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Can You Live Off Dividends?

Posted at Aug. 23, 2022, 8 p.m.

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.

How to Live Off Dividends?

For dividend income, it is good to have a dividend-paying stocks screener

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.

The benefits of a dividend stocks screener:

  • You have all stocks that pay dividends in one place
  • Fundamental and technical data for each stock can be analyzed
  • You will find cleaned data and makes the data comparable for you
  • It has calculated measurement metrics - so you do not have to care about
  • With an additional portfolio tool, you can monitor and optimize your holdings easily

The time horizon of investing - One of the most important points of retirement planning

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.

The needed budget has to be estimated

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.

Notice: Your goal will vary over years and has to be adjusted over time. We suggest thinking about your goals once a year and comparing them to the results of your dividend strategy to adjust this as well.

Example of setting up the financial goals for the dividend investing plan

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 %.

Can you live off dividends - Cost of living

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.

Minimum annual dividend net income: 19,692
Maximum annual dividend net income: 59,064

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.

How much money do I need to live off dividends?

The answer to this question or to a related question like "how much dividend income do I need" depends on several factors:

  • Investing time horizon
  • Living expenses
  • Taxes you will owe on your dividend income
  • Dividend yields
  • Dividend growth

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.

What is a realistic 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.

Dividend investing examples in August 2022 with a dividend yield around 5 %

Can you live of dividends - Example of dividend stocks with around 5% dividend yield

What is the result of our example with a 5 % dividend yield?

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.

How important are dividend yields if talking about financial freedom?

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.

How important are reinvested dividends?

Reinvested dividends are essential for financial freedom with dividend stocks, especially cash dividends. The following reasons are:

Reinvesting is shortening the saving time

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:

dividend passive income calculator - how important are reinvested dividends

How to interpret the results?

  1. Without reinvesting the dividends the savings per month have to be higher by 1,849. Because of the dividend yield of 7,5 % the savings are 1,651 instead 3,500 per month. That is a reduction of 53 %!
  2. To get the same amount of savings without reinvesting it needs around 53 years instead of 25 years to reach the goal!
  3. The longer the time horizon, the higher the leverage of the reinvested dividends.

Reinvesting works best with getting cash dividends

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:

Can you live off dividends - How important are reinvested dividends

Pros of living off dividends:

  • Dividends can provide a source of income that is not dependent on employment.
  • Dividends can provide a source of income that is not subject to fluctuations in the stock market.
  • Dividends can provide a source of income that is not subject to inflation.
  • Dividends can be used to diversify your investment portfolio.

Cons of living off dividends:

  • Dividends may not be sufficient to cover your expenses.
  • The annual dividend may fluctuate, and you may need to sell shares.
  • Dividends are not guaranteed, and a company may cut its dividend payments at any time.
  • A Dividend stock portfolio may underperform the overall stock market.

Final thoughts on living off dividends

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.

Appendix: Table - Results from dividend passive income calculator

How much dividend income respectively yield is needed

dividend passive income calculator - how much money do I need to Live off dividends (1)

Appendix 1: Cost of living - 1,000 to 2,000


dividend passive income calculator - how much money do I need to Live off dividends (2)

Appendix 2: Living expenses - 2,500 and 3,000


dividend passive income calculator - how much money do I need to Live off dividends (3)

Appendix 3: Expenses - 3,500 to 4,500


dividend passive income calculator - how much money do I need to Live off dividends (4)

Appendix 4: Cost of living - 5,000 and 10,000