The Intersection Of Dividend Investing And Financial Independence
Most of us dividend investors strive to accumulate wealth for financial security. So please allow me to put it another way. We seek financial freedom with dividends.
As a result, it is high time to publish a concise guide on achieving financial freedom with dividend investing.
That’s the plan for today. Let’s get moving so you can start investing.
How To Achieve Financial Freedom With Dividend Stocks
For your reference, here is a 7-step outline describing my suggested process for financial freedom with dividend income.
- Calculate your income requirements
- Forget about income taxes
- Determine your target dividend yield
- Develop a long-term mindset
- Start investing in dividend stocks now
- Reinvest all dividends
- Monitor and fine-tune your dividend portfolio
Next, let’s go through each step in detail.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
1. Calculate Your Income Requirements
Getting a handle on how much dividend income you need to earn is an essential first step to achieving financial freedom from dividend stocks.
Option 1: Determine Your Monthly Expenses
First, take a hard look at your monthly expense budget. Then, if you don’t have one, get busy putting it together.
Do you need help figuring out how? If yes, you can learn about creating a personal cash flow statement here.
As a result of the process, your actual expenses become a guide to determining the necessary level of dividend income.
Option 2: Use Your Current Earned Income
As a quick alternative, use the current income from your job as the goal for dividend income needs. It is perfect for starting your path to financial freedom dividend investing immediately.
Furthermore, remember to subtract any additional income you may have during your years of financial independence.
For example, your supplemental income from:
- Part-time work
- Side hustle
- Social security
- Retirement savings
Example Of Calculating Your Financial Freedom Dividend Income Requirement
Let’s say you earn the median U.S. household income. As of the date of this article, it was about $70,000.
Furthermore, I will assume you do part-time work that earns $10,000 per year.
Thus, taking $70,000 and reducing it by $10,000 means, in this example,
$60,000 in annual dividend income is required
Finally, divide $60,000 by 12 months in the year, and financial freedom means making $5,000 per month in dividend income.
Next, let’s move on to step number 2.
2. Forget About Income Taxes (for now)
First, I don’t want you to take any shortcuts in your financial planning. Furthermore, income taxes are an essential consideration. And yes, dividends are subject to income taxes in most situations.
However, everyone’s taxes are unique, so I suggest you talk to your local tax expert.
Thus, for today, I’m going to make this easy because who needs a tedious discussion about taxes? Not me.
So, forget about taxes as you pursue financial freedom with dividend investing.
Why?
Because your current income from working is subject to income tax, and so are your dividends.
Thus, for simplicity, I’m going to call it a draw.
More than likely, your tax bill will be less when living out your dream life from dividends.
Why?
Dividend income is subject to a lower rate than the income earned from a job.
Next, it’s time to get our hands dirty with dividend-paying stocks and dividend investing for passive income. One of my favorite topics!
3. Determine Your Target Dividend Yield
The dividend yield is the percentage of your investment dollars returned as cash dividends annually. Dividend yield can be calculated based on stock price or the amount invested.
For example, $10,000 invested in dividend-paying stocks with an average dividend yield of 5% means you earn $500 per year in dividend payments.
So, as you consider investing in individual stocks, look up the dividend yield. It is easy to find by doing an online search for any company stock that interests you.
Dividend Yields: The Good, The Bad, And Everything In Between
So, what exactly is a good dividend yield? The quick answer is that it depends.
Dividend yields can range from less than 1% to more than 10%. However, I prefer investing in stocks that yield between 3% and 5%.
You must also understand the tradeoff with high dividend yields.
On the one hand, higher yields mean more dividend income to achieve financial freedom faster.
On the other hand, higher dividend yields come with less potential for dividend growth and more significant investment risks.
Finally, for today’s example, I will use a:
Target dividend yield of 5%
4. Develop A Long-Term Mindset
Next, I must emphasize that dividend investing is not a get-rich scheme. Is it possible to get rich by investing in dividends?
The answer is yes. Many people have done so, and you can do it too.
However, most investors will pursue a dividend income investment strategy for many years before achieving financial freedom from dividends.
Let’s go back to today’s example to see why I say dividend investing requires a long-term mindset.
How Much Money You Need For Financial Freedom With Dividends
Reviewing step 1 in our 7-step financial freedom from dividends plan, we determined that $60,000 in yearly dividend income is required. Then, in step 3, I decided to use a 5% dividend yield.
Taking $60,000 and dividing it by 5% gives us a vital answer to today’s discussion.
Now, sit down, hold on to your hat, brace yourself or do whatever is necessary to stay calm.
$1,200,000 is the investment value required for financial independence with dividend income.
Yes, you read that right, a total investment of 1.2 million dollars.
First, that is a lot of money. Furthermore, statistics show that only 1 in 10 Americans are millionaires. Thus, financial independence from dividends may mean you are in elite territory.
However, remember that your exact number will be different. It will depend on the amount of annual income you require from dividends. And your dividend portfolio’s dividend yield.
Thus, play with the numbers. Calculate a better estimate of your investment required.
It may be significantly less than today’s example. Also, your stock’s dividend increases and capital gains will help you get there.
You can do it. However, it would be best to start building a million-dollar dividend portfolio immediately.
5. Start Investing In Dividend Stocks Now
Today, I won’t go into a lengthy discussion about picking dividend stocks and building a dividend portfolio today.
The most important advice I can give you is to get started now. The longer you wait, the longer it will take to earn financial freedom.
Here are some other dividend investing tips:
- Find stocks with long dividend payment histories
- Don’t ignore dividend growth
- Avoid high dividend yields
- Take advantage of dollar cost averaging
- Stay invested during bear markets
- Consider index funds for diversification
- Keep investment costs low
6. Reinvest All Dividends
Shortly after investing in dividend stocks, your cash dividends will start to roll in. At that point, reinvest all cash dividends received.
To do so, instruct your broker to automatically reinvest any dividends received back into the stock that paid them.
Alternatively, you can let your dividends accumulate in cash. Then, periodically choose to invest them in one or more dividend stocks.
Each method of dividend reinvestment has pros and cons. However, it’s hard to go wrong either way.
Last but not least, the final step in today’s plan for financial freedom with dividend stocks.
7. Monitor And Fine-Tune Your Dividend Portfolio
First, take an intelligent approach to start and build your dividend portfolio.
Second, periodically monitor your holdings. Most importantly, stay diversified. Keep any stock or industry manageable as a piece of the total pie.
Thus, choose dividend stocks across a variety of sectors, such as:
- Consumer staples
- Food and beverage
- Utilities
- Real estate investment trusts
- Industrials
- Banks
- Business services
Finally, use proven tips to increase dividend income from your portfolio. For example:
- Save and invest more new cash
- Invest in dividend growth stocks
- Swap lower-yielding stocks for higher ones
Finally, for motivation, track and watch your dividend income grow. Then, aggressively pursue your dividend investing tipping point where dividend income exceeds expenses.
Most importantly, your tipping point is where dividend investing and financial independence meet.
Okay. That completes today’s guide about financial freedom and dividend investing.
So, please allow me to wrap up with some final thoughts. But before I do so, please save this pin for later on your favorite Pinterest board:
Achieving Financial Freedom With Dividends
I hope you have found this article helpful. Furthermore, you leave encouraged to start or continue on your path to financial freedom.
I suggest learning as much as possible about dividend investing as part of overall financial planning.
For this, I suggest these resources.
From Simply Investing:
The Financial Freedom Investing Course
It is a comprehensive online platform offering everything you need to know about building a passive income stream from dividend stocks.
Or, stay right here and check out more articles from my:
Robust Archives of Helpful Dividend Investing Guides
Whatever you decide, good luck investing and achieving financial freedom!
Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.