Some time ago, I had a prospective client meeting with a gentleman whose daughter had special needs. The goal of his investment strategy was to leave enough money for her.
That makes sense, but what didn’t make sense was his “how” — he planned to live off dividends and pass the principal along to her.
Even if you can afford to do this, I don’t think it’s advisable, for a few reasons.
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1. Dividend yields are low
As of October 2025, the dividend yield of the S&P 500 is less than 2%. Of course, you can find dividend yields over 2%, but that typically requires a more concentrated portfolio.
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For today’s purposes, let’s pretend you have a diversified portfolio with a dividend yield of 2% that you plan to use for your monthly expenses. Say you need $15,000 a month or $180,000 a year. To generate that entire amount from dividends would require a portfolio of $9 million.
This oversimplifies the issue, but if I were to build a financial plan for someone who came into my firm and said, “I need $15,000 a month, so how much money do I need to retire?” the number would be far less.
Most financial planning software will use a total return approach. You can access a free version of what we use online.
2. When you search for yield, you invite risk
If you are buying stocks based only on the dividend yield, you are likely inviting a lot of risk into your portfolio. Dividend yield is calculated by dividing the annual dividend by the share price.
So, as share prices decrease, dividend yields increase. If you are searching for yield, you may just be filtering for companies that have seen significant drops in their share price.
If you can find high yields without significant price drops, my guess is that these companies are concentrated in sectors of mature stocks that have a history of high dividends.
Think utilities, financials, energy and so on. This is not to say these are bad investments, but you are betting on specific sectors, which may lead to a bumpy ride.
This is not unique to stock investing. If you are buying a bond with a significantly above-market coupon, there is risk that you are being paid for. That’s why high-yield bonds were called junk bonds until the marketing department got its hands on them.
3. They are just giving you your own money back
If you had $1 million in the bank and went in every quarter and took out $5,000, it would be tough to call this an income strategy. But in a way, this is the same structure as dividend investing.
If you own a stock worth $100 that pays a 2% dividend, when it pays the quarterly dividend of $0.50, the stock drops by that amount; i.e., your $100 stock is worth $99.50. Just as your bank account would contain $995,000 after taking out one quarter’s income.
Of course, this is not totally apples-to-apples. In a bank account, your remaining funds are in a deposit account. In the dividend example, you are staying invested in the stock with 98% of the money.
The important point is that dividends aren’t “free money.” They are giving you your money.
4. The tax consequences
I’m both a CFP® professional and an IRS enrolled agent, so tax planning is a huge part of our value proposition for our clients and prospective clients. Prospective clients often come to our firm to get a second opinion on a new tax strategy that another adviser is proposing.
Nine times out of 10, it is a permanent life insurance policy with a new marketing name. The point is that it is very hard to avoid taxation altogether. You just want to make sure that your income strategy is efficient.
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Dividends are taxable whether or not you reinvest them. Some dividends are taxable at capital gains rates. Others are taxable at income tax rates, which are higher.
Either way, if you have a significant yield, you will show a significant amount of income on the front page of your 1040.
You may be better off holding those high-dividend payers in a tax-sheltered vehicle, such as an IRA.
Additionally, if you are in a high tax bracket, it may make sense to live off a municipal bond portfolio and hold the stocks in your retirement account.
5. It’s going to be a roller coaster
Dividends are typically generated by mature stocks. “Stocks” is the key word. If this is your entire strategy, then, in theory, your entire portfolio is in stocks.
Our retirees typically have 60% to 70% in stocks. While this could never be guaranteed, a portfolio of 60% stocks is likely to experience a smoother ride than one of 100% stocks.
There is an ever-increasing number of dividend strategies that make sense in certain situations.
For example, a Dividend Aristocrat strategy buys stocks that have historically increased dividends. When you reinvest those dividends, you have historically done well.
I also regularly come across clients with six figures or more in utility stocks that they basically forgot about but have been reinvesting dividends for several decades.
The common thread among these effective strategies is that they are effective for accumulation. When it comes to decumulation, I believe there are better ways.
The examples provided are hypothetical and for illustrative purposes only.
