Determining How Much Money You Need For Dividend Investing
One of the many questions I get from readers is: how much should I invest in dividend stocks?
So, I thought it would be a good idea to put my thoughts in writing. About this important dividend investing topic.
Unfortunately, there isn’t one clear-cut answer.
On the other hand, by examining your unique situation. You can come up with the right answer for your purposes.
Here’s how to go about it…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
How Much Should I Invest in Dividend Stocks?
How much you should invest in dividend stocks will depend.
First on your investment objectives. And second on your dividend stock portfolio’s average yield.
Thus, the amount of money required may be as much or more than $1 million. Just a few dollars of dividend investments. Or, somewhere in between.
For our purposes, I’m going to assume a 4% average dividend portfolio yield. I will discuss how to calculate your portfolio’s yield before we are done.
Finally, since there isn’t a “one size fits all answer” to this question. Allow me to address the topic by looking at several different examples.
4 Scenarios For Determining How Much You Should Invest In Dividend Stocks
Thus, we are going to go through the amount of money required to:
- Live off dividends
- Supplement your income with dividends
- Allocate your assets to dividend stocks
- Invest entirely for capital appreciation
Most people will fall into one of these four situations.
Next, let’s examine each one. But, before we do, I want to point out our article archives on dividend investing.
There you will find more than 100 posts about dividend stocks and dividend investing.
They are well organized, so with a pretty quick scroll. You can find something of value. For your dividend investing journey.
Otherwise, stick with me here for how much you should invest to earn dividends…
How Much Money Should I Invest To Live Off Dividends?
In order to live off dividends, invest enough money to replace your earned income with dividend income.
By doing so, you will be able to maintain your standard of living. Here is what I’m saying…
In the United States, the median household income is about $70,000. Your income may be more or less. But it’s a good starting point for this example.
To replace earned income with dividends in this example. Allowing one to live off dividends. $1,750,000 is required.
Calculated as the amount of income desired. Divided by your portfolio’s average dividend yield. In this case, $70,000 divided by 4%.
Yes. I know. That’s a lot of money.
Making enough dividends to live off them is very difficult for most people.
So, let’s look a this in a different way…
How Much Money Should I Invest To Supplement My Income With Dividends?
Perhaps it is more realistic to supplement your income with dividends. Not completely replace it.
This may allow you to work part-time. Or, if you are retired, you may have other sources of income upon which you can rely.
Such as social security. Or, a private pension.
You may not be entirely financially independent. But, it’s a step in the right direction.
So, let’s say you will tap other sources of income amounting to $40,000. Leaving $30,000 to be earned from dividend stocks.
As a result, you need to invest $750,000 in dividend stocks to supplement your income.
Calculated as the household income of $70,000 minus other income sources of $40,000. Leaving $30,000 to be earned from dividends.
Finally, $30,000 divided by 4% gives us the amount of investment required for a goal of $30,000 in annual dividend income. It is $750,000.
Here’s yet another way to look at it how much of your portfolio should be in dividend stocks…
How Much Should I Invest When Allocating My Assets To Dividend Stocks?
This situation applies to anyone focused on asset allocation. And total investment returns.
Thus, generating dividend income is a secondary priority for this type of investor. But still important.
Furthermore, asset allocation is the process of dividing up one’s investments. Between different types of investment assets.
Here’s a way to think about it…
An old rule of thumb is to take your age. And subtract it from 100.
Then invest that amount in stocks. Put the rest in bonds.
So, if you are 40 years of age. 100 minus 40 gives us 60. So, this rule says put 60% of your portfolio value in stocks. And 40% in bonds.
Then, you might decide to take the amount in stocks. And put one-third each in dividend stocks, growth stocks, and international stocks.
So, let’s say we have a 40-year-old with a $100,000 investment portfolio.
Thus, $60,000 is invested in stocks. Of which one-third of that is invested in dividend stocks.
So, in this case, our investor has $20,000 invested for earning dividends.
Okay. How much do you need to invest in dividend stocks? Let’s look at one last situation…
How Much Should I Invest In Dividend Stocks When I Only Want Capital Appreciation
Some investors do not pursue a dividend income investing strategy. Instead, they seek capital appreciation.
Using an extreme example, let’s say your brother thinks investing in cryptocurrencies is going to make him rich at a young age.
Believing this, he has 100% of his assets invested in Bitcoin.
As a result, your brother has nothing invested in dividend stocks. Because they do not meet his investment objectives.
That’s a little extreme. However, I could make a similar argument if he only invested in growth stocks without dividends. This is a more typical situation.
Okay. Hopefully, that gives you a framework for deciding exactly how much to invest in dividend stocks.
FAQs About How Much You Should Invest In Dividend Stocks
Before I wrap up, let me address a couple of frequently asked questions (FAQs)…
How Do I Calculate My Portfolio’s Average Dividend Yield?
As I said at the beginning, the amount of money you need to invest in dividend stocks depends on two things.
First, your investment objectives. Second, your dividend portfolio’s average yield.
We used a 4% portfolio dividend yield for our examples. But, you will need to calculate your portfolio’s yield.
To do so, add up the total amount of annual dividend income you receive from your stocks. Then divide that by the market value of your portfolio.
Both of these values should be readily available. Just by accessing and reviewing your brokerage account.
If you are just getting started and need to open a brokerage account. Consider Webull.
Webull is fast to set up. And free to buy and sell shares. So, you will be investing in dividend stocks in no time at all.
Is There A Way To Reduce The Amount Of Money Required In Dividend Stocks?
Yes. You can reduce the amount of investment required. By investing in dividend stocks with higher dividend yields.
Stocks with 5%, 6%, or even higher yields are available.
Just be careful. Higher dividend yields are an indicator of greater investment risk.
So, do your stock research carefully.
Do you want the research done for you? Then consider the Simply Investing Report.
Simply Investing covers hundreds of dividend stocks based in the United States and Canada.
And each month it reassesses all of them. And suggests the best dividend stocks for your money at that time.
Why Does Investing In Dividend Stocks Take So Much Money?
Replacing or supplementing your income with dividends is a long-term investment strategy.
So, I suggest you focus less on the amount of money required. Instead, think of it as a journey. And focus on the process.
Look at your monthly budget. And allocate money each month to your dividend of stocks. Thus, setting up your dividend portfolio for long-term success.
Then, by reinvesting all the dividends you receive. Right back into the stocks you own. Also, benefiting from companies that raise their dividend regularly.
The amount of investment required that comes out of your pocket. Will be less than the values we have discussed today.
I’m talking about the compounding impact of dividend income. Something more easily experienced than explained.
And getting started with dividend investing is the best way to experience it.
Okay. That’s a wrap for today.
Here are a few concluding thoughts…
How Much Should I Invest In Dividend Stocks?
The amount of investment required in dividend stocks is dependent on two main things.
First, your investment objectives. Second, is the dividend yield of your dividend stock portfolio.
Remember that it takes a lot of money to live off dividends. Oftentimes 1 million dollars or more.
So, think of dividend investing as a journey. Not a destination.
The most important thing you can do is to start (or continue) your journey today. By investing regularly in the dividend stocks of your choice.
More Reading About Dividend Stocks And Dividend Investing
I mentioned this earlier. But would like to do so again…
Be sure to check our dividend stock article archives. It’s packed with information to help you maximize your dividend income.
More importantly good luck with your dividend investments. And determining how much of your portfolio should be in dividend stocks.
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.