Retiree Making $90,000 a Year in Dividends After '50 Years of Hard Work, Mistakes' Reveals His Top 8 Stock Picks
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Young Americans are showing an increased interest in dividend stocks as they look for steady income streams and ways to beat inflation. A report from RBC Wealth Management showed that over the past five decades through 2020, about 72% of the total return of the S&P 500 Index came from reinvested dividends and the power of compounding.
But which dividend stocks can help investors reach their financial goals? Let's see a case study for ideas.
About six months ago, someone asked an income investing community on Reddit if anyone was living off dividend income and how much investment it took to pull off that achievement. The question received over 200 comments, with many Redditors sharing their success stories and advice.
An investor living off dividend income said he was making about $90,000 before tax per year on his portfolio worth roughly $2.5 million. He said with social security, dividend income and no debt, he and his wife were "doing well."
"50 years of hard work, a lot of mistakes, some good luck and shifting from 100% growth to dividend growth + income generation at the right time."
Based on the details he shared on the social media platform, let's examine some of the key stocks and funds in his portfolio.
Schwab U.S. Dividend Equity ETF (SCHD) was among the key holdings in the retired investor’s portfolio earning $90,000 a year. The ETF tracks the Dow Jones U.S. Dividend 100 Index and provides exposure to some of the top dividend stocks trading in the U.S., including Home Depot, Coca-Cola, Verizon, Lockheed Martin, Pepsi and AbbVie. Since SCHD's holdings are mostly conservative dividend payers, it's suitable for investors close to retirement looking for consistent dividend income.
Schwab High Yield Bond ETF
The Schwab High Yield Bond ETF (SCYB) exposes investors to high-yield junk bonds with higher interest rates due to their lower credit ratings than investment-grade bonds.
The Virtus InfraCap U.S. Preferred Stock ETF
The Virtus InfraCap U.S. Preferred Stock ETF (PFFA) was another key fund in the portfolio. It targets income generation and capital appreciation by investing in U.S. stocks with over $100 million market caps. The fund uses about 20% to 30% leverage to boost income potential.
The Redditor earning $90,000 per year in dividends had a stake in JPMorgan Equity Premium Income ETF (JEPI). JEPI, which has a monthly dividend yield of about 7.3%, makes money by investing in some of the most notable large-cap U.S. stocks and selling call options. JEPI is ideal for those looking for exposure to defensive stocks. JEPI usually underperforms during bull markets but protects investors against huge losses during bear markets, as most of its portfolio consists of large, defensive equities.
JPMorgan Nasdaq Equity Premium Income ETF
The retired investor living off dividends said he had "some" shares of JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) in his portfolio. JEPQ is a high-yield covered call ETF that distributes monthly dividend income. The ETF invests in Nasdaq companies and generates extra income by selling call options.
NEOS S&P 500 High Income ETF
NEOS S&P 500 High Income ETF (SPYI) was also a part of the investor’s portfolio earning $90,000 a year in dividends. SPYI is a high-yield covered call ETF that pays monthly dividend income. It invests in some of the top S&P 500 companies and generates extra income by selling call options on stocks, generating extra premium income for shareholders.
The investor also had the Global X Russell 2000 Covered Call ETF (RYLD) in his portfolio, but he did not seem happy with the investment.
"Sadly before I learned better I bought some RYLD and XYLD. They pay a nice div. but I prefer holdings that grow in value as well as pay growing dividends. I’m slowly selling out of those positions and will reinvest in underweight areas," he commented.
RYLD generates income by selling call options on the small-cap-heavy Russell 2000 Index. Being a covered call ETF, RYLD is also not risk-free and often posts losses during down markets. The ETF is now in the limelight as analysts believe small-cap stocks will be among the top beneficiaries of an easing monetary environment.
The iShares Russell 2000 ETF
The iShares Russell 2000 ETF (IWM) exposes investors to small-cap stocks. It pays monthly dividends and yields about 1.1%.
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