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Can You Live on Your Dividends?

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

One of the most liberating days of my life was when I realized I could go to a part of the world with an abundance of the Three S's (sun, sand and super-cheap) using only my dividends. One of the worst days of my life that doesn't involve a breakup or arrest was when those dividends fell to pieces. Those were sad times indeed. But it got me to thinking about what it would be like to be able to live only on my dividends. It'd be pretty sweet, but what would it require?

Cash Won't Cut It

I've never been the type of person who expects to just one day sell all of my stock and live off of cash as if my portfolio were a savings account. That's the way people who expect to die tend to do their investing, and I figure my life has no definite end to it. So until further notice, I want my income to last forever.

Not to be too personal, but I can live on a gross of about $1,200 a month. It's not a super-lavish lifestyle and I could probably live for less overseas, but it's comfy and I want for nothing. Here are a few companies I'm considering that might allow me to (eventually) live entirely off of my dividends.

Oil Flow is Cash Flow

I like El Paso Pipeline (NYSE: EPB) because it has a lot of geographic regions locked down and isn't tied to one small area. Its ROE of 25.977 means it's doing an efficient job with the natural gas operation, its 17.93 P/E means it's priced about where the overall market is, and its 28.6% profit margin mean it's doing fine and can pay its 5% dividend yield without issue. I really love the fact that El Paso has 43.1% insider ownership, which tends to align the interests of management with investors and discourage conflicts of interest.

Unfortunately, it can also mean that a small junta of managers runs the business like an oligarchy and ignores the "little" investors. I also think El Paso's growth of 20% over the past 5 years is nothing special and its business is based off of a commodity which puts a lot of risk in there. The fact of the matter is, to make what I need (if there were no taxes), I'd need to have close to $300,000 invested into the company. That's a pretty tall order.

Growing Plants Can Grow Your Wealth

Terra Nitrogen (NYSE: TNH) is one of my perennial search results. I like that it has a 203% ROE and a P/E in the 14 range. I also greatly respect its 38.35% profit margin and 10.4% dividend yield. With about $150k I could live comfortably on Terra's diversified line of nitrogen-based fertilizers and other products, and it's got the chops to continue producing long enough to make it a viable long-term candidate. However, I don't like that Terra's price point is over $200. The market tends to like to price companies under $150, and I'm concerned that unless a stock split is imminent the price will recede into that territory. Not everybody can pull a Google or an Apple, and I might debate whether even they can indefinitely.

Get Paid Like a Banker

Arlington Asset Investment (NYSE: AI) is perhaps the trickiest sheep in this flock. It's a REIT, and I'm a documented REIT addict so I have to tread carefully. Mortgage-backed securities aren't as popular as they used to be, but they're still around and still have profits to pay us. Arlington is a microcap with a 5.38 forward P/E, which I think makes it a considerable deal possibility and perhaps a multi-bagger if it can be played properly. With its 32.85% profit margins, Arlington has the money to grow. It also has more than 6% insider ownership even after losing two of its founders. I also respect the 7.2% dividend yield, which means I could live on this with an initial investment of about $206k. However, I don't like the 3.8% ROE, the rather limp 14.9% 5-year trailing earnings growth (blah blah blah, recession, take your excuses somewhere else) and the fact that it chased off two of its three founders. This is ground to tread carefully on.

Renewable Energy Keeps on Working

BreitBurn Energy (NASDAQ: BBEP) is an interesting find. I don't know how I keep stumbling onto decent companies headquartered in Michigan during my research, but it's an interesting coincidence. I like the reasonable 14% ROE and 47.6% profit margins, which mean there's a good chance the 9.2% dividend should keep getting paid for the time being. I also like the 2.8% insider ownership. What I don't like, however, is the 31.37 forward P/E that indicates low analyst expectations for earnings. BreitBurn gives me the impression that it's largely lost its power to grow in its current form, and shaking up things to make the company stronger keeps me up at night. I don't want my dividends coming from a place that might have to undergo a revolution to be viable in 20-30 years.


Living on your dividends usually takes a lot of money, and it should always involve a lot of research. Be diligent or be afraid. Another part of the equation that makes living the dividend lifestyle possible is to diversify beyond a tiny number of companies. In a lot of cases, you want at least a dozen companies across a wide spectrum of industries, so a bad quarter or two for a particular company doesn't force you to look for a new job in a panic. The wider your net, the more weight it can hold, so don't be afraid to weave a lot of companies into it. You never know what companies are going to drop their dividend "just because," and finding yourself just short of what you need is a sad and scary place.

Another important component of living off of your dividends that any Fool can appreciate is living below your means. Just because you have enough to get $5,000 a month in dividend income doesn't mean you have to spend that much. Maybe you aren't a $1,200 a month freak like me, but getting more than you spend and keeping a few months' worth of expenses in cash is a great way to keep your options open. Building wealth takes guts, brains and patience in roughly equal measure.

pongun has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend El Paso Pipeline Partners LP. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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