How much do you have to invest to live off dividends?
How Much Money You Need to Retire on Dividends. As a rough rule of thumb, you can multiply the annual dividend income you wish to generate by 22 and by 28 to establish a reasonable range for how much you need to invest to live off dividends.
In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Here's a breakdown of how much you would need to invest based on different yields: For a 2% dividend yield, an investment portfolio of approximately $2,969,200 is required to generate $59,384 in annual dividend income.
But the truth is you can get a 9.5% yield today--and even more. But even at 9.5%, we're talking about a middle-class income of $4,000 per month on an investment of just a touch over $500K. Below, I'll reveal how to start building a portfolio that could get you an even bigger income stream than this today.
Dividend-paying Stocks
Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month.
To generate $5,000 per month in dividends, you would need a portfolio value of approximately $1 million invested in stocks with an average dividend yield of 5%. For example, Johnson & Johnson stock currently yields 2.7% annually. $1 million invested would generate about $27,000 per year or $2,250 per month.
Over time, the cash flow generated by those dividend payments can supplement your Social Security and pension income. Perhaps, it can even provide all the money you need to maintain your preretirement lifestyle. It is possible to live off dividends if you do a little planning.
Bank Savings Accounts
As noted above, the average rate on savings accounts as of February 3rd 2021, is 0.05% APY. A million-dollar deposit with that APY would generate $500 of interest after one year ($1,000,000 X 0.0005 = $500). If left to compound monthly for 10 years, it would generate $5,011.27.
Dividends can be classified either as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at lower capital gain rates.
How much money do I need to invest to make $4000 a month?
If you want to make $4,000 per month from a passive investment, you could do it by investing $100,000 once and getting a steady 4% monthly return.
If the average dividend yield of your portfolio is 4%, you'd need a substantial investment to generate $3,000 per month. To be precise, you'd need an investment of $900,000. This is calculated as follows: $3,000 X 12 months = $36,000 per year.
The basics. If you retire at 55, and the average life expectancy is around 87, then 300K will need to last you 30+ years. If it's your only source of retirement income, until the state pension kicks in at around 67/68, then you are going to have to budget hard to make it last.
To have a perfect portfolio to generate $1000/month in dividends, one should have at least 30 stocks in at least 10 different sectors. No stock should not be more than 3.33% of your portfolio. If each stock generates around $400 in dividend income per year, 30 of each will generate $12,000 a year or $1000/month.
| Stock | Market Capitalization | 12-month Trailing Dividend Yield |
|---|---|---|
| Gladstone Investment Corp. (GAIN) | $500 million | 6.9% |
| Modiv Industrial Inc. (MDV) | $112 million | 7.7% |
| LTC Properties Inc. (LTC) | $1.3 billion | 7.2% |
| Realty Income Corp. (O) | $44 billion | 6.4% |
Key Takeaways. A dividend is usually a cash payment from earnings that companies pay to their investors. Dividends are typically paid on a quarterly basis, though some pay annually, and a small few pay monthly.
| Company | Dividend Yield |
|---|---|
| Big 5 Sporting Goods Corp (BGFV) | 18.57% |
| Medifast Inc (MED) | 13.50% |
| Entravision Communications Corp. (EVC) | 13.29% |
| Arbor Realty Trust Inc. (ABR) | 13.28% |
But you'll inevitably need money to make a decent amount from dividends. If you can afford to invest $70,000, then you could earn more than $5,000 in dividends over the course of a year by buying three stocks: LTC Properties (LTC), AT&T (T 0.29%), and Enbridge (ENB 1.10%).
| Current Savings | Inflation Rate | Monthly Savings Goal |
|---|---|---|
| $0 | 3% | $12,987 |
| $100,000 | 3% | $12,008 |
| $300,000 | 3% | $8,090 |
| $500,000 | 3% | $4,172 |
As a rough rule of thumb, you can multiply the annual dividend income you wish to generate by 22 and by 28 to establish a reasonable range for how much you need to invest to live off dividends.
Is there a downside to dividend investing?
9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
However, if you are looking for a regular and stable income, then dividends might be a better option. On the other hand, if you are more interested in making short-term profits, capital gains might be a better choice. Ultimately, it comes down to your preferences and the type of company you invest in.
Can an investor really get rich from dividends? The short answer is “yes”. With a high savings rate, robust investment returns, and a long enough time horizon, this will lead to surprising wealth in the long run.
1: Simply let compounding work its magic. Over the long haul, the stock market has provided average annual total returns somewhere in the neighborhood of 10%. If the future ends up like the past, $100,000 would grow into $1 million in just over 24 years from compounding alone.
Real estate investing is a powerful strategy for turning a significant amount of money like 100K, into a million. Investing in rental properties or commercial real estate can provide monthly income through rent, along with appreciation in the real estate market over the long term.
