The Simplicity of Living off Dividends

Some people have made comments that many of my posts on this blog are not finance related, so I will make an effort to post more about ETFs and other financial topics in the future. Perhaps the reason why there are few finance topics on this blog is because living off dividends is such a simple technique that I rarely think too much about finance. The whole point of making money is so you do not need to think about money. You do not need to stress about making ends meet when you have few obligations and multiple streams of dividends flowing into your bank account.

Budgeting, tracking net worth, trading, and rebalancing are not worth it

While most people maintain spreadsheets to track expenses and net worth, living off dividends only requires you to invest all your work salary and spend your dividends. If you end up spending more than dividend income, simply “borrow from yourself” by maintaining a few thousand dollars in cash in a separate savings account that you borrow from but pay back with dividend income. Either use a spreadsheet to keep track of how much you own to yourself or ensure that this savings account has a fixed amount e.g. you have $2000 in it, run out of dividends to spend, so you “borrow” $500 to have a balance of $1500 and then when your next dividend payment comes in, put $500 into this savings account to top it back up to $2000.

I don’t recommend tracking your expenses or tracking your net worth because it is time consuming and because the information you get out of it is not valuable. If you track expenses, you can see where all your spending goes, but what matters is not what you spend your money on but how much you spend. If you spend such that your expenses are equal to dividend income, this ensures you don’t spend too much, and one of the benefits of living off dividends is that dividends increase over time as you invest more and as companies become more profitable, so there is a gradual increase in standard of living, which I think helps overcome the feeling of deprivation many feel when they are frugal. If you only spend e.g. $10,000 per year for the rest of your life, you are stuck on that level and do not feel as if you are growing or making progress, but if you live off dividends and your dividends grow, you feel a sense of personal growth. As for tracking net worth, when you diversify across multiple areas (e.g. retirement accounts, managed funds, ETFs, cryptocurrency, etc) then it becomes a huge burden to log in to each of these accounts to check the balance. What matters to financial independence is not net worth per se but passive income. You live off passive income, not net worth, and if you live off passive income then you’ll be able to assess automatically whether you have enough based on whether you are satisfied or not with your standard of living.

Because living off dividends is simple, there are only two things you need to consider: how to spend your dividends and what to invest your work salary in. Most people have no issue with figuring out how to spend their money (e.g. holidays, books, smartphones, and coffee). What to invest in is more complicated, and generally I recommend buying broad and diversified ETFs with a slightly heavier allocation towards high dividend paying ETFs (or LICs). However, more important than what you invest in, in my opinion, is the “buy and hold” mentality. You should buy with the intention of holding these investments for a long time, if not forever. I also do not bother with rebalancing. For example, in recent years the Australian stock market has underperformed whereas foreign stocks (particularly US stocks) have done very well. There are those who rebalance by selling off US stocks to buy Australia stocks to maintain a certain amount to certain countries. This is far more effort than necessary, adds administrative burden by triggering capital gains tax, and does not add much value because if you feel you have too little Australian stock, rather than sell US stock, you can simply buy more Australian stocks. For example, in recent years, as US equities has gone up, I have purchased more high-dividend paying Australian stocks and ETFs e.g. CBA and IHD.

Age in VDCO

For most people who ask, I recommend Vanguard’s diversified ETFs. You cannot beat the simplicity of these ETFs. Whatever your age is, hold that amount in VDCO and the rest you hold in VDHG. For example, if you’re 30 then hold 30% VDCO and 70% VDHG. These Vanguard diversified ETFs diversify across just about all asset classes (e.g. Australian shares, international shares, emerging markets, small caps, property, bonds, etc) so you don’t need to worry about mixing and matching. The reason why you hold your age in VDCO is to broadly follow the “age in bonds” rule, which is insurance against retiring just after a huge market crash. There are many people who are anti-bond and claim that they are a drag on performance, that stocks always go up on the long run, etc, but this is not true. In fact, this is dangerous advice. There is no guarantee that stocks go up in the long run as the value of stocks merely represent company profits and there is no guarantee that company profits will go up in the long run. Even if stocks do go up in the long run, there are huge market crash (e.g. 50% decline) that emerge, not just normal business cycles but debt supercycles that can take centuries to materialize. You do not want to be in the position of being in 100% equities and then losing 50% just before you retire as this can really set you back and impact on the quality of your retirement. Broadly following “age in bonds” (government bonds, specifically) is insurance against such a scenario. In fact, of all the rules of personal finance, “age in bonds” is, in my opinion, the most important. You can pretty much invest in any exotic high-risk asset class (e.g. emerging markets, tech stocks, robotics ETFs, cryptocurrency, etc) but if you own your age in government bonds, you are safe.

When markets go up, it is very easy to rationalize why defensive asset classes are poor quality. It is when markets go up that people easily covert to the cult of equity, but when there is a market crash or when there is a prolonged economic depression that lasts many decades or centures, many will understand and appreciate the wisdom of “age in bonds.” The reality is that when markets are booming, it’s easy to convince yourself why 100% equities or high leverage is a good idea, and the opposite is true when there is a market crash. It goes back to Warren Buffet’s quote about being fearful when others are greedy but also thinking about Ray Dalio’s idea that you must stress test your ideas because you are never be too sure in yourself  because it is easy to be moved by your emotions as well as other psychological biases.



8 thoughts on “The Simplicity of Living off Dividends”

  1. I’m wanting at least 5% on all my dividend stocks so I tend to avoid new ETF’s like VDCO etc and I also like some stable history of dividend results preferably over 5-10 years worth of data.
    In fact I’m not a fan of US stocks and stick to the ASX, WAM global is about as trendy as I like to get and thats only because Geoff Wilson and crew have such a outstanding record of delivering and I hold several of their LIC’s..
    Warren Buffett may be the Bradman of investing but as far as Dividend Income I prefer to follow some others like Peter Thornhill, or Gary Stone…..
    Agree on not being 100% in equities…just too risky, like to spread my money about in boring term Deposits, bonds, and the better mortgage trusts(I dont over do these as they do carry risk)…dont do Crypto’s or new tech stocks either….
    Enjoy your comments especially the ETF, LIC, financial ones…like to know how you invest in Crypto’s too…

    Liked by 1 person

    1. Thanks Mark. I’m actually a beginner in LICs and barely knew they existed until recently but based on what I’ve read they look like a great complement to high dividend paying ETFs such as IHD. I’ve been looking at eg BKI. In my opinion, crypto is a legitimate asset class in spite of many people’s opposition to it. In fact, that most people don’t value increases its upside potential even more. The value of crypto lies in its security and transparency. Essentially your ownership of asset classes like bonds, property and stocks is determined by your name on a registry somewhere. This brings up many risks of fraud, identity theft etc. Blockchain fixes this problem by ensuring that ownership and transactions are not handled by one single entity but by a network of distributed computers that verify the ownership and transactions. As such, it is highly transparent and trustworthy. I’ll write a separate post about this putting my thoughts down. Thanks for the comments!


  2. Gday, great post. Im 37, first time stock investor, and just about to pull the trigger on VDHG, but still trying to assess whether I need to invest in VDCO or other gov bond etf now, or throw everything into VDHG now and 10years or so on, and buy into VDCO or equivalent down the line as age/risk factors in?!. These etfs seems like the best option for me due to simplicity and set and forget.




    1. Thanks for the comment Ben. VDCO and VDHG are great options. How much of each you buy depends on your risk tolerance. As you get older and as you have less opportunity to recover from loss, you should have more VDCO. The exact amounts you have depends on your risk tolerance which is a personal preference.


  3. Thanks,

    Through all the reading iv done on VDHG, it does not seem that the strategy team at vanguard reduce risk assets in the portfolio at later stages to follow an “age in bonds” strategy, ir similar. They will only rebalance the fund back to its intended level of risk, so what you say makes sense, have your age in VDCO. But then you got twice the management fees and brokerage for the two. Itd be nice to just have the one fund, that reduced equities and gradually increased income assets over time. Maybe I should go with VDGR as its 70/30, but feel that may be still too conservative for now.



    1. What you’re describing are target date funds. They seem to exist in the US but I haven’t seen it in Australia. Whichever combination of the Vanguard diversified funds you go with, what matters is the risk level matches your tolerance of risk. How did you feel when the market recently dropped significantly? If you didn’t feel comfortable, go more conservative, but if you are comfortable with the volatility, consider increasing risk as you may get higher capital gains and even income. If in doubt then “age in bonds” is a good starting point. You can also modify your risk later.


  4. Hi Calvin,

    Thank you for your excellent articles which I have just discovered. I have other Vanguard ETFs which suit me very well, and was looking to invest some in VDHG and VDCO. The only thing holding me back at this stage is that they both seem low growth and fairly low yield since their inception.

    My question seems vague to me as I write it out, but do you think they will ultimately stack up against a mix of VAS and a VGB?

    I need to keep myself in spelt bread, almond milk and organic kale!


    1. Thanks marshmallow! VDHG does have low yield compared to eg VAS and this is due to Australia equities having high yields and franking credits vs VDHG which is highly diversified in eg foreign stocks. I recommend you look into the thornhill approach which advocates investing only in Australian equities because of the higher yields. I think this is a Good approach but not without risk because you are all in one country and while you get higher yield it may come at the expense of lower capital gains. So I think a hybrid approach is good ie put money into VAS or perhaps VHY for the high income if you are keen on dividends but divserify into international equities and bond ETFs just in case.


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