Dividends Day

Now that the holiday period is over it’s back to the twice weekly publication schedule. During the last few weeks there has been a slew of major holidays, Christmas, New Years, Hanukkah and for those with mutual funds Dividends Day!

Most mutual funds pay out the bulk of their dividends on the last trading day of the year so for those who use these for their passive income then this is an important day. This is different to individual stocks which typically pay out quarterly.

If you are working to a FIRE schedule then having a significant amount of passive income is critical as it limits the amount of your actual savings that you need to dip into each year. Of the main sources of passive income, dividends for most people are probably the most important. Some people might have rental income or online income but dividends will form the most important part for most people. If you are planning on retiring early then having a reliable passive stream of income is critical. For us, dividends will provide that stream until at least the time we hit 55.

Mutual funds are designed in most cases to produce around 2% in dividends most years (some might produce less, and some more but 2% seems to be about the norm). So by not reinvesting that money but instead using that to live on it should be enough to fund a large amount of a years spending.

So for us who are trying to spend around 2.5% per year then the dividends should provide the vast majority of our spending money. However bear in mind that a large chunk of our dividends are in retirement accounts so that money can’t be used now and has to be reinvested.

In reality this years dividends will provide around 50% of our 2018 spending which means around July we will need to dip into our savings to fund the second half of the year. The actual timing of this will also be influenced by how the market is doing.

Twenty Eighteen will be our first year officially on FIRE so it will be interesting to see how the finances go this year. Last year was definitely slightly fluid due to house moves and setting up in a new city. This year should be much more stable.

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Steve TraylenIncome MasterSteve Recent comment authors
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Hi Steve, I sold all my mutual funds a few years ago and now invested in stocks, and ETFs. I always enjoy those quarterly payouts. I like how conservative your withdrawal rate is at 2.5%.
2018 will be a great year!!

Income Master

That’s really impressive having approximately 50% of your spending covered by dividend payouts. The power of passive income.