How Much Money Do You Need to Live Off Dividends?

How Much Money Do You Need to Live Off Dividends? The goal of many investors is to build enough passive income streams to be able to completely fund their lifestyle even during retirement years. There are many different types of passive income streams, one of which is dividend payments. A dividend is simply a portion of a company’s profits that they pay out to their shareholders, generally on a quarterly basis. 

With all things considered, is there any way that an individual could completely fund their lifestyle through dividends? How much would your investment portfolio have to be worth to live entirely off dividend payments? 

What Are Dividends?

Before you determine how much money you need to live off dividends, let’s take a deeper look at what dividends actually are. Essentially, a dividend is a portion of a corporation’s profits that they pay out to individuals who own shares in their company. An individual who owns shares of company stock is also known as a shareholder. 

Most dividends are paid out to shareholders on a quarterly basis. So, for example, if you own 30 shares of a stock and the company pays $4 in annual cash dividends, you would receive $30 quarterly and $120 throughout the year for holding those 30 shares. 

While cash dividends are the most common type of dividends, they are not the only type. For example, companies can pay out to their shareholders through the following types of dividends:

• Cash Dividends: Companies pay cash dividends directly into a shareholder’s brokerage account. 
• Stock Dividends: In stock dividends, companies can pay shareholders with additional shares of stock rather than cash. 
• Dividend Reinvestment Programs (DRIPs): Through DRIPs, shareholders are able to reinvest their dividends back into the company’s stock, often at a discounted price.
• Special Dividends: A special dividend payment does not occur on a regular basis. Companies often make a one-time special dividend payment to shareholders to distribute profits that have accumulated over several years. 
• Preferred Dividends: A preferred stock is a type of stock that functions more like a bond rather than a stock. Therefore, dividends on preferred stocks are generally fixed.  

Overall, the most common type of dividend is the cash dividend. Therefore, most shareholders receive cash dividend payments on a quarterly basis. So, how much money would you need to invest to be able to live off dividends that are paid out on a quarterly basis? Is it even realistic to live off dividends? 

Is It Realistic To Live Off Dividends?

Being able to live off passive income streams such as dividends would be a dream, but is living off dividends even realistic?

Before determining if living off dividends is a viable option, you will need to figure out your monthly living expenses. Of course, the monthly living expense of every individual is different. Therefore, the monetary value you will need to build your investment portfolio will vary significantly from person to person. However, to successfully live off dividends, your investment portfolio will need to be quite large. 

While it is attainable, the average person would need to build an investment portfolio of at least $1 million to fully cover all their living expenses. Let’s dive a little deeper into this figure below and examine the impact dividend yield will have on your ability to live off dividends. 

What Is a Realistic Dividend Yield? 

Dividend yield refers to the amount of the dividend divided by the current stock price. You generally want a higher dividend yield as a 10% yield will always be better than a 2% yield. However, a typical dividend yield often falls between 1% and 6%. Indeed when dividends rise as high as 10%, something fundamental is often up with a company and it’s a red flag.

A yield between 4% and 6% is considered quite good in most circumstances. See the table below for examples of common dividend yields and how they relate to annual dividend income. 

Details	Example One	Example Two	Example Three
Investment Portfolio Size	$500,000	$1,000,000	$2,000,000
Dividend Yield	4%	4%	4%
Dividend Income	$20,000/ year  Or  $1,666/month	$40,000/year Or  $3,333/month	$80,000/year Or  $6,666/month

Dividend Sustainability: What To Look For? 

As the stock market and economy rise and fall, dividend yields often follow the same pattern. In order to better determine the dividend sustainability of the stock, shareholders should take into consideration certain factors.

Some factors that shareholders should look at when deciding if a particular stock has good dividend sustainability include:

• Dividend Payout Ratio: Indicates the portion of a company’s annual earning per share that a company pays in the form of cash dividends per share.  
• Dividend Coverage Ratio: Indicates the number of times a company could pay dividends to its shareholders using its net income over a specified fiscal period.  
• Free Cash Flow to Equity (FCFE): Measures the amount of cash that could be paid out to shareholders after all expenses and debts have been paid. 
• Net Debt to Earnings Before Taxes and Amortization (EBITDA): Measures an organization’s leverage and its ability to meet its debt.

The ratios outlined above each provide valuable insight into a company’s ability to sustainably meet dividend payouts each quarter. These ratios are also helpful to investors who are striving to grow their investment portfolios and live off their dividend earnings. 

Are Dividends Taxed?

While you can find ways to live off dividends, it is important to keep in mind that the income you earn from dividends is taxable income. However, dividend income is taxed in different ways depending on whether the dividends are qualified or non-qualified.

• Qualified Dividend: Dividends that are taxed at the lower long-term capital gains tax rate. 
• Non-Qualified Dividend: Dividends that do not meet the qualified dividend requirements and are taxed as short-term capital gains. 

To be considered a qualified dividend, the dividend must be paid by one of the following:

• A United States Owned Company 
• A Company in U.S. Possession 
• A Foreign Company Residing in a Country That Is Eligible for Benefits Under a U.S. Tax Treaty
• A Foreign Company’s Stock That Can Be Easily Traded on a Major U.S. Stock Market  

In addition to meeting the above criteria, shareholders must all meet holding period requirements to be eligible for the qualified dividend tax rate. These holding period requirements state that the stock must have been held in excess of 60 days during the 121-day period beginning 60 days before the ex-dividend date.

The ex-dividend date marks the cutoff point that determines whether a shareholder will be entitled to receive the upcoming dividend paid out by a company. 

Overall, it is in a shareholder’s best interest to hold qualified dividends as the tax rate will be much lower compared to non-qualified dividends. In fact, qualified dividends are tax-free for individuals in the 10%, 12%, and 22% tax brackets or those individuals earning less than $80,000 per year.

Best Investments To Live Off Dividends

While stocks are the most common dividend-paying investment, there are some alternative ways to live off dividends. The four best types of investments that could allow you to live off dividends include: 

• Stocks: The most popular option for dividend investors is owning stock shares from an already well-established and recognizable company that has a long track record of consistently paying dividends. 
• Mutual Funds: Some mutual funds pay dividends as they invest in individual companies that pay dividends.
• ETFs: Exchange-Traded Funds or ETFs are similar to mutual funds as they are made up of a conglomerate of individual companies that pay dividends for holding shares in the company. 
• REITs: Real Estate Investment Trust or REITs allow individuals to invest in real estate without owning or managing a property while also providing the opportunity to earn dividends from investing and holding them.  

Some examples of proven dividend-paying companies or even dividend aristocrats include:

• Realty Income (NYSE:O)
• Johnson & Johnson (NYSE:JNJ)
• Walgreens Boots Alliance ((NYSE:WBA)
• Lowe’s (LOW)
• Target (NYSE:TGT)
• Microsoft (NYSE:MSFT)
• American Express (NYSE:AXP)
• McDonald’s (NYSE:MCD)
• Coca-Cola (NYSE:KO)
• AT&T Inc. (NYSE:T)

Are Dividends Worth It? 

So, with all this being said, are dividends worth it? Well, investing in dividend-paying stocks has proven to be a great investment strategy for many individuals over the years. Dividends can help provide shareholders with a steady form of passive income while also helping to provide stability in their investment portfolio during rocky market periods.

However, dividends are never guaranteed as companies may not be able to pay their shareholders the expected amount if the market and economy are not performing well. Therefore, having only dividend payments as your only source of income could prove to be risky. 

Overall, there are definitely both pros and cons when it comes to investing in dividend-paying stocks, mutual funds, ETFs, and REITs. Being able to completely live off dividends will require investors to build an investment portfolio that consists of upwards of $1 million.

Ultimately, if you have the funds to invest in high dividend yield-producing stocks and are willing to stay consistent as you build up your investment portfolio, then investing in dividend-paying stocks could be worth it in the long run. 

Frequently Asked Questions

Can I Get Rich Off Dividends?

While you won’t get rich with dividends overnight, if you are consistent with your investment strategy investing in dividend stocks could make you rich over time. The most likely way to become rich off of dividends is to start investing early and often.

How Much Do I Need to Invest To Make $1,000 A Month In Dividends?

To make $1,000 every month in dividends, you would have a $400,000 investment portfolio that produced at least a 3% dividend yield over the course of a year.  

How Do I Make $3,000 A Month In Dividends?

To make $3,000 every month in dividends, you would have a $1.2 million investment portfolio that produced at least a 3% dividend yield over the course of a year.  

What Would A Single Person in Texas Need To Live Off Dividends?

The average cost of living for a single person in Texas is around $50,000 per year or $4,166 per month. Therefore, to be able to completely live off dividends, the individual would need to have an investment portfolio of around $1.7 million that produced at least a 3% dividend yield over the course of a year.

What Would A Married Couple In California Need To Live Off Dividends?

The average cost of living for a married couple in California would like to fall near $120,000 per year or $10,000 per month. For the couple to completely live off dividends, they would need to have an investment portfolio of around $4 million that produced at least a 3% dividend yield over the course of a year.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.