A Complete Guide To Building Your Dividend Income For Financial Freedom
Can you live off dividends? Let’s discuss this important topic.
Because many people ask the question.
And since the answer is yes. The purpose of this article is to provide a detailed explanation of exactly how to go about living off dividends.
Let’s get started…
Can You Live Off Dividends?
Yes. You can live off dividends.
However, it takes a combination of factors to make it happen. Specifically, you must:
- Think long-term
- Have the motivation
- Be disciplined
- Practice good money management
- Invest wisely in dividend stocks
- Manage a dividend stock portfolio
So, stick with me. Because I’m going to cover all of these points.
Then you will know exactly how to live off dividends too! Let’s keep moving…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
5 Step Guide To Living Off Dividends
Ready or not. Here’s your 5 step plan about how to live off dividends. It serves as an outline for the rest of this article.
1. Create The Right Mindset
We will start with some personal background information. Just in case you are wondering how we got to the point of living off of dividends.
This area will improve your understanding. About exactly how long-term thinking, and self-discipline come into play.
2. Develop The Motivation
Then, we will cover how to develop your motivation to live off dividends. And, why you should.
3. Practice Good Money Management
Next up, we will discuss how to manage your finances leading up to living on dividends. Plus, a way to calculate how much money you are going to need to save in advance.
My example will show you how to turn $575 into $1,000,000 and live off dividends forever.
4. Invest In Dividends Stocks
Fourth, we will cover investing in dividend stocks.
Specifically, how to go about it. Because buying only the best dividend stocks. And buying them at the right time is so important.
5. Manage And Monitor Your Dividend Stock Portfolio
Finally, you must know the best techniques. To manage your dividend portfolio before and during your dividend retirement years.
That’s it. Follow these 5 steps. And yes you can live off dividends!
We will cover each of these topics in greater detail.
But first…
A little personal background. To provide the proof that living off dividends is possible. And how thinking long-term and self-discipline come into play.
Here goes…
Example Of Living Off Dividends
We have been living off dividend income for several years. So yes, I think it is entirely possible to live off dividends.
Why? Because we are proof that it can be done. However, living off dividends takes knowledge, planning, and time.
But, you can do it too.
Not Just Living Off Dividends – Making Some Earned Income Too
Now, I will admit that both my wife and I also have earned incomes. Those incomes come from secondary occupations and part-time work.
We only do the work we choose to do now. Not the high-stress, long hours we did in the past. And of course, we make much less money.
Almost all the earned income we make goes into qualified retirement accounts. And, the rest of that income goes to pay taxes.
There may be a little money left. But what is left is much less than our expenses.
So, we aren’t living off earned income. We are living off investment income. More specifically, we are living off dividend income.
Generating an income from side hustling or working part-time is a good strategy for supplementing dividend income. Plus, we like staying busy.
You should consider it too. It can help you achieve your dividend retirement plans sooner.
But We Could Be Living Off Dividends – Honest
Even if both my wife and I quit working today, we could cover our expenses. And live off of dividends.
However, we could no longer fund our retirement accounts from our working income.
It is important to note that we didn’t create this situation overnight. We both started investing at a young age.
And, I focused on dividend growth stock investing more than 20 years ago.
With an eye toward funding early retirement with dividend income. That type of discipline and forward planning is what makes living off dividends possible.
As I said, you may want to consider having some part-time or side income too. It will accelerate your journey to living off dividends.
My Wife Didn’t Know We Were Living Off Of Dividends
Next, I want to further our personal story before I get started with the 5 steps for living off dividends…
And it may not surprise you. That I handle all of the personal-finance activities in our family.
As a result, I make sure the bills are paid on time. And verify we have enough money in our bank accounts to get through the month. Finally, I research, monitor, and manage our investments.
So, a few years ago my wife was working. And I was trying to get a part-time college teaching side gig off the ground. I wasn’t teaching a lot at the time. Therefore, I wasn’t making much money.
One day, my wife happened to look at her pay stub from her employer. And she noticed that the net pay from her 2 weeks of work was just a few dollars. As I mentioned, most of her income was going to an employer-sponsored 401(k) plan.
So she asked me, “What are we living on?” And, my answer was: “We are living on dividends”.
Okay. Enough about us.
Let’s transition to the 5 steps. Included in today’s guide to show anyone that is interested, that they too can live off dividends…
1. Create The Right Mindset For Living Off Of Dividends
I’m sorry to tell you that living off dividends takes time to accomplish. Unfortunately, it’s not a get-rich-quick scheme.
Think Long Term
That’s why it is important to think long-term. And start early for a successful dividend retirement plan.
Plus, living off dividends may require a large investment portfolio. Which takes time to build.
The size of that portfolio depends mostly on your living expenses. To make this point, I will show you how much money you need to live off dividends a little later.
Ready to live on dividends? Then, enough said!
Let’s keep moving along with the details of how to live off dividends so you can do it too.
Be Self-Disciplined
Let’s continue with the big picture view. Before we dig into the details…
In my opinion, to live off dividends you must be disciplined and consistent in your approach.
By taking action now with your finances. To prepare for living off dividends.
Then you must execute a dividend stock investing plan to achieve your goal.
Finally, time is your best friend when building a dividend income for early retirement. So, start early in life.
If you haven’t started yet. Then the best time to start is NOW.
Can you live off dividends? I think so. Let’s keep moving!
2. Develop The Motivation For Living Off Dividends
Funding retirement is not what it used to be. This is why a dividend retirement portfolio and strategy can be very useful.
Let’s explore what has changed with retirement planning. And why living on dividend income can fill the gap that has been created.
Because understanding the power of dividend investing. In my opinion, is very motivating.
Pension Plans & Social Security Vs. A Dividend Retirement?
Perhaps your parents or grandparents could rely on a company pension and social security to fund a comfortable retirement lifestyle.
But, company pension plans are becoming a thing of the past. Hopefully, social security will be there for us?
I am planning on it. But you never know.
Living Off Dividends From Dividend Stocks
So, living on dividend income from dividend stocks can be a big piece of your retirement finances. However, living off of dividends doesn’t have to be an all-or-nothing deal.
For example, my wife and I work in 2nd careers. We plan to work at least part-time for the foreseeable future. And I think most of us can plan on something from social security.
So let’s not make creating a dividend retirement plan harder than it needs to be. As a result, we will consider other income sources in our calculations.
The Benefits of Dividend Paying Companies
I have been investing in dividend growth stocks for many years. And before that, mutual funds that paid dividends.
I like buying and holding a portfolio of dividend-paying stocks. Here are several reasons why I like to do this. And why this approach supports a dividend retirement plan.
Plus, the motivation to get started. And keep going…
Real Cash For Living Off Your Dividends
With dividends you get real cash. You and I can spend that cash.
Or, reinvest it without touching the original investment. In learning how to live off dividends, I am going to show you how both aspects are important parts of the plan.
Good dividend growth stocks increase their dividends on an annual basis. Dividend increases provide the investor with more cash flow each year.
By investing fresh capital in dividend stocks, reinvesting dividends, and receiving dividend increases you can create dividend income for life.
That is the goal.
Living off dividends in retirement provides cash without the need to decide which of your assets to sell and when.
Most noteworthy, history suggests that 40% of the stock market’s long-term total return comes from dividends.
Dividend-Paying Companies Work Hard For The Investor
By selecting solid dividend growth stocks and holding them for the long term, the company does most of the work; not the investor.
Dividend payments and dividend increases provide evidence of a company’s financial strength.
Payment of consistent dividends often instills financial discipline within the company and its management team.
Finally, solid dividend-paying companies are frequently household names. We use their products and services each day.
Investment Costs And Inflation
Building and maintaining a productive dividend stock portfolio can be done for virtually zero investment costs.
Dividend increases by the companies we invest in will offset the effects of inflation.
Hopefully, you find the benefits of dividend-paying stocks motivating. I know I do.
However, to present a balanced view. There are risks to consider…
And, the strategy has its drawbacks and detractors.
Now, I think the benefits far outweigh the risks. But again, I want to present a balanced argument for your consideration.
Why? Because planning to live off of dividends is a big decision. And you should be armed with all of the facts.
So, let’s discuss the risks of dividend stocks and dividend investing next…
Diversification
Dividend-paying stocks tend to be clustered in only a few sectors of the stock market. This situation can make it difficult to achieve proper investment diversification.
When calculating how much money to live off dividends, an individual may find they need to put all of their assets in dividends stocks. Once again, this can lead to inadequate diversification.
Dividend Yield & Risk Trade-Off
To achieve the goal of living off dividends, it is easy to fall into the high dividend yield trap. Yes. Higher dividend yields are nice.
In the short term, they can provide more dividend income for living expenses. And reduce the need for a larger dividend stock portfolio.
But higher dividends normally have a higher risk of being reduced. And dividend reductions in a portfolio will destroy a dividend retirement strategy very quickly.
So, it’s important not only to focus on dividend yield but dividend safety and dividend growth potential. Besides, these other factors will lead to better long term investment returns.
Time, Skill & Discipline Required To Live Off Dividends
Running a do it yourself dividend stock portfolio takes time and skill.
Sure, you can live off dividends by investing in 1 or 2 exchange-traded funds. However, I think individual dividend-paying stocks offer higher dividends when taking into account investment risk.
Finally, you need to be disciplined. We covered this in step 1. But it deserves another mention.
Because you can’t bail out when the stock market drops. Or change your mind and start chasing the next hot investment.
If you do these things, living on dividends in retirement will never become a reality. Thus, you must have the discipline to make a plan and stick to it.
Step #2 Topic Area Recap – The Motivation For Living Off Dividends
We have covered a lot in step 2. So, allow me to summarize and recap…
Can you live off dividends? Yes. I believe so. Find your motivation to do so.
Dividends can be an important part of your retirement income strategy. Furthermore, dividends from dividend-paying stocks offer many important advantages for an investor.
Finally, there are some drawbacks to a dividend investing strategy. So, consider the pros and cons for yourself. The choice of living on dividend income is yours.
What is up next in learning if you can live off dividends?
Before we start investing in dividend stocks, it is important to consider some other areas of your finances. Let’s address them now.
3. Practice Good Money Management
When living off dividends, it is best to put the odds of success in your favor.
So, here are a couple of areas to consider while you are working and preparing for living off dividends in retirement.
Eliminate debt
If you want to retire on dividends, it is important to avoid consumer debt. So, live within your means and get all credit card debt paid off.
Buy used cars and drive them for a long time. This will help to eventually eliminate car payments.
Your mortgage debt is okay. Shop around for the best rate when applying for a mortgage.
Interest rates are at all-time lows. So, if you already have a mortgage, consider refinancing to save money if you haven’t done so already.
However, do not refinance and take cash out. Your home is not an automated teller machine.
Ultimately, being mortgage-free will be a big plus when you are living off dividends. Pay your mortgage off based on its terms. And you should be fine.
Finally, keep a close eye on your credit score. Be sure to monitor it on a regular basis. You can check yours for free using Credit Karma.
Determine Your Annual Expenses
To know how much dividend income you will need, you need to know how much money you spend.
There are a couple of ways to determine what your expenses will be in retirement.
Living Off Dividends – Estimating Expenses Using The 80% Rule
This rule states that you need 80% of your earned income in retirement.
Why 80%? The rule assumes some of your costs will be eliminated once you retire. For example, you will not have the costs associated with commuting to and dressing up for work.
The 80% rule is easy to apply. It can give you a quick answer. But, let’s look at another method.
How To Live Off Dividends – Better Yet, Track Your Expenses
Tracking your expenses monthly is a great habit. Expense tracking allows you to know exactly where your money is spent.
To estimate your expenses, review your annual expenses during your working years. Then remove expenses no longer necessary in retirement. I already mentioned commuting and clothing costs. Perhaps you won’t be dropping $7 a day on lunch out with your co-workers either.
Next, don’t forget to add in new spending now that you are free of that 9 to 5 job. Higher travel costs come to mind. Also, add in health insurance costs if you are not qualified for government-sponsored health care.
Will you still have debt payments? Hopefully not, but be sure to take those into account. Finally, don’t forget about income taxes.
Personal Capital is a great tool to track and manage your total financial picture. Best of all, Personal Capital is free to sign up and use.
How To Live Off Dividends – Other Income Sources
So now you know how much your expenses are. But before we move on, subtract from your estimated expenses other sources of income you may have.
Consider social security income. And don’t forget pension income if you are lucky enough to have that. Maybe you will have other sources of income, like a part-time job or a side-gig.
Remember that a little extra income can go a long way to being able to live off your dividends sooner rather than later.
Living Off Dividends Calculator – An Example, Part 1
Once you know your expenses and other income sources. Then you can determine how much stock you need to live off dividends.
I’m going to use an example based on an average US household to run my “live off dividends calculator”.
The Sources For Our Living Off Dividends Calculations
According to a USA Today study, the average US household spends $67,801 per year.
Furthermore, based on a US News report the average social security recipient receives $17,532 per year.
Finally, I’m going to assume this household preparing to live off dividends has a $10,000 income from part-time work.
Now I can figure out how much dividend income this family will need to live off their dividends. It is their expenses minus their social security income minus their income from part-time work.
The numbers in your calculations will be different. But, this will give you the idea of how to go about it.
The First Living Off Dividends Calculation You Need
To run the living off dividends calculations…
- Start with $67,801 estimated annual expenses
- Subtract out $17,532 in social security income
- Subtract out $10,000 income from part-time work
This gives us $40,269. I’m going to round this answer to $40,000 to make it easier to remember.
So, our family requires $40,000 of dividend income each year to cover their expenses and support their standard of living.
It is important to note that if our family can reduce expenses, the less money they will need to live off of dividends. And, the sooner our family can achieve dividends for life.
How Much Do YOU Need To Live Off Dividends?
The answer is, that it depends on your specific situation. Use the calculation model I just went through for our average US household.
Put in your own numbers. And then you will know exactly how much money YOU need in dividends for living.
Saving, Investing & The Power of Compounding Dividends To Live Off Of
As I said at the beginning, living off dividends is not a get rich quick scheme. It is important to start saving and investing as early in life as possible.
Rarely do good things in life come quickly and easily. The ability to live off dividends is no different.
Living Off Dividends Calculator – An Example, Part 2
Let’s run part 2 of the living off dividends calculator. This isn’t a perfect analysis, nor is it intended to be. Besides, everyone’s situation is different.
The purpose of this example is to provide a thought process so you can do your living off dividends calculation.
In that same USA Today study I just referenced, the average US household has $74,664 of income. This serves their expense needs of $67,801.
The difference leaves $6,863, or $575 per month to invest in dividend stocks. We will get to investing in dividend stocks in just a moment.
Now, let’s invest that $575 per month. $575 invested monthly at a 9% annual rate return will generate an investment portfolio of $1 million in 29 years.
If our family can reduce their expenses and invest $750 per month at a 10% annual return, the number of years to get a $1 million portfolio drops to 25.
The Moral Of This Story About Living Off Dividends
Yes. I know it seems like a long time. But, think of it this way…
If you are 30 years old and can generate a $1 million portfolio in 25 years, then you can retire and live off dividends at the age of 55.
So, starting earlier and saving more are the best things you can do if you want to live off dividends in the future. And, you have complete control when you start and how much you save.
Every dollar saved adds up. We save on all of our online purchases using Rakuten. By signing up and making your first purchase, Rakuten also gives you $10 cash. It’s free money.
Finally, you can’t control investment returns. But history shows that 9-10% annual return from dividends stocks is entirely possible over the long run.
Step #3 Topic Area Recap – Preparing To Live Off Dividends By Practicing Good Money Management
Can you live off dividends? Of course, you can. But you need to be motivated and you need to prepare.
Earlier, we talked about your mindset and motivation to live off dividends. Specifically, why and how dividends can be an important part of a dividend retirement strategy.
Then in this section, we discussed some important things to prepare for living off dividends. Specifically, good money management practices. They are:
- Eliminate consumer debt
- Calculate your annual expense requirements net of other income sources
- Establish a monthly investment amount and start investing in dividend stocks
- Spend less, save more to speed up your progress
Back To Our Example – Living Off Dividends Calculator
We walked through the calculations for a typical US household. Our make-believe family needs $40,000 in dividend income. Now they need to build a $1 million investment portfolio by saving and investing each month.
$40,000 of annual dividend income divided by a $1 million dividend stock portfolio tells us our family needs a 4% dividend yield. This is entirely possible.
If you run your calculations and the dividend yield is higher than 5%, the living-off dividends strategy becomes riskier and more difficult to achieve.
Making Living Off Dividends Less Risky & More Attainable
To reduce your dividend yield requirements or the amount you need to save to live on dividends, do a combination of the following:
- reduce your expenses
- save money and invest more
- start investing earlier
- work longer
All of the above actions will create a larger dividend stock portfolio for you to live off of.
And don’t forget to consider some part-time or side hustle income once you retire. By doing this you can reduce the amount of money required to live off dividends and retire on dividends sooner.
So now, we are motivated and getting prepared to live off dividends. By setting the right foundation.
So, what’s next?
It is time to start investing in dividend stocks. I have many resources to help you with this at Dividends Diversify. I will highlight them as we go.
4. Invest In Dividend Stocks
Let’s get started with a few of the basics. It’s important to learn about dividend stocks and dividend stock investing if you are planning to live off of dividends.
What Are Dividends?
A company can do several different things with the cash they have from making a profit. They can
- Payoff debt
- Reinvest in their business
- Buyback their stock in the stock market
- Pay their investors a cash dividend
So, a dividend is a cash payment to you as an investor in a company’s stock. That cash comes from the profits made by the business.
A company is not required to pay a dividend. And, before each dividend payment, the company’s board of directors must approve it and declare it.
What Types of Investments Pay Dividends
There are several different types of investments that pay dividends. Funds that pay dividends are a good choice for some. So, let’s start there.
Mutual Funds & Exchange-Traded Funds
Mutual funds – Many mutual funds pay dividends. These funds hold a collection of investments that allows an investor to get instant diversification by purchasing just one investment holding.
Exchange-traded funds (ETFs) – Exchange-traded funds are similar to mutual funds. And there are plenty of good dividend-paying ETFs.
The main difference is that an ETF tracks an index. And, ETFs trade on the stock market like an individual stock.
You can learn more about ETFs and read about one of my favorite dividend-paying ETFs here.
Be sure to check these articles out. And learn more about how ETFs can be an effective part of your dividend growth investing strategy for income and income growth.
Special Types Of Stock
But, our real focus in this article is how to live off dividends by investing in individual dividend-paying stocks.
REITs – REIT stands for Real Estate Investment Trust. It refers to when a company owns, bankrolls, or manages income-creating real estate. The rent that is generated from each property is distributed to the real estate shareholders as dividends.
Some people try to live off REIT dividends. Because REITs offer higher dividend yields.
But, I think that is too risky. Living off REIT dividends alone does not provide enough diversification.
You can read more about REITs below. With an article about a great real estate investment trust to invest in.
My favorite REIT: Realty Income – The Monthly Dividend Company
Preferred stocks – Preferred stock is a hybrid security that has a mix of bond and common stock characteristics.
The investor doesn’t have the capital appreciation or dividend growth potential like common stock. So, in exchange, the investor normally receives a higher dividend yield.
Common Stocks That Pay Dividends
By owning the common stock of a company, you are a part-owner in that business. And, participate in all the potential rewards and risks that go with ownership. One of those rewards includes dividend payments.
The best stocks that pay consistent dividends are the focus of this article.
In my opinion, this investment type is the best for living off dividends. Why? Because you get to pick the stocks that pay an appropriate dividend amount regularly. And you pick the stocks that increase those dividends each year.
So, we want to invest in and have a plan for living off stock dividends. Then, how do we find those stocks and how do we pick them? We are going to cover that topic now.
How To Find Stocks That Pay Dividends
I have an in-depth article on how to find and select the best dividend stocks. Here are some of the highlights from that article. Be sure to check it out later for more information.
To get started, here are a some sources to find good dividend-paying stocks.
Dividend Kings, Dividend Aristocrats, and the Dividend Achievers list– These groups of companies have increased their dividends many years in a row.
Simply Investing – Simply investing is a service that provides high-quality dividend stock recommendations. Including an interactive data base for finding, selecting, and buying the best dividend stocks.
Dividend stock screeners – Yahoo Finance has a dividend stock screener that I use periodically to generate dividend stock investment ideas.
Motley Fool – The stock advisor from Motley Fool is an excellent resource. They have a solid long-term track record dating back to 2002.
Morningstar – This premium investing service is hard to beat. I’ve been using Morningstar for about 20 years.
Their insight and analysis are right on for finding dividend stocks. And improving one’s investment knowledge. When it comes to investing, never stop learning.
Dividends Diversify model stock portfolio – Last but not least, my very own Dividends Deluxe model stock portfolio. It includes about 40 dividend stocks that I own and review on a periodic basis.
You can stop by here at Dividends Diversify anytime. I analyze and assess these dividend stocks so you don’t have to!
How To Live Off Dividends – Picking The Best Dividend Stocks
Now, we know how to find a good dividend stock. But, we want to pick the best ones to achieve our goal of living off stock dividends.
Furthermore, I have several criteria I would like to share in order to select the best dividend stocks for your living off of dividends portfolio.
The Business
Business model – How does the company make money? Typically, dividend-paying companies provide essential services and products. Food, beverages, electricity, water, and natural gas come to mind immediately.
Business strategy – How does the company plan to grow?
Dividend Metrics – Dividend Yield
Dividend yield – This is a calculation of the percentage of dividend per share received relative to the stock price. For example, if you buy a share of stock for $80 and that company pays $2 a year in dividends your dividend yield is $2 divided by $80, or 2.5%.
The dividend yield is a very important metric. Remember our example family needs a dividend stock portfolio that yields 4%.
Pick dividends stocks with dividend yields that are too low and our family won’t have enough dividend income to live off of. On the other hand, picking dividends stocks with high dividend yields may be too risky. For these reasons, I prefer stocks that have a dividend yield of 3-5%.
Dividend Metrics – Dividend Growth
Dividend growth rate – By investing in stocks that continually increase their dividend, our cash flow goes up without needing to do anything. The dividend increases offset the effects of inflation on our expenses.
To calculate the dividend growth rate on an annual timeframe, take the current year’s dividend per share divided by the prior year’s dividend per share and subtract 1. This will give you the dividend growth rate compared to the prior year.
I like to look at the historical dividend growth rate over 1, 3, 5, and 7 year periods to understand what has been happening with a company’s dividend growth both short term and long term.
These calculations are a little more complex. I use a financial calculator to perform them.
Consecutive years dividend growth – How many years has the company increased its dividend in a row?
Dividend aristocrats are companies that have increased their dividends for at least 25 years in a row. Dividend Kings have consecutive dividend increase streaks of 50 years or more.
Take note that the lists of Dividends Aristocrats and Dividend Kings are great places to look for dividend stocks.
Dividend Metrics – Policy & Payout Ratio
Dividend policy – Some companies have a dividend policy statement or stated objective. This is helpful, but not necessary. Oftentimes the dividend policy is linked to a dividend payout ratio.
Dividend payout ratio – The dividend payout ratio is a measure of how much a dividend stock pays in dividends relative to their earnings and cash flow. The dividend payout ratio is another very important metric.
Lower dividend payout ratios are generally better. A lower ratio provides more dividend safety. It decreases the chance a company will cut their dividends when they have a bad year or two.
Look At The Business Fundamentals
Revenue growth trend – Higher dividends are paid from higher profits. And, higher profits come from a rising revenue stream.
You may be living off of stock dividends for a long time. So, you want companies that can grow over the long-term
Earnings trend – Higher profits can also come from other areas than growing revenues. More profitable products, cost reductions, and price increases can increase a company’s profits. These are all important factors that a good company will work on year after year.
Financial position – We want to avoid dividend stocks from companies that are on shaky financial ground. 2 things I look at are the company’s level of debt and its credit ratings. Lower debt levels and higher credit ratings are generally better. They increase dividend safety.
Try Not To Over Pay For Dividend Stocks
Stock valuation – We don’t want to overpay for our dividend stocks. The value of a stock is important when we make our investments.
But, this is a tricky area. The best dividend growth stocks rarely come at cheap valuations.
So it is best to buy shares consistently every month. This is called dollar-cost averaging.
And, when the next bear market in stocks comes, keep buying. This is when you will get the best prices and the highest dividend yields. If you have picked solid dividend-paying companies, their stock prices will eventually recover.
And remember, you will be living off dividends. Not ever selling your dividend stocks.
So, the only price that matters is what you pay when you buy a dividend stock. The price at any point in time after that is mostly irrelevant.
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How Many Dividend Stocks Do You Need To Own If You Want To Live Off Dividends?
Okay, how many stocks are required in your portfolio? This is debatable. If you ask 3 different investors you might get three different answers.
Academic Research Suggests
Academic research suggests 20 – 25 stocks will achieve the greatest diversification with the least number of holdings.
Fewer than 20 dividend stocks and your investment risk gets significantly higher. But adding more than 25 stocks brings very little additional benefit from diversification. Also, more stocks increase the time and complexity required to manage your living off dividends stock portfolio.
Strive For Diversification Among Sectors
Just be sure to have 20-25 stocks from different industries and different sectors of the stock market. For example, do not buy all your stocks from the utility sector.
Invest in several industries and sectors. Here are some examples of different sectors where good dividend-paying companies can be found:
- Utilities
- Consumer goods
- Health care
- Technology
- Industrial goods and services (eg. machinery & equipment)
More of these sectors are understandable on the surface.
How To Buy A Dividend Stock
I get this question a lot. I will publish a dividend stock analysis about one of my dividend-paying companies. Let’s say, Apple, for example. Or, telecommunications company AT&T.
Apple and AT&T are 2 stocks in the technology sector. And they are members of the Dividends Deluxe model portfolio.
Apple has a low dividend yield and a higher dividend growth rate. On the other hand, AT&T has a much higher dividend yield and a lower dividend growth rate. But, both are suitable for a dividend growth stock portfolio.
For Beginning Investors
A new investor will read one of these reviews and get excited about investing in stocks for the first time. So they ask, how do I buy shares?
Here’s how to buy shares of stock…
Investors most commonly buy and trade stock through stockbrokers. The investor decides whether to go through an online brokerage firm or a face-to-face broker. Most stock trades by individual investors are made online these days.
There are a couple of online stock brokers that I recommend. You just need to open up an account.
Then transfer some money into your newly opened brokerage account. Finally, buy shares of the dividend stock of your choosing.
You can buy as few as one share or buy more if you like. So you do not need a lot of money to get started.
Zero Commission Online Stock Brokers
As I said, you do need a brokerage account. Webull, Robinhood, and others allow you to trade stock for free. That means no commissions are charged for your purchase of shares.
Okay. We are ready for the 5th and final step in today’s guide.
Let’s do it…
5. Manage And Monitor Your Dividend Stock Portfolio
So, you are now buying and owning a portfolio of dividend stocks. Each month you are taking your extra cash and using it to purchase shares in 1 or more dividend stocks of your choosing.
But there is a little more work to be done. First of all, you are going to start collecting dividends. Hooray!
But you are still working and you are not living off dividends yet. So what do you do with the dividends that you are collecting? The answer is, to reinvest them.
Furthermore, as time goes on, your portfolio is going to get out of balance. And, you will need to handle that little task too.
I will explain that in a moment. But first, let’s fully understand dividend reinvestment.
Reinvesting Your Dividends
You have a couple of options for reinvesting your dividends.
Automated Dividend Reinvesting
First of all, you can automate dividend reinvesting. What this means is that you tell your brokerage firm to automatically reinvest the dividends paid by a company back into that company’s shares.
The advantage of automated dividend reinvesting is that once you set up, you can forget it. And your cash from dividends is put back to work in your dividend stocks right away.
On the other hand, investment decisions are taken out of your control. You may automatically reinvest in shares of an overvalued stock. Or, a stock you own too much of already.
Manual, Lump Sum Dividend Reinvesting
The second option is to let your dividends accumulate in cash.
And then when you are making your monthly cash purchases add your dividends collected to the amount you are saving each month. Then, put that money into the stocks of your choice.
The Dividend Reinvestment Choice Is Yours
Either of these dividend reinvestment methods is fine.
It’s a matter of personal preference. And by all means, if you will be tempted to spend your dividends, reinvest them automatically.
Finally, when your dividends meet your expense needs, stop reinvesting them.
Why? Hopefully, this is obvious by now.
At that point, you will be able to live off your dividends. And, you will no longer want to reinvest them.
To sum up, reinvest dividends until you need them to pay bills. Then take them in cash.
Rebalancing Your Dividend Stock Portfolio
Once or twice a year you should look at the values of the stocks in your portfolio. You know that you need about 20-25 stocks for adequate diversification.
So, make sure that no one individual stock makes up an oversized position in your portfolio. In a perfect world, if you had 25 stocks each would be worth 4% of the total value of your how-to live-off dividends stock portfolio.
But, it’s not a perfect world. So, it’s good to set a maximum percentage and make sure no individual stock exceeds that maximum level. Let’s say 10% for sake of argument.
What do you do if a stock starts to reach its maximum percentage?
Either sell some shares and use the proceeds to buy other dividend stocks. Or, stop investing in it and try to increase the value of your other stocks with new money. That money can come from your monthly savings and accumulated dividends.
Protect Your Living Off Dividends Portfolio With Diversification
What you don’t want is one stock getting too big. If the company runs into business troubles, it can blow a hole in your dividend stock portfolio.
Diversification provides protection. And if you pick the right stocks, this probably won’t happen.
But it can. General Electric and Kraft-Heinz are recent examples of companies that ran into trouble and had to reduce their dividends.
Topic Area Recap – Building Your How To Live Off Dividends Portfolio
Can you live off dividends? For sure you can. But, you must learn how to build and maintain a dividend stock portfolio.
And, we covered a lot about dividend investing in this section. But it comes down to just a few things.
First of all, identify, select and buy the right dividend stocks each month. Furthermore, reinvest the dividends you receive. Finally, periodically rebalance your portfolio so no one stock becomes too large.
Let’s now wrap this up with a few key points to take away and remember.
Wrap Up & Key Success Factors For Living Off Dividends
First of all, here are the major topics covered in this article:
- Why you would want to live off dividends – your motivation
- Some steps necessary to prepare for living off dividends while you are working
- How to execute a dividend stock investing plan to achieve your goal of living off dividends
Furthermore, here are key factors that will lead to success in living off dividends in retirement:
- Start dividend stock investing when you are as young as possible
- Eliminate consumer debt while working
- Estimate the annual expenses you will need to cover with dividends
- Determine how much money you need to live off dividends and meet your income needs
- Learn how to identify and select the best dividend stocks for your investment dollars
- Save your excess cash and invest in dividend stocks every month
- Reinvest all of your dividends received back into your dividend stocks
- Rebalance your dividend stock portfolio periodically so no one stock gets too large
Then when you meet your goal and dividend income covers your expenses:
- Stop reinvesting your dividends
- And, enjoy living off your dividends
Can You Live Off Dividends?
Yes. You can live off dividends.
First of all, find your motivation and stay disciplined with your dividend retirement strategy.
Run your living-off dividends calculations. Find you out how much money YOU need to live off dividends. Practice sound money management.
Furthermore, get busy preparing to live off dividends today so you can do so in the future.
Finally, build and manage your dividend stock portfolio so you too can retire on dividends.
Further Reading To Make Your Dividends For Life Early Retirement Plan A Reality
My Favorite Dividend Retirement Planning Resources
Throughout this article, I mentioned many ideas, tools, and resources that have helped me on my journey to living off dividends. In different ways, products and services just like these provide so much value to your finances.
So, I have summarized them here for your convenience.
- Manage all your finances with Personal Capital for free
- The Simply Investing Report for dividend stock picks
- Morningstar investment research and analysis
- Motley Fool Stock Advisor
- Save money with Rakuten & get $10 cash now
- Check your credit for free with Credit Karma
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.
Hi Tom,
Sounds amazing 🙂 Thanks to you, I now always take a close look at the dividend scenario when choosing any new investment, and our stock choices are tilted towards dividend-paying value stocks.
I’m a little worried about the longevity of this bull market, so we also have a fair amount of bonds. But I much prefer stocks.
Cheers,
Miguel
Hi Miguel. I agree. The stock market will not go up forever. Hopefully, the next pullback is a healthy one and we can pick up some better values and higher dividend yields along the way. Tom
Hi Tom,
Let me say that I love your blog. I follow you on Pinterest and find that your posts are informative and refreshing. Regular stock investing is not for me, but it’s a different story with dividends earning stocks. My husband is not into this at all, but hey, so does many people out there when they want instant gratification. Good thing I am the one who handle the finance. ^_^
Thank you for the kind words, Sumi. I am glad we have dividend investing in common! Tom
Mrs. DD must have been relieved when you said you guys were living off dividends! I would love to have a million-dollar stock portfolio 🙂 Soon though.. I anticipate within 5-7 years this should happen…
That time will pass before you know it, GYM.
This is the motivation I needed right here Tom. I am hoping my wife and I can reach this milestone in the not too distant future. We started investing in our mid 20’s and are happy to already have amassed over 200K in our investment accounts. However, when our expenses are almost 3 times what the monthly dividends are, makes it a tab bit harder to keep on motivating ourselves
Thanks for the great write up. Congrats on all your achievements
Regards,
Dr. Dividend
Thanks, Doctor. Keep it up. At times it may seem like you are not making progress, but your momentum will grow and soon you will hit that tipping point where dividends exceed your expenses. Good luck! Tom
This is a detailed post as usual! It would definitely be my dream come true to be able to live off dividends in retirement. I will be bookmarking this for future reference.
Cheers,
Enoch
Thanks, Enoch. Glad you enjoyed it. Tom
Sounds like a great option! This is a real motivation for me! I am always interested to know the experience of others. Thanks for sharing! Now you have a new reader).
Thanks, Darina! Glad you enjoyed it Tom
OK, the first step is start early in life. I’m kinda screwed then. I only started learning the truth about personal financial responsibility and how money works a couple of years ago and I’ll be 50 this summer. Thanks anyways.
Hi Cheryl. The most important step is the first step no matter your age. It’s never too early or too late to start investing for dividends. You can still make a lot of progress in pursuit of your financial goals by following the guidelines in the article. Tom
I think this is all above my head and I am getting too old to try and figure it out on my own. I don’t really understand how to create these dividend or where or how to invest? I wish that I had been more aware of stuff like this younger. These are the kind of life things that should have been taught in school. How to prepare for your future. No all about what happened in the past centuries lol … Anyway, is there companies to help with these investment strategies that you can just pay? I am 43 and retirement is not looking so good, but I would like to have atleast SOME money invested to make life as a retired person not so harsh. I will not work forever, no matter what my finances are. I want at least a little freedom to myself in my future, not to an employer. Any suggestions for someone who is getting old and just starting to register all this?? Please!! Thank you!
Hi April. Yes. Investing in a dividend-paying ETF like Vanguard High Dividend Yield ETF (ticker symbol: VYM) is a great option for anyone who wants to keep dividend investing really simple. Make a small investment each month or as your cash flow allows and reinvest the dividends received automatically back into the fund. That’s it. You just need to have a brokerage account to do so. Tom
Saving is love, saving is life. I’m 18 and I just started funding a Roth IRA $5,500 a year. Assuming the growth rate is around 10.7% (that’s the national average for last year) I could retire on $1.4 million at age 50, or bring it all the way up to $4.1 million at the standard retirement age of 60. I should mention for those who don’t know, that a Roth investment account whether it be IRA or 401(k) is post-tax income, so when the time comes to withdraw it, I don’t have to pay taxes on it because that would be double taxation. Also, speaking of Roth 401(k)’s, assuming I have commercial employment at 20 (I’m studying to be a chemical engineer so I am blessed in that it probably won’t be much of a problem for me) I plan on putting $18,000 a year into a Roth 401(k) which I can withdraw at 60 for roughly $10.2 Million USD, also tax free.
The way I see it, you can have as much fun as you want now, and have difficulty retiring, or suffer a bit now for either an early, comfortable retirement or a luxuriously wealthy one that offers some promise of having an estate to pass down to your offspring (should you choose to do so).
I don’t know about you, but I’d take saving $23,500 a year for a $14.3 Million dollar payout any day.
Well said. You will be living off dividends and living off investments in no time! Thank you for leaving your thoughts. Tom
I like your article on this. Very clear and concise on what to do. -DP
Thanks, DP. Glad you liked it. Living off dividends is a great goal to set and ultimately achieve! Tom
My husband and I just started this dividend investing journey and have brought our 4 children along for the ride. We’ve asked them to take some of their own savings to participate. We created an account for them and helped them select some really cheap stocks that pay dividends to get them started. We’re educating them. Our youngest is 12. I’m so glad we can help them navigate this and teach them, especially since we had to learn the hard way.
Like others, I’m disappointed that we’re only learning about this side of investing now, when retirement is too soon on the horizon, but there’s no better time than the present. Thanks for this very educational article. I’ve learned a few things and will be sharing this with our kids, so we can all invest successfully!
Thank you for sharing your story. It is so inspirational. I can tell you and your entire family are on the right path and you will certainly find financial success however you choose to define it. Thanks again and all the best! Tom
There’s no need to buy dividend stocks, you can invest instead in S&P 500 index and simply sell off whatever the account increases. I max out my 401k, plus $15k 401k from my employer, plus $12k Roth (incl wife’s), and $30k cash. I’m staying fixed at these amounts and increasing my standard of living only with raises and any other extra income.
I’ve invested all cash, IRA, and 401k into S&P 500 (IVV ETF). I could retire at age 55 (earliest age to withdraw 401k with no penalty) and live off approx $30k or retire at 67 and live off approx $50k assuming 7% return. I’ll put 2-3 years of basic living expenses into a secure account and withdraw from that in the event of an economic downturn.
Warren Buffet recommends 90% of your wealth in an S&P 500 index during retirement, so invest 100% until then and you can’t go wrong. The key is to avoid management fees which would cost me hundreds of thousands of dollars before I even hit retirement.
Hi Lee. Thank you for your perspective. And yes, like most things in life, there are more ways that one to accomplish a goal. The most important thing is to have a solid investment plan and stick with it through thick and thin. Sounds like you are doing just that. Congrats! And good luck with your investing and early retirement plans. Tom
I enjoyed reading this article word for word! Most blogs or articles about investments almost looks like a foreign language to an ignorant oblivious mind! I believe I can use this to help our son, who is leaving to the military soon, to begin investing at a young age. His main reason for that choice is to start off on the right foot debt free for college that he knows we cannot afford. Thank you for simplifying this in a way that will now make it possible for us to begin!
Thank you so much for your kind words. I am glad you found the article inspiring and useful. It sounds like your son has a good plan. Get him started dividend investing with his military pay for sure so he can start building his dividend income at a young age. Best wishes. Tom
Retired at 62 with dividend stocks and ss , no debt….
After 1 1/2 years all is well, no plans to spend principle.
Congrats. That’s an awesome accomplishment! Tom
Hi Tom,
That was a very detailed post, but totally worth it. You brought up some very interesting points and I’m glad I took my time to finish reading it.
Hi Simon. Thanks for giving it a good read. I think a lot of people consider living off dividends. And it is a good option for those who plan ahead and are disciplined with their savings and investments. Tom
Tom,
I noticed that you did not include Closed End Funds (CEF) as a source of dividend. I have looked at dozens of diversified CEF’s and focus on only those that have a market cap above $1B and have an average daily trading volume of at least 200K/day.
I am considering allocating 10% of my IRA to CEF’s.
I would be very interested in your opinion on CEF’s as part of a dividend strategy.
Hi Wade. Thank you for the insightful comment and question. I have invested in CEF’s over the years with mixed results. And have tended to deemphasize them in my portfolio as I have gotten older. Mainly because they are a little riskier than I prefer now. Especially those CEFs that use leverage and target specific stock market sectors. Those risks aside, they tend to offer higher dividend yields which are great for income-focused investors like you and me. Done thoughtfully as you suggest, I think CEFs can be a part of an overall income portfolio strategy. Keeping your allocation to 10% or less is a good idea. Just be prepared for plenty of downside volatility when the stock market corrects. And/or interest rates start to rise again. Tom