Creating Retirement Income Only From Dividends and Interest?

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What happens when you finally want to live off of your portfolio? Most withdrawal methods call for a combination of spending dividends and selling shares to cover the rest. But what if you wanted to live only off of dividends from your stocks and the interest from bonds? I was curious to see how this would have worked out historically.

Let’s say you had $100,000 invested in a mutual fund, and you had to live off the dividend income produced from those shares without any additional buying or selling. I found historical price data and dividend distributions for select funds from Yahoo Finance that went back to 1987-1990, and added up the trailing 12 months of dividends to see how much money they would have generated over a year’s time.

The Vanguard Wellesley Income Fund (VWINX) is a low-cost, actively-managed fund which has been around since 1970. It is composed of approximately 35% dividend-oriented stocks and 65% bonds (mostly corporate for higher yields). This conservative allocation is designed to create a steady income stream with less focus on capital appreciation. Let’s see how $100,000 invested in 1988 would have done in terms of income:

In 1988, interest rates were relatively high and $100,000 of Wellesley shares would have created nearly $9,000 of annual income. In 2012, that same set of shares would be worth $156,000 and your income would be about $5,400 annually. The income produced had some swings, but overall did not seem to track with inflation although the share price did better. According to the CPI, $100,000 in 1988 would buy as much stuff as $180,000 today.

The Vanguard 500 Index Fund was the first index fund available to the public and is now one of the largest funds in the world, passively following the S&P 500 index of large US companies since 1976 and thus always 100% stocks. Even though this is not a dividend-focused fund, it still does produce a regular stream of dividends from the companies it tracks:

In contrast, $100,000 of the Vanguard 500 Fund would have only created about $2,700 of income in 1988, but that income has grown over the next 24 years to about $8,800 today in 2012. Also of high significance is that the value of your $100,000 worth of shares from 1988 would be worth around $500,000 today.

This is just a limited snapshot of two funds, but it would suggest that you can’t just buy an income-oriented fund that has a large chunk of bonds and expect to sit back and spend whatever dividends are spit out. However, things would have turned out much better if one was reinvesting a big chunk of those Wellesley dividends when the overall yield was high. I can still envision a income-oriented portfolio, but I will have to set a reasonable withdrawal rate that isn’t too high and have the discipline to plow the rest back into buying more shares.

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  1. Very interesting. I have often wondered about a dividend-focused portfolio and how much income it could generate, but I see it would really just be a supplement to other sources, and not provide enough on its own.

  2. I think to really be able to reply on an income-only retirement approach from investments, not tapping capital at all, requires some real estate investment (e.g. rental homes, apartments). Jonathan, have you considered investing more broadly in this area? I don’t recall you ever discussing this angle in much detail before

  3. What if it’s not full of bonds but a fund focused on dividends like DVY?

  4. I was looking for the next step in the calculations which you’ve briefly mentioned… where a 3 or 4 percent withdrawal rate is calculated into the 500 index and only taking 3/4 percent of VWINX divided (so for the 9k first year only use 3k and reinvest the rest 6k).
    kinda seems like you’re comparing apples to oranges without it.

  5. Kurt @ Money Counselor says:

    A buddy of mine retired at age 41 (he’s now 54) after following the formula in the book Your Money or Your Life. As the book prescribes, he’s lived since almost totally from interest on long-term US bonds (which he purchased when interest rates were more like 7%). And he’s done a bit of temporary, part-time paid employment here and there.

    I think I wouldn’t be comfortable depending solely on dividends. Even dividend stalwart GE was forced to succumb during the financial meltdown and slashed its dividend by something like 2/3rds. Too risky.

  6. What would you do if you have 5K to put for e.g in Roth IRA…from these 2 funds…keeping in mind that will be reinvesting the dividend for lets say next 10-15 years..

  7. “However, things would have turned out much better if one was reinvesting a big chunk of those Wellesley dividends when the overall yield was high.”

    For apples-to-apples comparison of charts, you will need to do draw the charts with dividend reinvestments 🙂

    Alternatively you could draw the index fund chart with regular withdrawals.

    I feel the case for bonds over stocks is that it’s money in hand vs unrealized gain.

    I wouldn’t put all my money into bonds the day I retire. I would perhaps go with the “age in bonds” formula. i.e. percentage of bonds in portfolio = my age. i.e. 62% in bonds at age 62. 101% at age 101 😉

  8. @MT – Rental property is definitely under consideration, but one factor is that I live in an expensive area, one of the few where the price/rent ratio is still crazy high and you can’t just buy a foreclosure for under $50k and rent it out. I think if I lived within an hour’s drive of such a property, I would try that. I’ve heard too much property management and tenant issues to do it long-distance.

    The income from REITs may have to suffice for now.

    @Teague – Good idea.

    @Ace, whytax – I would like to do the reinvestment scenario, but honestly that’s too much work to do manually for a weekday blog post. You’d also want to account for inflation, because the 3% withdrawal rate is intended to be adjusted for inflation. In the 80s that was really high. I might do it later, but if someone wants to run the numbers, I’d be happy to post it up and credit them for the work.

    @JR – I would still stick with a solid overall asset allocation:

  9. I am actually attempting to have a portfolio of income producing stocks from dividends to life off of in retirement. I am currently 32 and assume a retirement age of 70. I also assume no Social Security as it helps me focus on my investing. I started my income portfolio accidentally when I was around 26. I knew that a dividend can provide a certain part of a stocks total return, but didn’t notice the effets of the income stream until after I held for around 5 years. I can say that you need to start early (i.e. young) and invest periodically over the years (one a month, quarter, year, etc). After 5 years of re-invested and hopefully increased dividends you can see a nice income stream forming. The key is to invest in quality companies that have increased their annual div payment year after year. Once website that is maintained for dividends is

    There is a tools section where you can download an Excel sheet, plug in some values and it can project your income in the future factoring in inflation, contribution rate/growth and dividend growth.

  10. Why not dividend aristocrats instead? I’m assuming Wellesley fund does not invest in them exclusively. There are many on the aristocrats list longer than the 25 years minimum requirement.

  11. I like the Dividend Aristocrats, but there is not an ETF or mutual fund that held all of them with a long history. During the 2009 crisis some of the Aristocrats dropped their dividend (financials, GE) so it would better to track all of them as a group rather than just the ones which are still Aristocrats as that would be survivorship bias.

  12. @Jonathan: Why not then buy them each? The real fees would be the first time you buy them all, then each year the ones that leave/join the list. Without running the numbers I suspect would be much cheaper than most funds, and would be easy to maintain. Especially in the $100,000+ range to generate any decent return.

  13. My dividend portfolio is focused on purchasing undervalued Dividend Champions. I am hoping one day, call it 10 or 15 years from now, I can just turn on the income stream that it produces.

    Currently, year to date, it has only produced a couple hundred in dividends so I have a LONG time to go lol

  14. @Chris – It does take more principal than most investors expect to generate dividend income that you can live off of. The key is to start early and reinvest the dividends.

    I love dividend stocks for their growth, stability and the income they provide. Now that Apple will pay dividends my entire portfolio is made up of dividend payers. JNJ, MSFT, RPM just to name a few of my favorite individual stocks.

  15. Living off of income from dividends and interest is a great way to retire. Not only will you have “monthly income” from it, but you will not be burdened if you want to take a trip or need extra money for special occasions.

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