Dr James Fox explores whether it would could be possible to generate enough dividend income to live comfortably and stop working.
Posted by Dr. James Fox
Published 30 May, 2023
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Like many investors, I receive dividend income from the stocks I own. In my case, dividend-paying stocks represent the core part of my portfolio. But just how much would I need to earn from dividends to live off this income alone? And would it be possible?
Let’s take a close look.
How could it work?
Well, I’d want to build a portfolio of dividend stocks that collectively pay me enough money to live from. Let’s say this is £30,000, but I appreciate this might not be possible in London.
And I’d want to be doing this within an ISA wrapper. That’s because any capital gains, dividends, or interest earned within the ISA portfolio is tax-free.
So, if I was earning £30,000 from dividends, I’d actually be taking home more money than someone on a £45,000 salary — including student loan repayments.
Of course, unless I picked specific stocks, I wouldn’t expect this income to be spread evenly across the year. At this moment, the majority of my portfolio’s income comes around April and May, shortly after the end of the financial year. So that’s something to bear in mind.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
What would it take?
Well, to earn £30,000, I’d need to have at least £375,000 invested in stocks. That’s because I believe the best dividend I can achieve is around 8%. This would involve investing in companies, like Legal & General, that don’t offer much in the way of share price gains.
But what if we don’t have £375,000? And let’s face it, the majority of us don’t.
Well, I’d need to build a portfolio over time. And I could do that using a compound returns strategy. This involves reinvesting my dividends and earning interest on my interest. It’s very much like a snowball effect.
Naturally, there are several key variables here. The starting figure, the yield I can achieve, and the amount of money I contribute from my salary every month.
If I started with £10,000 and stocks yielding 8%, in theory I could reach £375,000 in 19 years. But this would require me to contribute £400 a month and increased this contribution by 5% annually throughout those 19 years.
And by contributing £400 a month, I’d fall way under the maximum annual ISA contribution of £20,000.
Compound returns isn’t a perfect science, and as with any investment, I could lose money. But it’s certainly safer than investing in growth stocks.
About the stocks
Of course, the above is great in theory, but I’d need to pick the right stocks. I’m looking for stocks with strong dividend yields, but I also need to be wary. Big dividend yields can be a warning sign, and the dividend coverage ratio is a good place to start.
View over Old Man Of Storr, Isle Of Skye, Scotland
Story by Zaven Boyrazian, CFA
Few investors come close to matching the exceptional track record of billionaire Warren Buffett. The ‘Oracle of Omaha’ has steered his investment firm to generate close to a 20% average annualised return since the 1960s. So it’s no surprise that when Buffett gives advice, investors listen… carefully.
And with the cost of living continuing to rise, his previous tips about the need to earn passive income are now more relevant than ever. After all, “If you don’t find a way to make money while you sleep, you will work until you die”, he famously said.
With that in mind, here’s how any investor can immediately start earning a passive income overnight.
The power of dividends
While many investment portfolios tend to be geared towards growth, it’s easy to overlook mature, boring dividend-paying stocks. After all, why would you invest in a dull self-storage enterprise when there are bleeding-edge biotechs curing cancer?
So how do investors tap into all this passive income potential? It’s simple. All they need to do is buy shares in a dividend-paying company, and wait for the money to come rolling in, usually once every quarter.
But is it really that simple?
Risk versus reward
The most lucrative dividend stocks over the long run aren’t necessarily the ones with the highest yields today. Instead, it’s the businesses that generate exorbitant volumes of consistent free cash flow that not only fund shareholder payouts but also enable them to grow over time.
That’s a lesson Buffett has learned firsthand with his investment in Coca-Cola (NYSE:KO). The soft drinks giant has used its consistent and steady cash flows to increase dividends every year for 63 years in a row. And consequently, Buffett’s now earning more than a 60% yield on his original investment in the late 1980s.
Sadly, past performance doesn’t guarantee future results. And if investors blindly buy previously successful income stocks without investigating the underlying risks or potential rewards, their passive income could quickly disappoint.
So let’s take a closer look at Coca-Cola.
Still worth considering?
Starting with the positives, Coca-Cola’s latest results show that the company continues to expand sales organically at impressive profit margins. And even after another round of price increases, thanks to the group’s brand driving pricing power, sales volumes have remained robust, indicating that customers are happy to pay a premium.
That all translates into yet more free cash flow, paving the way for its 64th consecutive dividend hike. However, there are some brewing headwinds to keep a close eye on. Rising global sugar taxes and rising economic constraints in key emerging markets undermine the group’s long-term momentum.
As such, even if dividends continue to rise, future payout hikes might be far less impressive. Put simply, there may be other better dividend growth opportunities to explore right now. Nevertheless, for investors seeking reliable passive income, this Buffett-style stock might be worth a closer look.
Three income powerhouses are trading at very compelling valuations right now.
Each offers attractive income with substantial upside potential.
Here’s why I’m overweighting them while the market is still giving them away at a discount.
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When looking to retire on passive income, I look to build a portfolio diversified by sector that is filled with high-yielding, high-quality businesses that have durable defensive business models, strong balance sheets, high and sustainable yields that are well-covered by underlying cash flows, and have the potential to either grow at a rate that meets or beats inflation or generate excess income that can be reinvested to generate growing income to offset the corrosive impacts of inflation.
While diversification is a sacred pillar of my investment strategy, at the same time, as a value investor, I do tend to overweight sectors that are opportunistically valued at the time. This is how I’ve been able to generate outsized total returns with below-market beta over time. With that in view, in this article, I’m going to detail what I think are three of the most undervalued, attractive, retirement-friendly income machines right now.
The Most Undervalued High-Yield Sector That Is Hated Right Now
The most undervalued high-yield sector right now is the business development company sector (BIZD), as it has sold off pretty aggressively since last July:
While there certainly are concerns about private credit in general due to the influx of capital into this space in recent years, the compressing spreads, the muted M&A activity, and, most recently, concerns about AI disruption of software, which does have a substantial place in many BDCs’ lending portfolios, I think that overall these concerns are largely overblown. This is especially true in the leading quality underwriters, as their portfolios continue to deliver strong underwriting performance and their internal risk metrics are not showing any material signs of growing weakness and potential credit defaults.
Within the BDC space, there are quite a few opportunities right now that offer attractive and sustainable yields that I would have no issues buying if I were an income-focused retiree as part of a well-diversified portfolio. If you want to go with the bluest of the blue chips, Main Street Capital Corporation (MAIN), Capital Southwest (CSWC), and Ares Capital (ARCC) are three great names to choose from, though I do not view them as being particularly cheap at the moment. If you want to move further into tech, you can go with the leading blue-chip Hercules Capital, Inc. (HTGC), which is a solid opportunity, albeit trading near fair value, in my view.
However, if you want to go after more undervalued names while still insisting on quality, I think names like Golub Capital BDC (GBDC), Blackstone Secured Lending Fund (BXSL), Blue Owl Capital Corporation (OBDC), and several others offer an attractive combination of yields and value right now. While it is entirely possible that some of these BDCs – such as BXSL and OBDC – will cut their dividends in the coming quarters, it is also important to keep in mind that their current yields are high enough that even a 10-20% cut in their dividend would still leave them yielding over 10%. This is similar to how GBDC recently cut its dividend by 15%, yet still yields over 10%. This reduced dividend rate would then be quite sustainable, barring a very aggressive pace of rate cuts from the Fed and/or a material economic downturn. Meanwhile, their substantial discounts to net asset value, strong underlying balance sheets, and defensive portfolio posture, along with strong underlying performance, set them up to be dependable and relatively defensive income machines.
Why Residential REITs Could Be Near A Major Inflection Point
The second most undervalued high-yield income machine right now, in my view, can be found in the real estate investment trust space (VNQ), as it has been in the doldrums ever since interest rates began rising aggressively in 2022.
While triple-net lease is typically the bastion of sustainable income, with names like Realty Income Corporation (O) and NNN REIT, Inc. (NNN) headlining that space with fairly attractive yields, one of my favorite places to invest in the real estate sector right now is the residential space.
This is because there continues to be a general housing shortage in many markets in the United States, and rental rate dynamics in key Sunbelt markets are about to hit an inflection point where I think they will likely increase materially later this year and into 2027, as new supply is expected to be weak moving forward while demand continues to grow due to strong in-migration into these markets. Some of the most attractive ways to play it right now are Mid-America Apartment Communities, Inc. (MAA) for multifamily, along with Camden Property Trust (CPT) as another attractive option, and then in the single-family space, American Homes 4 Rent (AMH) and Invitation Homes Inc. (INVH) are both deeply undervalued as well.
All four of these REITs offer pretty solid dividend yields with strong dividend growth track records backed by rock-solid balance sheets, diversified portfolios of quality residential real estate in good markets, and yet all four of them trade at deep discounts to net asset value. Between their essential nature, attractive long-term growth prospects, status as a real asset inflation hedge, and deep value, I think these make for a very compelling place to allocate capital right now, especially in an environment where many other real asset investments, especially in the precious metals space (GLD) and commodity materials space (XLB), as well as increasingly the energy sector (XLE), have recently undergone strong rallies, making this one of the few real asset value plays remaining.
High Yields With Inflation-Resistant Growth
The third most undervalued high-yielding retirement income machine right now is midstream infrastructure (AMLP). Now, some midstream infrastructure is not discounted at all, such as Kinder Morgan, Inc. (KMI) and The Williams Companies, Inc. (WMB), which are quite richly priced after strong recent rallies. However, there are some attractive opportunities in this space yet that combine high yield with inflation-beating growth, very strong balance sheets, well-diversified and high-quality asset bases, and good management teams.
In particular, Enterprise Products Partners L.P. (EPD), Energy Transfer LP (ET), MPLX LP (MPLX), and several other K-1-issuing MLPs look very attractive right now, and in the 1099-issuing midstream side of things, there are also a few attractive opportunities, such as Plains GP Holdings, L.P. (PAGP). While they’re not as cheap as they were this past October, when I was pounding the table on them as my highest conviction pick at the moment, they still offer very attractive combinations of yield and inflation-resistant growth, as well as defensiveness thanks to their longer-duration, highly contracted cash flow profiles.
As a result, I think they still are a must-own as a substantial allocation in any income-focused retirement portfolio.
Risks & Investor Takeaway
While I’m very bullish on select undervalued high-quality BDCs, REITs, and midstream companies right now, none of them is risk-free. As already mentioned, BDCs are facing a plethora of headline and fundamental headwinds, whereas REITs remain highly interest rate sensitive, and residential REITs in particular need to work through some oversupply conditions in certain markets, which I think will happen soon. Finally, midstream infrastructure companies are mostly prone to commodity price volatility, impacting their equity valuations, even if their underlying cash flows are fairly resistant to it. Additionally, they have operational risk as they end up investing in growth projects that need to be executed on time and within budget to generate attractive returns.
Thanks to the attractive income yields and risk-reward profiles, these are three sectors where I currently have substantial allocations and very likely will continue to allocate capital to in the coming months, as long as they remain undervalued high-quality sources of attractive income and growth at High Yield Investor.
The Most Important Thing You Can Do for Your Kids (and Grandkids) in 2026
By Brett Eversole, Daily Wealth
Since the pandemic, we’ve seen two separate economies emerge. They’re moving in different directions. One is thriving… while the other is struggling.
We call this the “K-shaped economy.” And it was one of the biggest topics in finance and economics last year…
Folks in the higher-income portion of the economy are doing incredibly well. They’ve seen their wages rise. And more important, their assets have grown. These folks are much better off today than they were five years ago.
Lower-income Americans have experienced the opposite. Their wages haven’t grown as fast. They haven’t benefited from the stock market boom. And inflation crushed them during the post-pandemic era.
Most people believe the K-shaped economy is an income-disparity problem… They say that some people make a lot while others don’t make enough. That’s a compelling idea politically – but it doesn’t explain what’s happening.
In America, we’re seeing a K-shaped economy for a single reason…
One group of Americans owns assets… and the other group doesn’t.
Now, there’s a way to ensure your kids and grandkids belong to the asset-owning portion. And acting on it is the most important thing you can do for them this year…
A New Opportunity to Get Ahead
It’s not politics. It’s economics. This divide is all about owning assets and having them work for you – or not.
If you’re in the asset-owning category, chances are you’ve done darn well over the past five years. And that’s almost regardless of your personal income or employment situation. Asset growth has been so strong that it has dwarfed the pain of inflation.
It’s another story for those who don’t own assets. For them, it’s almost impossible to get ahead.
The simplest way to fix this problem isn’t through political jockeying. We just need to move more folks into the asset-owning category.
And now, thanks to one piece of legislation, there’s a new opportunity to jump-start asset ownership for members of your family.
It’s called the Invest America Act. It became law as part of the One Big Beautiful Bill Act last year – and it went into effect on January 1.
The Invest America Act allows you to open a tax-deferred investment account for anyone under the age of 18.
For the pilot portion of the program, the government will also fund accounts belonging to children born between January 1, 2025 and December 31, 2028 with $1,000.
These accounts are a type of individual retirement account (“IRA”). The difference is that traditional IRAs are mostly off-limits for minors, since you must have income to fund one.
By contrast, these accounts are open to all children. And just about anyone can fund them up to the $5,000 annual limit. They’re the perfect way to make your child or grandchild an asset owner right now… and help them join the upper portion of the K-shaped economy.
I’m sharing this because I believe setting up your children and grandchildren for long-term financial success is one of the most important gifts you can give them…
Investing is all about putting your money to work for you. The longer you’re able to do that, the better off you’ll be. You want compounding to work in your favor… And that means starting early.
How I’ll Set My Kids Up for Success
Everyone’s situation is different. But here’s what I plan to do for my two young daughters, aged 8 and 4…
I’m going to prioritize maxing out each of these accounts ($5,000 a year) for at least the next 10 years. Assuming an 8% annual return, they’ll each have about $72,000 saved a decade from now.
That might not sound like much… I’ll have contributed $50,000 to each account. The funds will have grown by less than 50%. But compounding will have only begun to work in our favor.
From there, my girls will have roughly 45 years until retirement. And that’s where the magic happens…
Over that time, those $72,000 accounts will compound to roughly $2.3 million.
For just $5,000 a year for a decade, I can effectively fund each of my children’s retirements. That’s incredible.
Again, each situation is different. But if you’re reading this, you’re likely an investor who wants to make your money work for you. And if you’ve got children in your life, you probably want to see them in the upper part of the “K.”
That means taking advantage of these new accounts is the most important thing you can do for your children and grandchildren in 2026.
While you can open one right now, funding doesn’t begin until later this year. In the meantime, figure out your contribution plan… Maybe you can’t max out multiple accounts each year, but even small contributions will grow dramatically over decades.
If you can only contribute $2,500 a year for the next decade, the account should grow to nearly $1.2 million. Even investing just $1,000 per year for the next 10 years would mean a final balance of nearly half a million dollars.
The point is, a small investment now will lead to life-changing returns in the future. Invest now so your children will be able to thrive in the future.
This simple step is how you ensure your kids or grandkids are in the upper part of the K. And I urge you to take advantage of it.
Again, each situation is different. But if you’re reading this, you’re likely an investor who wants to make your money work for you. And if you’ve got children in your life, you probably want to see them in the upper part of the “K.”
If you have a dividend re-investment plan, you should be able to live off the natural income and leave your capital, to whoever you wish.
Pure-play energy refiners receive little investor attention. When people think about energy stocks, they usually think of large, global, full-spectrum players like Exxon Mobil (XOM) and Chevron (CVX); however, income-focused investors are aware of midstream companies with attractive yields and growing dividends.
Refining companies, which turn crude oil into fuels, are referred to as downstream energy companies. Pure-play refiners operate in a highly interesting energy subsector. For a refiner, both its inputs (crude oil) and its products (fuels like gasoline and jet fuel) have prices set in the commodity markets. As a result, refiners need to be highly efficient to remain profitable when commodity prices are unfavorable.
There are just three large refining companies:
Marathon Petroleum Corp. (MPC), with a $53 billion market cap
Phillips 66 (PSX), with a market cap of $57 billion
Valero Energy Corp (VLO), with a $55 billion market value
Marathon Petroleum released fourth-quarter and full-year results, with some outstanding numbers. For reference, MPC currently trades for $190 per share.
For 2025, MPC reported net income of $4.0 billion, or $13.22 per share. This was up nicely from $10.08 per share for 2024. Cash from operations totaled $8.3 billion.
Marathon Petroleum’s management is focused on returning cash to investors. For 2025, $4.5 billion was paid out in dividends and share buybacks. From 2020 through 2025, the number of shares outstanding decreased by over 50%. Fewer shares automatically produce growing earnings per share.
Marathon Petroleum has consistently grown its common stock dividend by 10% annually. The company owns more than 60% of MPLX LP (MPLX), an energy midstream company. The growing distributions from MPLX to MPC are expected to fund MPC’s 2026 dividend and standalone capital.
For investors, MPC is a solid dividend growth stock. When profits are high, shares are repurchased, EPS continues to grow, and dividends are increased.
Three historically reliable signals are flashing at the same time – and that rarely ends well.
The bullish narrative may be masking deeper structural cracks beneath the surface.
Here’s how I’m positioning before the next potential market reset unfolds.
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While the S&P 500 (SPY) and NASDAQ (QQQ) have been on tremendous bull runs since 2023, there are three historically reliable warning signs emerging simultaneously that indicate that the market could be due for a significant correction in the near future. While I am not a market timer and I’m not predicting a correction in the near term, I do think it is important that investors, especially more risk-averse ones, keep these risks in mind and monitor them closely as they build their portfolios today. In this article, I will detail these and share how I am positioning my portfolio in the current environment.
The S&P 500’s Most Dangerous Valuation Setup In Decades
The first warning sign is that valuations and equity exposure are at stretched levels. In fact, the S&P 500 has gotten so overvalued that Howard Marks recently pointed out that J.P. Morgan research reveals that whenever the S&P 500 has reached its current valuation level, the next decade has always yielded real annualized total returns of around 0%. Additionally, there are numerous other metrics that indicate the S&P 500 is significantly overvalued right now.
Margin Debt At Extreme Levels: A Classic Late-Cycle Warning
Not only that, but the positioning of market participants is also indicating a very bullish, if not complacent, market sentiment. For example, household allocation to equities has reached near-record levels, and this has typically indicated that the market is late in a bull-run cycle. This makes sense simply because, from a mechanical perspective, the more people in the market, the greater the number that could be pulling out, or at the very least withdrawing their positions relative to new entrants and new additions being made. Not only that, but margin debt is at elevated levels. This typically indicates that investors are feeling too optimistic about the market and, should sentiment turn, could lead to an outsized downturn as investors flee to safety by closing margin positions, leading to outsized selling.
advisorperspectives.com
Additionally, studies have shown that when margin debt reaches levels similar to where it is today, it can help. It is often an early indicator that a sharp market pullback is ahead, which again makes sense given that falling prices can result in margin calls, which lead to forced selling, which then leads to deeper drawdowns in the market than would otherwise be seen. Not only that, but buying stocks on margin tends to lead to elevated valuations relative to what would otherwise be seen, therefore requiring a further pullback in stocks simply to achieve a proper valuation.
The One Yield Curve Signal Investors Ignore At Their Own Risk
The third warning sign is an inverted yield curve. This is an important indicator because, while an inverted yield curve does not mean that a recession is guaranteed to happen, historically, yield curve inversion has been a very reliable indicator of an upcoming economic recession, as the chart below illustrates.
currentmarketvaluation.com
Given that the yield curve recently inverted quite sharply, that means that we may well be in store for a recession. This is because yield curve inversion tends to signal that monetary policy is too tight and, therefore, credit creation slows. This, in turn, can lead to both a stock market correction and a contracting economic environment. It also signals a risk-off environment because it means that investors are fleeing to longer-term bonds (TLT), which are traditionally a safe haven, as a way of hedging against a sharp economic downturn.
While the yield curve has since uninverted, this too is typical before a recession hits, as the chart above illustrates, indicating that the recession could be imminent.
AI Boom Or False Comfort? Why The Bull Case May Be Misleading
Sure, there is a bullish case for the market today, namely that we are on the cusp of an AI productivity boom as well as a manufacturing renaissance in the United States, both of which, if successful, could lead to enormous gains in economic activity, and where manufacturing-related job increases could help to offset some of the lost jobs due to AI. Additionally, the one big beautiful bill act from last year implemented tax and regulation changes that are overwhelmingly pro-business in nature.
However, as these indicators show, there is a strong case to be made for a sharp stock market correction, whether it be due to a recession, as the recent inversion of the yield curve seems to point to, or simply due to the fact that markets are overvalued and overleveraged. At the very least, with valuations and leverage at the levels they are at, any sort of speed bump, the AI boom, and/or material disappointment in economic activity in the United States could send markets substantially lower.
On top of that, there are significant geopolitical risks that could trigger a drawdown, including a major war involving the United States and Iran, an escalation of the war in Europe, which at the moment is relatively confined to Russia and Ukraine, but could conceivably expand beyond that, and/or a conflict involving Taiwan in the Far East, especially if the U.S. were to be drawn into that conflict in a major way.
How I’m Structuring My Portfolio For What Could Be A Major Reset
Given this outlook, how am I positioning my portfolio?
First of all, I am avoiding the major indexes because of the significant drawdown risk. That being said, I’m not completely running for the hills and going all in on cash and cash equivalents (SGOV).
Instead, I’m remaining well diversified with a significant allocation to gold bullion (GLD) leases that provide the safe haven hedge that gold tends to provide in uncertain environments, while still generating attractive income for my portfolio. Additionally, I’m investing aggressively in durable and defensive real asset businesses that pay out attractive yields and trade at deeply undervalued valuations. These include several leading blue-chip midstream infrastructure companies (AMLP), as well as several mission-critical, deeply undervalued REITs (VNQ) with attractive dividends and strong balance sheets, as well as senior secured debt from high-quality underwriters and several other highly attractive infrastructure investments (UTG).
This approach has served me well, especially when combined with an opportunistic capital recycling strategy that has enabled me to achieve total return outperformance over the past five years since launching High Yield Investor, along with a 7% to 8% dividend yield and below-market beta.
Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.
The current bull run continues, until ‘Buy the Dips’ fail
If you think of your portfolio as money lending business and as long as the company continues to pay you interest, you are willing to lend it’s your hard earned.
If one of your customers fail to pay their interest payment, close the loan arrangement and move on.
Be watchful that the fire doesn’t melt your Snowball
