A Way to Retire on Dividends

The goal of every dividend investor is to one day accumulate a portfolio of income-producing stocks that would throw off a large amount of dividends every month. The goal of living off dividends is achievable, but it takes capital, time, skill or luck to get to the magic point.

The magic point is where the dividend income exceeds the expenses of the dividend investor.

In a previous article, I discussed how investors can increase their dividend income, in order to reach their crossover point. It is very important to follow a few simple rules to create a sustainable dividend-producing machine, which would produce dependable income for decades.

First, investors should focus on companies that have a long history of paying and raising dividends. I typically look for companies that have increased dividends for at least 10 years in a row.

Second, investors should make sure these companies are trading at attractive valuations. Paying a P/E of over 20 would lead to poor results, as investors in Coca-Cola (NYSE:KO) and Wal-Mart (NYSE:WMT) learned a decade ago.

Third, investors should make sure that the company’s dividend is sustainable out of earnings or cash flows. I typically look for a dividend payout ratio of less than 60% for ordinary stocks. For REITs or master limited partnerships,  I look for FFO Payout and DCF Payout Ratios.

Fourth, investors should perform a qualitative analysis of the dividend-paying company they’re considering. This analysis should include understanding how the business makes money, growth prospects, competitive landscape, whether the business has any moat, whether the company has any strong brands that consumers are loyal to and result in pricing power.

Fifth, investors should try to build a diversified dividend portfolio consisting of at least 30 individual stocks coming from at least 10 sectors. Having exposure to internationally based companies is a plus, even though most dividend growth stocks derive a major part of their profits from outside the US.

Some of the companies that have strong dividend growth and attractive current yields include:

Kinder Morgan Energy Partners (NYSE:KMP) owns and manages energy transportation and storage assets. This master limited partnership has raised distributions for 15 years in a row and has a 10-year distribution growth rate of 10.90%/year. Yield: 5.20% (analysis)

Philip Morris International (NYSE:PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. This tobacco company has raised distributions every year since its spin-off from Altria Group in 2008. Yield: 3.70% (analysis)

Chevron (NYSE:CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend achiever has raised distributions for 24 years in a row and has a 10-year distribution growth rate of 8.10%/year. Yield: 3% (analysis)

Procter & Gamble (NYSE:PG) provides consumer packaged goods in the U.S. and internationally. This dividend king has raised distributions for 55 years in a row and has a 10-year dividend growth rate of 10.90%/year. Yield: 3.20% (analysis)

PepsiCo (NYSE:PEP) engages in the manufacture, marketing, and sale of foods, snacks and carbonated and noncarbonated beverages worldwide. This dividend aristocrat has raised distributions for 39 years in a row and hass a 10 year dividend growth rate of 13%/year. Yield: 3.30% (analysis)
Enterprise Products Partners (NYSE:EPD) provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products and petrochemicals in North America. This master limited partnership has raised distributions for 14 years in a row and spots a 10 year distribution growth rate of 8.30%/year. Yield: 4.80% (analysis)

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