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Should you be living on your dividend payments alone in retirement? Or should you sell some stocks? What if you do a little of both? Learn about the pros and cons of both options and see how you can make your income in retirement.

You can listen to the introduction of this series here.

You will learn

  • What does it mean to create a “safe” income?
  • What is the dividend option for retirees.
  • The pros and cons of living on dividend payments alone.
  • How to Use the Total Returns to Make Your Own Dividend.
  • The pros and cons of selling stocks in retirement.
  • Why dividend growth is still important in retirement.

Related content

A few words about the “Create your own dividend option” option discussed below. It will surely help you put pictures on the concept.

I had a great conversation with a DSR member recently. She compared Canadian Utilities (CU.TO) and Alimentation Couche-Tard (ATD.B.TO) from a retirement perspective. She was trying to figure out which stock would be better suited for generating income.

On the one hand, you have a utility with limited growth potential but an impressive dividend growth history (49 years!). With a yield of 5%, it looks like a no-brainer. Exactly.

On the flip side, you have a growth-oriented company with an impressive dividend growth rate (24% CAGR over the past 5 years) but a mediocre return (0.80%).

How much time will it take Couche-Tard (0.80% return) to match Canadian Utilities’ return? Short answer: forever.

Judgment? Choose Canadian Utilities and Ignore Couche-Tard!

Not so fast.

Let me remind you about the concept of total return? As I mentioned earlier, dividends are not guaranteed, let alone magical. Couche-Tard offers a low return because the company has a strong focus on growth. It pays a small return, but uses most of its money to grow the business and create value for shareholders.

Finance 101: When a company finds ways to create value for shareholders, it needs to use its cash flow. When that is not possible, the dividend appears to allow shareholders to allocate capital more optimally.

Rather than wondering how much time it will take Couche-Tard to generate interesting income from its dividend alone, ask yourself how Couche-Tard’s stock price could rise faster than Canadian Utilities’. The answer? Pretty shocking when you look at the past 10 years.

Right, over the past 10 years the ATD has increased nearly 1,000% while Canadian utilities didn’t even hit 100%. If I had invested 100,000 in ATD in 2011, I would have almost $ 1 million today to fund my retirement. With CU? Less than 200K. What amount will generate the most income? At this point it’s a rhetorical question.

The solution is not to invest in all the couch tards in the world and ignore the Canadian utilities. When you retire you want to have some “safe shots” like CU in your portfolio. This type of business brings stability and a decent expectation that you will make good income year after year.

I used this extreme example because I didn’t pick cherries as it came from a real life example from a member. It shows that too A balance between low-yielding, high-growth stocks and classic “retirement stocks” like utilities and REITs could create the perfect mixed bond portfolio.

Dividends aren’t magic. Therefore, instead of getting a high yield from Couche-Tard, you are getting high growth. After you retire, you can easily make your “million dollar investment” and generate your own dividend by selling some stocks every now and then.

Remember: the value is either in the dividend or it is the stock value. It’s exactly the same. When you focus on building a portfolio with amazing dividend producers, you don’t have to worry about your average dividend yield.

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