Earning 'Passive' Income By Investing In Retirement Isn't Easy

But this doesn't mean you shouldn't do it

Photo by Annie Spratt on Unsplash

Hi everyone!

I have a special treat for you this Wednesday morning, a new guest post from

Rocco Pendola

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In this post, Rocco discusses a topic I have written about many times—Dividend investing. I’ve always viewed dividend investing as

• Sub-optimal—under-diversified and tax-inefficient and;

• Irrational— It does not matter if your returns come from capital gains or dividends.

But, most people disagree with me and I welcome the opportunity to share the opinions of well-reasoned people who make well-argued cases about the pros and cons of a particular issue—which is what Rocco does in this article.

You can Subscribe to Rocco’s “Never Retire” Substack, here:

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The myth of passive income.

A few people in this world actually make truly passive income doing little to no work, yet thousands write articles, do videos, and host workshops telling the rest of us how to do it. But, guess what, most of these gurus aren’t doing it either. Because it’s not easy.

In today’s installment, we focus on earning dividend income, which is hardly a passive, hands-off endeavor.

First, with a thorough review of the basics via two CNN Underscored articles I wrote. Then, with a look at the tax implications of dividend stocks via a Substack, I enjoy The Simple Side.

And, finally, my take, geared towards those of us who will Never Retire (or simply don’t have six figures sitting around in the stock market), that:

• Blows up the myth—the fantasy, really—of living off of dividend income.

• Resets the expectations around what is—when considered from a realistic perspective—a potentially worthwhile endeavor.

To be potentially worthwhile, you need a firm grasp of the basics, so we start with a primer on the basics.

And a look at the way you can actually generate increasing income—and maybe build wealth—over time with dividend stocks—

You also need to understand how the IRS taxes dividends. This is one of the better discussions of that topic I’ve seen in a while:

Tax Efficient Investing with Dividend Stocks

Now, the role I think dividend stocks can play for most people as a source of income.

If you pay attention to investing at all, you’ve likely heard people tout dividend stock investing and reinvestment—known as dividend growth investing—as a way to generate passive income.

First, this is hardly a passive process. You need to put in work—meaning considerable time and effort—to find the right dividend stocks to invest in. Once you do that, you have to manage your portfolio.

While some people consider this a pastime or hobby in retirement, I call it work. It’s not quite the same as playing golf or traveling. It just sounds amazing to think you buy stocks then live off of the income they generate. Sounds amazing, but, unfortunately, the basic math just doesn’t add up.

Second, the math. I can’t believe more people don’t run it. I assume they don’t because if they did, there would fewer zealots advocating dividend growth investing and far fewer people loyally following their lead into some level of near-certain disappointment.

To understand what follows, you need to have read or already have a sound understanding of the basics.

Consider a $40 stock—(I approximated Verizon for this example)—with a dividend yield of 6.9%, which is pretty high.

• 100 shares of a $40 stock has a market value of $4,000.

• At a 6.9% yield, you can expect to earn—not factoring dividend reinvestment, taxes and other potential variables during the year—$276 in annual dividend income.

That’s hardly enough to live off of for a few days, let alone a month or longer.

But you’re persistent, so you keep building your position in this $40 stock that—to keep our example neat and tidy—never moves from $40.

• 1,000 shares of a $40 stock has a market value of $40,000.

• At a 6.9% yield, you can expect to earn—all else equal—$2,760 in annual dividend income.

Nothing to sneeze at, but still not nearly enough money to “live” off of. Divide that by 12 and you’re looking at $230 a month. You could likely pay a bill or two and/or do some discretionary spending with it. But—remember—you had to build a $40,000 position in a stock yielding 6.9% to get there. Not an easy task.

Still, you persist!

• 10,000 shares of a $40 stock has a market value of $400,000.

• At a 6.9% yield, you can expect to earn—all else equal—$27,600 in annual dividend income.

Now, we’re talking.

You could do something—maybe even cover your entire life—with $2,300 a month, which would probably get paid in quarterly installments of $6,900.

Amazing. But, if you had $400,000 invested you’d likely be in a different situation. One where you weren’t watching pie-in-the-sky YouTube videos (or producing them) about earning this type of so-called passive income.

Of course, you could spread your money across dividend stocks or invest in an ETF that only owns dividend stocks. But, good luck yielding 6.9%. You’re doing well if you manage to yield 4% or 5%.

Plus, yield is a function of stock price. So—holding the dividend constant—yield goes up as the stock price goes down. If that $40 stock sinks to $30, your $400,000 is now $300,000. I don’t know many people who are happy sitting on a $100,000 on-paper (or realized) loss just to collect $27,6000 annually.

But people do it.

AT&T is a classic, if not great illustration of this. Retirees and others relied on the stock for its healthy dividend income, even as the stock price stagnated and languished. There were huge, polarized fights over this on the message boards. Probably still are. But the folks who hung on not only had to endure an underperforming stock price at times but a dividend cut when AT&T spun off Warner Media. 

Between the basics and my real-world exercise, I think this makes it clear. Over time—and with a meaningful amount of money invested—you can earn decent or better money with dividends. But the odds that you’ll live off of that money are relatively low. 

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.