Invest $1 Million In These 7 Funds To Live On Dividends Forever

One of the most important questions that every investor has to answer at some point is: how much do you need to retire?

According to a report from the BLS, the average annual income for 65–74-year-olds in the United States was $59,872 and for 75-year-olds and older it was $43,217. Meanwhile, Macro Money Concepts founder Chuck Czajka recently said of retirees:

For every $50,000 of income you need, you need a million bucks,

Given that $50,000 is roughly in the middle of these values – and is actually pretty conservative when accounting for Social Security checks – it appears to be a fairly safe assumption that $1 million is a sufficient retirement nest egg for someone happy to live in a middle to lower cost of living area in the United States.

While many prefer to simply mix that $1,000,000 sum between a standard S&P 500 (SPY) index fund and bond fund (BND) and then employ the 4% (or in this case I suppose, 5%) rule, we think that this can come with some challenges.

First and foremost, the 5% rule is inherently riskier than the 4% rule, though it may still be feasible.

Second, any method of funding a retirement that depends on regularly selling stocks and bonds faces a sequence of returns risk, especially when that nest egg is not particularly large to begin with. If one needs only $50,000 annually from their retirement portfolio of $5 million, it does not matter too much to their long-term wellbeing if the market crashes 50% on any given year, as $50,000 is still only 2% of $2.5 million. However, $50,000 is 10% of $500,000, so investors using the 5% rule on a $1 million portfolio are taking on a considerable sequence of returns risk, especially if the market were to crash by 50% and remain subdued for a prolonged period.

In contrast, living off of dividends rather than selling shares of bond and stock ETFs can largely eliminate this sequence of returns risk because dividend payments from a diversified portfolio of stocks are much less volatile – and therefore more dependable – in nature than the market value of that portfolio of stocks. As a result, by building a portfolio of dividend funds, investors can largely eliminate their sequence of returns risk while still maintaining passivity in their investments. This can then free them from the burden of managing their investments while also being able to rest easy knowing that even market crashes are unlikely to upset their passive income stream.

In this article, we will explore a sample 7 fund portfolio that should enable you to live off of dividends forever with a $1 million portfolio.

Sample $1 Million Dividend Portfolio

Without further ado, here is the portfolio:

Click to enlarge

#1: Schwab U.S. Dividend Equity ETF (SCHD)

We put 50% of the portfolio into SCHD because it is a very low-cost fund at just 0.06%, has a phenomenal track record of generating a double-digit dividend per share CAGR over the long term, and is also well-diversified across the dividend stock universe. As a result, while the yield on this ETF is too low to meet our goal of generating at least $50,000 per year in passive income by itself, its growth component will help ensure that our portfolio’s passive income yield will grow in-line with inflation over time and also help offset any potential dividend cuts from funds with less stable payouts such as BIZD and JEPI.

#2: Virtus InfraCap U.S. Preferred Stock ETF (PFFA)

We like PFFA due to its sky-high yield and the diversification it provides our portfolio due to its preferred stock (i.e., fixed income) portfolio. It does implement a little bit of leverage in order to juice its yield, but it is a reasonable amount given the stability of its underlying holdings and the ETF has been able to support pretty stable monthly payouts over time.

#3: Alerian MLP ETF (AMLP)

AMLP is a diversified ETF that:

1. juices our portfolio’s overall yield
2. gives us exposure to energy midstream infrastructure, which diversifies our portfolio nicely

Given the financial strength and growing payouts of many midstream companies right now, we think this is a good addition to our portfolio.

#4: Cohen & Steers Quality Income Realty Fund (RQI)

RQI gives our portfolio exposure to real estate stocks, primarily REIT (VNQ) common and preferred shares, combined with a prudent mix of leverage to provide very attractive income for our portfolio. We also like that RQI sustained its monthly payout during COVID-19, providing evidence of the strength of its management and construction and giving us confidence in the sustainability of its payout through future downturns.

#5: Cohen & Steers Infrastructure Fund (UTF)

UTF gives our portfolio exposure to infrastructure stocks, primarily utilities (XLU) common and preferred shares, combined with a prudent mix of leverage to provide very attractive income for our portfolio. We also like that – just like RQI – UTF sustained its monthly payout during COVID-19, providing evidence of the strength of its management and construction and giving us confidence in the sustainability of its payout through future downturns.

#6: JPMorgan Equity Premium Income ETF (JEPI)

JEPI combines an attractive monthly payout with giving our portfolio exposure to mega-cap technology stocks like Microsoft (MSFT) and Amazon (AMZN) (its top two holdings). That being said, we do not anticipate it being much of a dividend growth stock over time given that it employs a covered-call-like strategy to support its large monthly payouts, resulting in some inconsistency in the size of its payout on a month-to-month basis and capped upside during strong bull markets.

#7: VanEck BDC Income ETF (BIZD)

Finally, we included BIZD to give our portfolio diversified exposure to floating-rate debt investments via BDCs. In addition to the nice yield boost that this fund provides us with, it also helps to diversify our portfolio by giving us exposure to an asset class that tends to outperform REITs and utilities during periods of rising interest rates. That being said, the choppy past performance of BDCs during periods of economic distress and BIZD’s varying payouts in the past cause us to keep this holding on the smaller side.

Investor Takeaway

As we demonstrated in this article, with a simple seven-fund portfolio and a $1 million retirement nest egg, you can live comfortably off of just your cash flow, especially when supplemented by social security checks. In fact, if you truly only need to live off of ~$50,000 from this portfolio, you can even reinvest about $12,000 per year, to further accelerate your dividend growth alongside the dividend growth that will likely continue to come from funds like SCHD.

When compared with the potential stress of navigating volatile markets with the 5% Rule, living off of dividends from a well-diversified portfolio like this could be a much-preferred path. That being said, it is important to remember that this is not personalized financial advice, so be sure to speak with your own financial advisor/planner before making any decisions about how you are going to invest for retirement.