Can you retire on dividends?

Morning Star AU

Apr 23

I received a question from a reader asking about a mainstay of retirement planning—the 4% rule. I will paraphrase, but the premise of the question was, if the ASX dividend yield including franking ...

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I will paraphrase, but the premise of the question was, if the ASX dividend yield including franking ...</p>\n\n<a href=\"https://www.morningstar.com.au/personal-finance/can-you-retire-on-dividends-2\">Source Link</a>\n\n</div>\n","source":"morningstar_stock","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Can you retire on dividends?</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nCan you retire on dividends?\n</h2>\n\n<h4 class=\"meta\">\n\n\n2026-04-23 00:00 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://www.morningstar.com.au/personal-finance/can-you-retire-on-dividends-2><strong>Morning Star AU</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>I received a question from a reader asking about a mainstay of retirement planning—the 4% rule. I will paraphrase, but the premise of the question was, if the ASX dividend yield including franking ...</p>\n\n<a href=\"https://www.morningstar.com.au/personal-finance/can-you-retire-on-dividends-2\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"BK7095","symbol_name":"多种金属与采矿","start_time":0,"source_url":"https://www.morningstar.com.au/personal-finance/can-you-retire-on-dividends-2","article_id":"2629889990","we_media_id":null,"thumbnails":[],"rights":{"source":"morningstar_stock","url":"https://www.morningstar.com.au/personal-finance/can-you-retire-on-dividends-2","rn_cache_url":null,"directOrigin":true},"url":"https://stock-news.laohu8.com/highlight/detail?id=2629889990","pubTimestamp":1776873600,"columns":[],"sourceInfo":{"source_id":"morningstar_stock","name":"Morning Star"},"weMediaInfo":null,"summary":"I received a question from a reader asking about a mainstay of retirement planning—the 4% rule. I will paraphrase, but the premise of the question was, if the ASX dividend yield including franking credits is above 5% why would a retiree worry about withdrawal rates?","collect":0,"end_time":0,"defaultTopTitle":"morningstar.com.au","property":[],"viewcount":null,"language":"en","relate_stocks":{"BK7095":"多种金属与采矿","BK7511":"ESG概念","BK7507":"资源股","BK4585":"ETF&股票定投概念","MVW.AU":"VANECK AUSTRALIAN EQUAL WEIG","VIG":"股利增长指数ETF-Vanguard","XKO.AU":"标普/澳交所 300指数","BK4588":"碎股","BHP.AU":"BHP GROUP LTD","XJO.AU":"标普/澳交所 200指数","XAO.AU":"标普/澳交所 普通股指数"},"translate_title":"你能靠股息退休吗？","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"BHP.AU":1,"XKO.AU":0.9,"XJO.AU":0.9,"XAO.AU":0.9,"VIG":0.9,"MVW.AU":1},"content_text":"I received a question from a reader asking about a mainstay of retirement planning—the 4% rule. I will paraphrase, but the premise of the question was, if the ASX dividend yield including franking credits is above 5% why would a retiree worry about withdrawal rates? Wouldn’t it be better to just live off the dividends of a share portfolio. The reader suggested that the 4% was a classic case of the financial services industry overcomplicating a topic.This question had it all. I am a fan of income investing and I write and talk a good deal about the amount a retiree can safely take out of a portfolio. I also fervently believe that anyone can be a successful investor. The investment industry is guilty of overcomplicating investing which makes it appear inaccessible for the average investor.The short answer to the question is that it is a feasible approach. The long answer involves some caveats and guidance for investors who want to pursue this strategy.Starting with the basicsIn theory if an investor only lives off the income generated by a portfolio they would never run out of money. And not running out of money is the whole point of trying to figure out a safe withdrawal rate. Living off of dividends means relying on the income generated from the assets held in a portfolio. If those assets are never sold there would always be a source of income. The market goes up and the market goes down. None of it matters. Only dividends count.The challenge of living off income is amassing enough assets to support a retiree’s day to day life. On a global basis this is hard. The S&P 500 which makes up around 70% of the global share market has a dividend yield of 1.24% as of April 2026. That is significantly lower than the 4% figure that is often cited as a safe withdrawal rate. That means a retiree needs a portfolio that is more than 3 times larger to generate the same amount of money than the 4% rule would provide.Australia is different. ASX shares typically have a higher yield due to the local preference for dividends that come from the tax advantages in Australia. Franking credits eliminate the double taxation of dividends in Australia by offering a credit for corporate taxes. Franking credits increase the post-tax income for Australian investors holding Australian shares.As the reader points out the yield on Australian shares when franking credits are included exceed 4%. That means a retiree can support the same level of income with a smaller portfolio than using the generally accepted withdrawal rate. The ASX currently has a trailing 12-month yield of 3.30%. The ATO estimates the franking credit yield on the ASX All Ordinaries each month. Over the past year the average franking rebate yield is 1.46%. That is a different index from the ASX 200 but a good approximation for franking credits.Investors are able to get around a 4.76% total yield by investing in the local market. In the pension phase of superannuation a retiree would not pay taxes on dividend income or on a withdrawal of funds from super. Franking credits would still be provided to the retiree and could be claimed even if there was no taxable income that needed to be offset. The government would pay the retiree the amount of credit. This is very favourable tax treatment.At first glance this strategy seems sound. At the risk of overcomplicating things there are some considerations for investors pursuing this strategy.A dividend is not guaranteedA dividend is not a contractional obligation. A dividend is a choice by the board and management of a company . This choice is based on the ability of the company to fund a dividend.Dividends are funded by the profits of a company. There are lots of factors that influence profits. The performance of a specific company and the overall economy all come into play. The safety of a dividend is governed by the payout ratio. The payout ratio refers to the percentage of earnings that are paid out in dividends. A 100% payout ratio means all earnings are paid out in dividends. A 50% ratio means that half of earnings go to dividends.The higher the payout rate the smaller the margin of safety for any fluctuations in earnings. At a 100% ratio if earnings drop the dividend will exceed earnings. In theory a company could support this dividend by spending cash from the balance sheet or by borrowing money. In practice a company would likely cut the dividend.Due to the preference for dividends in Australia the payout ratio is much higher for ASX listed shares than other global markets. That accounts for the higher dividend yield of Australian shares compared to global shares. The current dividend payout ratio in Australia is around 62%. This is actually quite low for Australia. In 2016 the payout ratio was over 75%. It is still much higher than many markets around the world. The S&P 500 has a dividend payout ratio of just under 24%.The high dividend payout ratio in Australia impacts the safety of dividends. And dividends in Australia fluctuate constantly. We can use BHP (ASX:BHP) as an example. BHP is Australia’s second largest company and makes up around 8% of the ASX 200 index. In the calendar year of 2022 BHP paid total dividends of $4.64 a share. In the calendar year of 2023 BHP paid out dividends of $2.61 a share. In the calendar year of 2024 the dividend was $2.20.The problem this presents for a retiree living off dividends is that year to year income would fluctuate. And that can be a challenging way to live. If a whole retirement portfolio was invested in BHP income would drop by 52% in 2024 compared to 2022.The way to address this risk is by diversification. Investors diversify to remove single security risk from our portfolio. In an income investing strategy diversification removes the risk that company specific problems impact a dividend and the overall income generated from a portfolio. The other issue is if something happens to the economy that impacts many companies. COVID was an outlier but also a cautionary tale. A quarter of Australian companies cut or deferred dividends during 2020. More dividends were cut in Australia than globally which shows the risk of a high payout rate.One way to ride out the volatility of dividends is to hold cash. When dividend income falls the cash could be used to make up for the shortfall. If dividend income increases, a portion of the increase could be used to replenish the cash reserve. Holding cash can smooth out changes in dividend income and provide more predictability for a retiree. This is an income investing equivalent to the bucket method of asset allocation which we discuss in this episode of our podcast Investing Compass.Dividend growth needs to keep up with inflationA little appreciated aspect of the 4% rule is that it only governs how much money is withdrawn during the first year of retirement. After that a retiree would increase the dollar amount of withdrawals by the rate of inflation. This guarantees a steady real standard of living. To keep up with inflation over a multi-decade retirement requires income growth. This is another concern with Australian dividend paying shares. The average dividend growth per share in Australia has been 3.70% a year over the last 10 years. The S&P 500 has grown average dividends per share by 7.82% a year over the same period. The growth in Australian dividend growth has outpaced the RBA target for inflation but has fallen short in the current inflationary environment.The lower growth can be at least partially attributed to the high payout ratio in Australia. Higher payout ratios mean that companies have less wiggle room to grow dividends without earnings growth. It also means that there is less money left over for a company to invest in growing earnings which is the long-term driver of dividend growth.The news is not all bad. Official inflation represents the increase in prices for a basket of goods that is supposed to represent what an average person in Australia consumes. That does not necessarily correspond with the spending of each individual. For example, in the last few years there have been large increases in housing costs in the official CPI figures.Unsurprisingly, housing costs make up a big part of the CPI basket at close to 22%. If a retiree has a fully paid off house this would not be a consideration. This is why considering personal inflation rates is worthwhile to understand future spending needs.There are ways to mitigate the slow growth in dividends by designing a portfolio that is diversified between companies that pay high dividends and have high payout ratios and companies that may have lower dividends but better prospects for earnings growth and future dividend growth.This may include an allocation to global dividend payers despite the lack of franking credits. Balancing dividend growth and high current yields creates a more balanced income portfolio.The lack of diversity in the Australian marketEarlier in this article I discussed diversification as a strategy to limit single security risk. In the context of an income portfolio this would lower the risk from dividend cuts from a single company. Purchasing each of the big four banks would lower the single security risk of a single bank.This is only one aspect of diversification. Each of the big four banks has a similar business model. Non-company specific factors are likely to impact all of the banks. The ASX 200 is very concentrated and I am personally very concerned about the potential for dividend growth from the biggest companies in Australia that make up a disproportionate part of the index.I wrote about my concerns in an article last year titled Are we in the last days of ASX dividend dominance? One way to explore this issue is the yield of the ASX 200. The yield today is 3.30%. At the end of 2022 it was over 4.50% and since 1980 the yield has been around 4.30%.The market has gone up which lowers the yield if there is no growth. However, that is not the whole story. In the last two years the yield has dropped a little less than 17%. About a third of the drop can be attributed to drops in the market capitalisation weighted dividends while two thirds are related to share market gains. Either way this hasn’t been a positive outcome for income investors. Especially if you are trying to fund your retirement through dividends.Relying solely on dividends from the ASX requires confidence that two sectors and five companies within that sector do well. This is another reason why diversifying into global equities could be a prudent approach to lower the risk of volatility in income. This would increase exposure to different sectors and companies. It would also likely require more money to generate the same level of yield as the ASX and currency risk would come into play.Another option for investors is to diversify away the concentration risk inherent in the ASX 200. This can be done by building a portfolio of individual shares with different weightings from the index or using an equal weighted index which is tracked by the VanEck Australian Equal Weight ETF (ASX:MVW).Is income investing right for you?Investing is about trade-offs between risk and reward. As investors we deem some risk as acceptable and gladly take it on to achieve our desired outcomes. Some risks we try to mitigate. An income investing strategy is no different. Take a holistic look at your financial position to see if living off dividends makes sense. It may remove the risk from fluctuations in asset prices. But it introduces new risks to a portfolio.I would love to hear from readers who have taken an income investing approach and the pros and cons of your strategy. Email me at [email protected]For more on income investing please see the approach I take and how to use ETFs to generate income.Articles mentioned:Are we in the last days of ASX dividend dominance?","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":false,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"isVideo":false,"video":null,"symbols":[],"gpt_button":0,"need_auth":false,"need_login_tip":false,"code":"91000000","status":"200"}}}