That little wiggle you felt a few weeks ago wasn’t a result of overeating the day before. It was the world shifting. In a meaningful way.
As you may have heard by now, in May, Barclays downgraded Electric Utility bonds across the United States.
For the past several decades, utility companies of all stripes have been one of the best places to park money for safety and income. After all, turning off your power, water, or gas was the last thing you would do if you were in a period of financial difficulty. You might cut back on luxuries, wear your clothes another season, put off retirement savings(!), or even sell you car. By the time you get to the point of not paying your utility bills, you are in pretty dire straits; it’s one of the last places people cut expenses. Add to this the fact that if a utility get into financial trouble (whether of its own making or not) they have a great deal of power to raise their rates. The realpolitik of the situation is that the electric company has you over a barrel, and they know it. When you flip the switch, you want the lights to go on; it’s that simple. Most people will complain about price increases, but they will complain as they are paying the bill. Cutting out water, electricity and natural gas delivery to your home really isn’t something anybody ever wants to do. This is one reason that utility stocks are known as “widow and orphan” stocks; they’re as reliable as anything can possibly be.
I used to think this way, however I don’t think it’s realistic to live off dividends and never touch your capital in retirement. First of all, any RRSP savings will eventually be converted into an RRIF and face stiff withdrawal rates. Second, what if you want (or need) excess capital in one year to pay for a car, new roof, large vacation, etc.? You’d probably look to sell off some stock to access the capital. Finally, there’s the potential to work longer than needed in order to reach a target dividend income stream. It’d take a million dollars in capital to spin off $35,000 to $40,000 in dividends. Why wouldn’t you want to tap into that million dollars?
I’m sure it’s just coincidence, but I’ve come across a lot of “When do you know you’re ready to retire?” articles the last little while. — EDIT: Just this morning, Robb at Boomer and Echo has written a post on this very topic. — After reading a few of these, it struck me that I had never really considered the question of when I would reach my (financial) retirement threshold. It’s not just because retirement is so far away, or because I haven’t taken the time to make a specific goal. The reason is because, as a dividend investor, the answer is so obvious that almost no thought is needed.