Examining The Investment Required For Living Off Dividends
This article digs into the question: how much money do you need to live off dividends?
It is for anyone seeking regular passive income from dividend stocks. And the financial freedom provided by a substantial sum of dividend income.
In the end, your number will be different from my number. And my number will be different from someone else.
As a result, I will give you tips to calculate exactly how much YOU need to invest to live off dividends.
So, let’s get right at today’s question and answer…
How Much Money Do You Need To Live Off Dividends?
To live off dividends, the average household in the United States needs to have $1,687,500 invested.
This amount is based on the median household income of $67,500. And assumes a 4% dividend yield on the amount invested in dividend stocks.
The money needed is calculated as:
Income required / Dividend yield = Investment needed to live off dividends
Running the answer to today’s question through the above formula gives us:
$67,500 / .04 = $1,687,500
Next, let’s explore this calculation. So you can apply it to your specific situation.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
Determining The Income Required To Live Off Dividends
Everyone’s income needs are different. So, determining your income requirements is the first step toward living off dividend payments from the best dividend stocks.
The easiest way to do this is by looking at what you earn from working today. And assume you can live comfortably by replacing that income with dividends.
Another method is to track your expenses for a year. Then adjust those expenses.
First, adjust by subtracting costs that will go away. For example, expenses for commuting to and from work.
Second, adjust your expenses by adding new expenditures you expect to incur. Such as the cost of increased leisure travel. Or, to pay for health benefits previously provided by your employer.
Thus, think hard about how much money you must make from dividends each year.
To sustain your current lifestyle with dividends. And come up with an amount that works for your specific situation.
The Importance Of Dividend Yield
The dividend yield is a stock’s annual dividend rate per share. Divided by the stock’s price.
For example, if a company pays $2 per share to its investors every year in dividends. And the company’s stock price is $40 per share.
Then, the company’s stock has a dividend yield of 5%. Calculate as…
$2 / $40 = 5%
And in case you are not a math wizard. Know that 5% is the same as .05. The decimal equivalent of a number is presented as a percentage.
Okay. No more math lessons. I promise!
Because you can easily find the dividend yield for any stock that interests you. Without doing the math.
Either by doing a stock search in your brokerage account. Or by using any one of the many independent online databases.
By doing so, you can find stocks with dividend yields of less than 1%. Or, greater than 10%. And anywhere in between.
However, as a rule of thumb, most desirable dividend-paying stocks yield more than 1% but less than 6%.
Furthermore, your investment portfolio will have its unique overall dividend yield. It will depend on the composition of stocks held. And their dividend yields.
And choosing the stocks to build your financial freedom portfolio is entirely up to you.
Finally, when you start investing for higher dividend yields. It means less money is required to live off dividend payments. And vice versa.
However, higher dividend yields tend to come with greater investment risk. I will more on yields and risk a little later in this article.
But, for now, with that background information in mind. Let’s look at several more examples.
How Much Invested To Live Off Dividends
Since we have only looked at the average U.S. household. Seeking the best dividend stocks with an average dividend yield.
But not everyone, especially you and me, strive to be average! When it comes to our dividend investing.
Example 1: How Much Money To Live Off Dividends For Alex
The situation…
Alex is in her 20s and she wants financial freedom at a young age.
She lives on just $20,000 per year. Sharing an apartment with a friend. And being conservative with her spending.
Furthermore, Alex doesn’t mind taking a little extra risk with her investments. And believes she can build a sustainable beginners dividend portfolio that has a dividend yield of 5%.
Finally, she thinks she can get a higher dividend yield. By concentrating her portfolio on real estate investment trust stocks.
How much investment is required for Alex to live off dividends?
$20,000 / .05 = $400,000
Example 2: How Much Money To Live Off Dividends For Jack & Diane
The situation…
Jack and Diane are in their 30s. And they want to start living off dividends as soon as their daughter graduates from college.
By then, they will be in their mid-40s. And want to travel a lot. While they are still young and fit enough to do so.
They have analyzed their expenses. And have increased them to cover travel costs. Also, premiums for health insurance.
Thus, they feel they need $120,000 in annual income from dividends. Or, $10,000 per month.
Furthermore, Diane is the investor in the family. And she’s determined to get rich off stocks that pay dividends.
While managing her dividend portfolio to yield 4% on average.
How much investment is required for Jack and Diane to live off dividends?
$120,000 / .04 = $3,000,000
Example 3: How Much To Invest To Live Off Dividends For Tim & Mindy
The situation…
Tim and Mindy want enough dividends to retire at the traditional retirement age. That being, in their mid-60s. And they have done a great job planning for it.
First, their home is paid for. Second, Medicare will cover the bulk of their health care costs. Finally, their wants and needs are few.
They want days to just take it easy. Work in their garden. And play with the grandkids.
And as a bonus, they will be receiving monthly social security payments.
So, Tim estimated their annual expenses. Then he subtracted the amount they will receive in social security income. It came to $40,000.
Tim also handles the family investments. He wants to invest a bit more for growth. And a little less for dividend income.
Furthermore, Tim likes to hold a blend of individual dividend stocks. Along with some mutual funds he has selected himself. To provide for greater diversification.
Thus, a 3% dividend portfolio yield feels about right to him. And he hopes a million dollars in dividend-paying investments will get the job done.
So, let’s see if he’s in the ballpark…
How much investment to live off dividends is required for Tim and Mindy?
$40,000 / .03 = $1,333,333
Okay. With those examples under your belt. You should be able to answer the question: how much investment money is required to live off dividends.
Next, let’s cover several important and related topics…
Frequently Asked Questions About How Much It Takes To Live Off Dividends
There are many different aspects to successful dividend investing. And covering them all here is beyond the scope of this article.
However, some aspects are more important than others. When your goal is determining how much to live off dividends.
So, let’s tackle those areas before we wrap up…
Are High Dividend Yields Better?
High dividend yield stocks are not necessarily better than lower-yielding stocks. While higher dividend yields do reduce the investment required to live off dividends. They also can indicate issues about dividend sustainability and safety.
As a result, the high vs low dividend yield tradeoff can mean less opportunity for dividend growth.
Or, in the worst case, less safety for a stock’s dividend into the future. Leading to a possible dividend reduction.
Do I Have To Pay Taxes On My Dividends?
Some but not all investors pay income taxes on their dividends. Unless you hold your dividend stocks in a tax-advantaged retirement account. Taxes are due in the year dividends are received.
So, be sure to factor in income taxes. When determining how do you need to live off dividends, net of tax.
Dividend taxation is complex. And everyone’s tax situation is different.
So it’s best to consult with your tax advisor. If you aren’t comfortable making this estimate yourself.
Should I Reinvest My Dividends?
As you work to achieve your objective, all dividends received should be reinvested. Right back into one or more stocks held in your dividend portfolio.
Doing so will build your investment required to live off dividends more quickly.
Later, after your goal is achieved. Then, by all means, take your cash dividends versus reinvesting them. To pay your living expenses.
Since you will have accumulated the amount of money to live off dividends.
After all, that’s what we are trying to accomplish here. To live off dividends!
What Are The Best Stocks For Living Off Dividends?
In my opinion, some stocks are better suited for living off dividends than others.
I think the best stocks are those that have long-term track records. Of paying uninterrupted dividends on their shares.
My favorites are on the lists of Dividend Kings and Dividend Aristocrats.
Depending on your skill and experience level. Especially in the early stages of your journey. It can be a good idea to get some help with your stock picks.
If this is something that interests you. Here is one of my favorite resources for stock recommendations.
Okay. That’s all I have for today.
Allow me to wrap up with a summary…
How Much Money Do You Need To Live Off Dividends?
To calculate the amount of money required to live off dividends…
1) Calculate your annual income requirement.
2) Determine your dividend investment portfolio’s average dividend yield.
3) Divide your income needs from #1 by your portfolio’s yield from #2.
Then get to work on saving and investing money. By doing so, you will be living off dividend income sooner than you think.
Hungry for more knowledge about dividend investing? Then check out this article…
Anything you need to know about dividends
…but were afraid to ask.
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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.