Living Off Dividends – How Much Do You Need?
Living off dividends is a dream.
Your money’s invested in an income producing asset.
On top of that, it can multiply for you without you having to do anything. In fact, it’s best if you don’t touch it.
Better yet, it’s making you passive income that you can either keep as regular income or reinvest.
The tax rate on this income is little to none. At the time of creating this post, single filers can make up to $40K and pay 0% in federal taxes. The next bracket up is 15% in taxes, and the next after that is 20%. It stops there.
These aren’t the best tax rates an investor could find. But they are way better than earned income taxes. And the income is passive in the purest sense of the word…
How to Start Living Off Dividends
Here’s how you can start living off dividends. You choose a handful of great dividend-paying companies that look like they’ll grow in the future. Then, invest your money in these stocks. The stocks grow and you get an extra quarterly or monthly payments. This extra payment is the dividend.
You can either keep the dividend as income, or you can reinvest it back into your portfolio to grow it faster. Each method is appropriate at different times. It depends on your current needs.
When reinvesting, it’s usually referred to as DRIP. It stands for Dividend Reinvestment Plan. This is when you set up a system, so the dividends paid to you are automatically buying more shares of the stock you own. This will grow your portfolio slowly at first. Then, as time goes on, it will gain more and more speed.
At first, you’ll want a DRIP. Set an income goal. Figure out how much you need invested to meet or exceed your dividend income goal. As your portfolio grows, so will your dividend payouts.
When you meet your goal or pass it, see where you are in your life. If you’re ready to retire or chase a different career, great! You can start living off dividends instead.
If not, great! Let it grow some more while you figure things out.
How Long Does it Take to Live Off Dividends?
That depends on lots of factors. Factors including stock price, initial investment and any amount you continue to invest. Here’s a link to a free Dividend Calculator. It can help you figure things out.
If you are aggressive about it or have a large initial investment, it’ll take less time to reach the nest egg you’re planning for.
$500K invested with a 3% dividend will produce an annual $15K.
That same amount with a 5% dividend yield will produce $25K a year.
If you invest $1 million and find solid companies with an average 5% dividend payout, you’ll be making a nice $50K per year.
If you have a good chunk of change to invest, you can start living off dividends within months. If you don’t, a realistic timeline is 10-15 years.
It’ll take a bit longer if you want a cushier amount of money each year.
One concept to understand when you’re dealing with stocks, is the price is always moving. It’s moving either up or down. It will not stay the same. Occasionally, you’ll have a stagnant stock. But it usually doesn’t stay that way for long, or at least forever. A healthy stock is a bullish stock.
Risk of Living Off High Dividend Yields
Watch out for a high dividend yield. Many times, when a company is producing a high dividend yield, it’s to entice stockholders to buy. Although, high payouts aren’t always sustainable.
Avoid the dividend stocks that are bearish in the long term. Make sure there isn’t anything fishy going on with the company in the background.
Those two pieces of advice should help you continue living off dividends and keep you out of trouble. Because the last thing you want is to invest in a failing company and lose your money. Even the shrinking of your money is a bad deal. It defeats the purpose of investing at all.
A growing stock keeps things moving up, so your money can keep rising as you stop contributing to it.
Here’s something else to keep in mind…
A bummer when it comes to taxes on dividends is that you pay taxes twice, sometimes three times. And this is common across the board when it comes to taxes.
Here’s what I mean. You earn money from your job and pay taxes on that income. Then you invest what’s left into a dividend stock. You receive dividends. If you earn more than $40K in dividend income, you pay another tax. Plus, if you ever want to take your money out of a stock that’s climbed higher, you might have to pay even. more capital gains taxes.
Living Off Dividends in Retirement
Even the purest form of passive income requires some time investment. This is to keep it moving in the right direction. When it comes to dividend investing, the time input is tiny. But still something!
Make sure you watch the companies where you own stock. Keep your eye on the leadership. Also keep up with daily news and any developments or advancements.
The last thing you want when living off dividends is one of your companies to go out of business. More than likely, your shares would become worthless, and you’d lose your money.
You can usually catch these things before they happen. But you must pay attention to your company and what is going on inside. Sometimes there are strings of unfortunate events. Sometimes companies get bad press. If your company is headed in the wrong direction, it might be wise to move your money somewhere else.
Other things to watch out for are internal stock dumping, cuts in dividends or diminishing cash.
During dividend retirement, you could also consider a partial DRIP. Putting a percentage of your dividends back into your portfolio will help it grow. It won’t grow as it was before you started using the dividends as income. But it’ll keep things moving quicker than if you weren’t reinvesting at all.
Living Off Dividends Calculator
To simplify things for you, check out this dividend reinvestment calculator. This free tool reveals how your portfolio value grows when dividends are reinvested.
You want to get the most realistic growth prediction. I recommend choosing a stock and researching the needed information.
That way you’re using real numbers from a real stock that you own or want to own. It will produce real growth numbers for you. Not ones that are fabricated.
Final Thoughts and More Opportunities
Living off dividends can be like heaven on Earth. You have all the free time in the world. You can pursue fun things like traveling, hobbies or spending time with family.
Or you could pursue a career that has terrible pay but is your dream. The pay wouldn’t matter because you have a solid source of income backing you up.
And like I said before, taxes aren’t fun. But the portfolio income tax rate is sweet compared to earned income taxes.
Delaying gratification and putting in some work up front can really pay dividends later.
About Vanessa Adelman
Vanessa Adelman graduated with an Interdisciplinary degree. She majored in Entrepreneurship, Painting, Music and Film. Shortly after, she received a copywriting mentorship with Mark Morgan Ford. Then, she earned her AWAI Verification. Now, Vanessa freelances in the financial direct response industry. She’s been investing since 2016. In her free time, she enjoys books about money and wealth. She loves being with her boyfriend, hunting, fishing and going on outdoor adventures.