Many retirees love the idea of letting their investments pay their bills in retirement. You simply collect and spend your dividends, without ever touching the principal.

But thinking that way can grossly limit how you use your money to actually enjoy retirement.

The more appropriate question probably isn’t “can” you live off dividends, but “should” you.

The truth is, you could live partly or completely off dividends, but you probably don’t want to.

To see why, we need to unpack what dividend investing really means, and how it does or doesn’t fit into one’s retirement income plan.

Make sure to read to the end to learn why I believe this debate actually misses the bigger point!

Why Dividend Income Feels So Appealing

There’s something psychologically satisfying about dividends. They arrive automatically. You don’t have to sell anything. They feel like a “reward” for investing well.

That emotional comfort matters.
After all, many retiree may struggle with the idea of “spending down” their savings. Dividends create the illusion that you can live indefinitely off the interest, never touching principal.

But there’s a catch: today’s yields aren’t what they used to be.
Even a diversified dividend fund, such as the Vanguard Dividend Appreciation ETF (VIG), might yield around 2% to 2.5%.

On a $1 million portfolio, that’s $20,000 to $25,000 a year before taxes. For most retirees, that’s not enough to live on.

So what do many do? They start chasing higher yields, 6%, 7%, 8%+ through concentrated energy funds, real estate trusts, or high-dividend stocks.

And that’s where risk creeps in.

The Hidden Risks of Chasing High Dividend Yield

High dividend yields are often high for a reason.

Sometimes the company’s price has fallen because its business is struggling. Other times, the payout isn’t sustainable and eventually gets cut.

Think back to 2020, when dozens of once-reliable dividend payers (airlines, banks, and energy firms) suspended payments overnight. Retirees counting solely on those dividends suddenly faced a cash-flow crisis.

In other words, dividend income can feel “safe” but behave very differently in practice.

That’s why many favor a total-return approach instead.

The Total-Return Approach: A Better Way to Create Income

Rather than dividing investments into “income” and “growth,” total-return investing combines dividends, interest, and strategic sales to create sustainable cash flow.

In practice, it works like this:

Dividends and interest provide a baseline of income.
Periodic rebalancing or planned share sales supplement cash needs.
Tax-efficient withdrawals are coordinated across accounts (brokerage, IRA, Roth).

This approach is vastly different because it’s not about maximizing dividend yield.

In years when markets rise, you can fund income by trimming appreciated assets. When markets fall, you rely on dividends, interest, and a short-term cash buffer (the first “bucket” in your retirement income plan).

The result: steadier cash flow, less emotional stress, and more tax flexibility.

Dividends and Taxes: What You Need to Know

Not all dividends are taxed the same.

Qualified dividends (from most U.S. stocks) are taxed at favorable long-term capital gains rates — 0%, 15%, or 20%, depending on your income.
Non-qualified dividends (often from REITs, bond funds, or international holdings) are taxed as ordinary income.

And while it may sound appealing to “live off dividends” from your brokerage account, that income can push you into higher tax brackets or increase Medicare premiums (IRMAA).

A well-designed tax strategy balances when and where you take income — sometimes selling shares in a lower bracket can actually save you more than chasing yield ever could.

Behavioral Traps to Watch Out For

Dividend-only investors tend to fall into a few common traps:

Concentration risk: overweighting a handful of high-yield sectors.
Neglecting total performance: ignoring capital appreciation and inflation adjustments.
Liquidity mismatch: not having enough cash set aside during dividend cuts or market downturns.

In short, “income comfort” can quietly turn into portfolio fragility.

Why the Dividend Debate Misses the Point

At the end of the day, the whole “dividends-only” discussion is a bit of a moot point.

You should take the income in retirement that allows you to live the life you want, assuming your financial situation supports it.

Only taking dividends implies that your retirement savings isn’t being depleted and that your portfolio will continue to grow indefinitely throughout your retirement years.

That sounds noble, but it also assumes your priority is to leave behind a large estate.

That may not be your goal.

You might prefer to travel more, give more, or simply enjoy your money while you can.

By restricting yourself to dividends, you could end up living vastly below your means, leaving behind wealth you didn’t intend to, at the cost of experiences you could have had.

Your portfolio exists to fund your life, not the other way around.

A Better Question: How Can I Create Reliable Income in Retirement?

The goal isn’t to live off dividends. The goal is to live off your plan — a coordinated strategy that balances growth, safety, and taxes.

That’s where an evidence-based framework like the bucket strategy comes in:

Short-term bucket: 1–3 years of cash and short-term bonds for stability.
Intermediate bucket: bonds and conservative funds to replenish the short-term bucket.
Long-term bucket: equities for growth and inflation protection.

Dividends play a role in all three, but they’re just one piece of a much larger income puzzle.

Recap

Dividends are a valuable and consistent part of many retirement portfolios. But they’re not a replacement for a full income strategy.

You can, and should, enjoy the comfort of seeing dividends roll in.
Just don’t let them define your income plan.

The retirees who thrive aren’t the ones chasing yield. They’re the ones using every lever available, dividends, capital gains, Roth conversions, and tax-efficient withdrawals, to build sustainable, flexible income that supports their life.

Because true retirement freedom is about building a life you genuinely love living.

Have any questions about what you’ve read? Let’s talk about them!