Investing in a company that pays out dividends can be one way to get a passive income stream. In chapter one we talked about why to invest in a dividend stock and what dividends are. The key point here is: Define a clear goal for setting up a dividend strategy.
If you want to live off dividends, you will need to invest in dividend stocks. To find dividend stocks, you can use a stock screener as we offer. A stock screener is a tool that allows you to filter stocks by certain criteria. For example, you can use a stock screener to filter for stocks with a high dividend yield.
There are many reasons why it's important to start investing early. One of the most important is that compound interest can have a significant impact over time. The longer you invest, the more time your money has to grow. This is especially true if you reinvest your dividend income to buy more stocks. So have in mind reinvesting dividends as long as you are within the investment time horizon that keeps your investment strategies safe or the investment time shorter.
Additionally, you need to declare the budget you need that should be covered by dividend income. Otherwise, with no goal in mind, you would start in the middle of nowhere. So to start analyzing your situation you should break your average monthly costs into two segments. On the one hand, you have to take all existential things. The sum of it would be the minimum goal. All on top is nice to have and could be on the list of luxury goods and services. Let's consider this as the maximum. To tune the lists you should consider also an average inflation rate of 2 % each year.
In the following example, we assume that we will have a look at the next 25 years. So in 25 years, we will maybe live off dividends. Today we have a minimum of costs of 1,000 and a maximum of 3,000. The average inflation rate is 2 %.
As a result, in 25 years we need to have a minimum monthly passive income from dividends of 1,641 and a maximum of 4,922. Multiplying by 12 let us know the range per year.
Of course, this is just a ballpark estimate. To get a more accurate picture of how much money you'll need to live off dividends, you'll also need to factor in the taxes you'll owe on your dividend income.
Let's say you're in the 25% tax bracket and you have 19,692 to 59,064 in annual expenses, you'll need to earn 26,616 ( 19,692 / ( 1 - 0,25 ) ) respectively 78,752 in dividends to cover your cost of living.
The answer to this question or to a related question like "how much dividend income do I need" depends on several factors:
At the moment we can check the first three bullet points. To keep it as simple as possible, we ignore the dividend growth at this point and keep an eye on the dividend yield.
The average dividend yields of companies in the S&P 500 are 1.85%. For the MSCI World, it is almost the same. In many situations yields are 4%-6% good. A realistic dividend yield can be around 5 %. But depending on the stock price where you buy the dividend stock as well as the market situation can lead to even better dividend yields. Later we talk about and use the tool on this site to find better opportunities to push the investment portfolio to a higher level.
For our calculation, we assume average annual dividend yields of 5%. So if you have annual expenses of 26,616 you need to invest around 523,220 ( 26,616 / 0,05 ). With 78,752 of living expenses p.a. you have to invest 3 times your minimum situation respectively 1,575,040.
For dividend Investors, it is one of the most significant indicators. On the one hand, the higher the key figure, the less you need to invest to reach your goal. So let's take the annual expenses of 78,752. If the average yield of your dividend portfolio is rising from 5 % to 7.5 % you would need to invest 1,050,026 and this is 1/3 less. But high dividend yield or the highest dividend yields on the other hand can also be an investment risk. But more on that later.
Reinvested dividends are essential for financial freedom with dividend stocks, especially cash dividends. The following reasons are:
When you reinvest your dividends, you are effectively giving yourself a boost in income growth. The extra money that you earn from reinvesting your dividends can be used to accelerate your savings, helping you to reach financial freedom sooner. In addition, reinvesting your dividends allows you to compound your gains, which can lead to even greater wealth over time.
Let's get back to an example. If the current cost of living is declared around 3,000 per month, 25 years later it will be inflated by 2% p.a. to 4,922. Considering the 25 % annual tax on the dividend income stream (tax allowance not considered) to cover the costs, the investor would need a dividend portfolio of around 1,049,988 if the average dividend yield would be 7,5%. The following table shows the development of the portfolio each year:
If you are getting dividends from a company that has raised its stock price over time, then it might not make sense to buy more shares at current prices. You could decide instead (and this is where things get interesting) to hold your existing positions and use the cash received as dividends on new investments. The following overview should represent this:
Living off dividends can be a viable option for some investors. With the content of this chapter you can see and answer all the questions on the web that are focused on "How much dividend will I get with an investment of ... ?". It is not that important to know what you will get, it is important what you need and this is the right point to start to create respectively to evaluate your dividend investment strategy. In addition, if you getting retired keep in mind that you have not to live just from dividend payouts, but also from selling stocks from your portfolio from time to time.
However, it is also important to consider the pros and cons before deciding to live off dividends. If you are considering living off dividends, be sure to do your research and invest in a diversified investment portfolio of dividend stocks.
In order to live off dividends, you need to determine financial needs. Find out what has a significant influence on reaching of how to live off dividends.