How much money do I need to live entirely off dividends? Here is the lowest amount you can probably get away with




How much money do I need to live entirely off dividends?
How much money do I need to live entirely off dividends?  

Whether you're just starting out your career or nearing retirement, the idea of stockpiling an investment portfolio to generate a passive income might be intriguing.

But how much money do you realistically need to be able to drop out of the workforce and get by on dividend payouts alone?

While you will have to start by honestly assessing what you can live with - and without. But there's a simple formula and some less simple risks you'll need to consider when making the big dividend-dependency decision.

  • Here's how to get Walmart and Kroger to pay YOU inflation-protected income on a quarterly basis

  • Mitt Romney says a billionaire tax will trigger demand for these two physical assets

  • What do Ashton Kutcher and a Nobel Prize-winning economist have in common? An investing app that turns spare change into a diversified portfolio

Dividends are great tools for investors

Dividends are payments made by publicly traded companies to their shareholders. They're typically used to communicate strength about the company's financial position. Steady dividends - even low ones - often signal a company's positive projection of its long-term outlook.

Many dividends are paid in cash. For investors with 401(k)s or IRAs, dividends are often automatically reinvested and, through the power of compounding, offer a powerful tool to grow a nest egg.

For straight-up equity investors, those cash payouts fuel dividend income - where passively generated payouts cover your living expenses.

How much you'll need

How much you'll need exactly depends on your income, spending habits and living expenses. Which means the answer is highly personal.

But once you know how much you'll need to live, here's a simple formula to apply that to sort out how much you need in total.

Desired Dividend Income / Dividend Yield (%) = Estimated Portfolio $ needed

Let's consider a desired dividend income of $37,522, which was the real median single-person income in the U.S. in 2021 according to data from the St. Louis Federal Reserve.

Next, consider what you can reasonably expect from dividend yields. It's fair to plan on yield rates between 1% and 6%.

Using our formula mentioned above, here's how yields translate to required portfolio size:

  • 2% yields require a portfolio of $1,876,100

  • 3% yields require a portfolio of $1,250,733

  • 4% yields require a portfolio of $938,050

  • 5% yields require a portfolio of $750,440

  • 6% yields require a portfolio of $625,367.

Yet as we'll see, these numbers need further refinement thanks (or really, no thanks) to taxes.

Weighing the risks of this approach

There are three potential consequences that should be considered before you commit fully to this income strategy.

Taxes. Dividend payments from a taxable brokerage account, or traditional 401(k) and IRA accounts, are considered taxable income.

Downside risk. Dividends aren't a slam dunk. High-yield dividends may not be sustainable and a company too focused on returning profit to investors could lose out on growth later. And sometimes without warning, today's higher dividends tank.

If you plan to pay your bills with dividends, you'll need to feel the risk is both reasonable and worth it.

Too-tight budget. If you think you can manage expenses at a median dividend income, then planning is everything. High inflation, rising interest rates and global turmoil can do a number on your portfolio: You'll need a strong stomach and stronger strategy.

As housing is a foundational cost, start there. Should you move? For the first time, median asking rents crossed the $2,000 threshold in May, according to Redfin. The numbers now range nationally from $1,453 in San Antonio, Texas to more than $4,000 in the New York metropolitan area.

High yield = high risk?

Handled carefully, the pursuit of steady, sustainable dividend income can be a winning play.

For older Americans, living off dividend income could make sense, especially if it delays taking a Social Security benefit. The longer you wait, the more money you'll get when you collect.

Yet as with anything investment related, risk never goes away. History is littered with companies whose high yields indicated looming weakness.

And when in trouble, companies often ditch the dividends first. So in crafting a strategy, it helps to remember this truism: Powerful dividends and portfolio diversification make for a great combination.

What to read next

  • If you want to be rich, use these 3 Warren Buffett techniques no one ever talks about

  • Billionaire Carl Icahn warns the 'worst is yet to come' - but when an audience member asked him for stock picks, he offered these 2 'cheap and viable' names

  • 'Biggest crash in world history': Robert Kiyosaki issues another dire warning and now avoids 'anything that can be printed' - here are 3 hard assets he likes instead

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

COMMENTS

More Related News

Mitt Romney Brutally Assesses How Low Donald Trump Will Go
Mitt Romney Brutally Assesses How Low Donald Trump Will Go

The Utah senator responded to the former president's meeting with Kanye West and white supremacist Nick Fuentes.

Aristocrat Leisure (ASX:ALL) Is Due To Pay A Dividend Of A$0.26
Aristocrat Leisure (ASX:ALL) Is Due To Pay A Dividend Of A$0.26

The board of Aristocrat Leisure Limited ( ASX:ALL ) has announced that it will pay a dividend of A$0.26 per share on...

Here are 3 crucial things you need to know before buying a car in 2023 - save yourself thousands of dollars even as interest costs skyrocket
Here are 3 crucial things you need to know before buying a car in 2023 - save yourself thousands of dollars even as interest costs skyrocket

New car demand remains in overdrive.

Nick Fuentes is well known as a white supremacist and anti-semite. That hasn
Nick Fuentes is well known as a white supremacist and anti-semite. That hasn't stopped Trump and at least 5 GOP lawmakers from associating with him since 2017.

These controversial encounters have rattled the GOP with Kevin McCarthy and Mitt Romney urging other lawmakers to avoid Fuentes.

Caffyns (LON:CFYN) Has Affirmed Its Dividend Of £0.075
Caffyns (LON:CFYN) Has Affirmed Its Dividend Of £0.075

Caffyns plc ( LON:CFYN ) will pay a dividend of £0.075 on the 9th of January. This payment means that the dividend...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Economy