%.
The margin of error has been described as an "absolute" quantity, equal to a confidence interval radius for the statistic. For example, if the true value is 50 percentage points, and the statistic has a confidence interval radius of 5 percentage points, then we say the margin of error is 5 percentage points. As another example, if the true value is 50 people, and the statistic has a confidence interval radius of 5 people, then we might say the margin of error is 5 people.
In some cases, the margin of error is not expressed as an "absolute" quantity; rather it is expressed as a "relative" quantity. For example, suppose the true value is 50 people, and the statistic has a confidence interval radius of 5 people. If we use the "absolute" definition, the margin of error would be 5 people. If we use the "relative" definition, then we express this absolute margin of error as a percent of the true value. So in this case, the absolute margin of error is 5 people, but the "percent relative" margin of error is 10% (because 5 people are ten per cent of 50 people). Often, however, the distinction is not explicitly made, yet usually is apparent from the context.
The top portion charts probability density against the actual percentage, showing the relative probability that the actual percentage is realized, based on the sampled percentage.
In the bottom portion, each line segment shows the 95% confidence interval of a sampling (with the margin of error on the left, and unbiased samples on the right). Note the greater the unbiased samples, the smaller the margin of error.
Having multiple sources of income during retirement is important for all of us as investors plan for retirement.
Below, few links on how to avoid outliving our retirement fund: for further reading
to Avoid Outliving Your Retirement Savings from Time.com
How to avoid outliving your retirement savings from CNNMoney
Make sure your nest egg doesn't crack from CNBC
Although this is more on the US’s context and perspective but from the above article most of the writer promote to have annuities ( aka of CPF Life ) as a source of retirement income. How about you ? do you have any annuities from insurance firm as one of the “tap “ of your retirement cash flow.