Living from dividends in retirement. I did an interview with a reporter from the Dow Jones news service on May 20* about living from dividends in retirement. I gave Monica Gutschi some of my best arguments gleaned over well more than two decades of following the dividend growth strategy. Here's the summary of my before and after interview notes. ♣ Well before you retire, you gradually build up a portfolio of common stock in quality companies with a good record for providing increasing dividends. You hold them into retirement. You must have the patience to hold the stocks for years … the stamina to hold through the vagaries of the market. It could take some 15 years for serious cash to be generated. I was asked about conventional wisdom says you switch to bonds in retirement. “It's bunk.” After years of holding your common stocks they will be providing double-digit yields because of dividend growth. Why on earth would one switch to a lower yield, fixed-income instruments? Bond prices fluctuate too. It's the income these stocks eventually generate you are after… the growing income. Common stocks that provide a growing income become more valuable as the years go by. ♣ If you had purchased 1000 shares of Toromont (TIH) on January 1st ten years ago for $8,130, your yield now would be 7.4% and the shares worth $27,790 (more than three times as much). Not bad, eh. After 15 years, it’s even better. Your yield would be 17.4% as the cost of the 1,000 shares in 1995 would have been only $3,445. (The Toromont data is courtesy of MacDougall, MacDougall and MacTier.) ♣ My wife and I own a lot of shares with double-digit dividend yields. And I’m talking yield, note. I'm not counting capital gains (from $3,445 to $27,790) in the 17.4%. The TransCanada I bought in 2000, after its dividend reduction, now yields 12.9%, Our Canadian Utilities purchased in 1992, yields 12.6% now. Our Fortis from 1995 yields 16.9%. Great West Life, luckily purchased in March 2009, yields 8.7%. I gave the Dow Jones reporter more yield examples after holding these common shares for 15 years: BNS 29%, Power 24.5%, Enbridge 23.7%, Metro 20.8%, CNR 32%. On more recent purchases, our yields are much lower, of course, because the dividends have not yet had time to build. Are you patient? Here’s the key point: with dividend growth, your capital grows too. You can eat into capital in retirement (we do) and still not touch your original investment. Here’s another bonus: there's next to no tax on our Canadian dividend income for most people. Interest on bonds is fully taxed, and it's fixed. Me switch to bonds in retirement? No way! ♣ You are still worried about a short-term fall in stock prices? Right? Once you retire, you could keep a year's income needs in par-value account so you do not have to sell. Do not sell if there's a rout. Control your behaviour. Hold for the growing dividends. Hold as Warren Buffett does. The strategy works. We have been working it. Sure there is the odd dud: Manulife reduced its dividend last year. But all the non-financial stocks in my list, except one, increased their dividends in 2009. The stalwarts more than make up for the odd reduction. ♣ Since talking with the Dow Jones reporter, I've completed figures on another stock we bought 20 years ago, in 1990. The price was $364 for 100 shares. In 2009, the average of the high and low price, times 100, was $3,659. That's up 905%. But we are not selling. The dividend is up from .25 in 1990 to $1.96. That's up 684%. We now earn about 54% on our initial investment. In other words, we get a bit more than half our investment back this year alone. As the dividend grew, so did the price of these BNS shares. YES!

* The column was posted on the Wall Street Journal site on May 26 2010 ‘A strategy that pays dividends’. The column is not available without a subscription. This is why I keyed in these notes. It boils down to this: you can live from dividends in retirement and eat into profits without touching your original stash if you are a patient and disciplined person. It's simple. Buy and hold top quality dividend-growing stocks.