May 30, 2022

How Much Money to Live off Dividends

Read more about Investing

Interested in earning passive income with dividend-paying stocks? Find out how much money you need to invest in order to live off your dividends.

When you own a stock that pays dividends, you're essentially earning passive income.

But can you actually live off of it?

After all, that's the goal.

In this guide, find out how much money it would take to live off dividends. Plus, learn how dividends impact your taxes and whether dividend stocks are high-risk.

What are dividends? Dividends are portions of a company's profits paid to shareholders in exchange for investing in their stocks, usually quarterly. That means several times a year, these companies will be sending you a check for an amount proportionate to how much you invested in them.

How Can I Live off Dividends?

You can live off of dividends by investing enough so that the amount you receive each year covers your annual expenses.

It all comes down to two factors you'll want to keep in mind:

Living off of dividends usually requires you to live frugally. In fact, much of your journey towards financial independence will involve finding ways to cut your spending.

To figure out your budget and spending needs, consider the following factors:

  • Do you have any dependents? More people means more money needed for food, housing, and other necessities. The same goes if you're supporting a spouse.

  • How do you get around? Some places have convenient public transit, or offer the ability to get around by bicycle, but in others, a car is a necessity. An expensive one.

  • What's the cost of living in your area? The cost of rent, food, and other necessities varies from place to place. The place you can afford to live may not be the place you want to live.

  • Do you have any medical conditions that require treatment? In the U.S. especially, the cost of health care can heavily affect a family's financial planning.

  • How much do you need for discretionary spending? Living off of passive income until you can't afford to spend it doing the things you enjoy.

Pro Tip: One of the easiest ways to figure out precisely how much your expenses will be is to take advantage of an online budgeting tool or money management app to track your finances. These do a lot of the heavy lifting for you. Then, you'll just have to figure out how much you can earn from dividends based on what you can afford to invest.

How Much Money Is Needed to Live off Dividends?

How much money you need to live off dividends depends on the dividend yield. This number varies from one investor to another, but a realistic dividend yield generally lies somewhere between 1% and 6%.

To provide you some examples, The Motley Fool put together of some of the top dividend-earning index funds with low expense ratios and varying degrees of risk. Here are a few of them.

Index FundDividend YieldExpense RatioRisk Level
Invesco S&P 500 High Dividend Low Volatility ETF (NYSEMKT:SPHD)4.89%0.30%Average
Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD)3.16%0.06%Below Average
Vanguard Dividend Appreciation Index ETF (NYSEMKT:VIG)1.67%0.06%Below Average

To find the dividend yield, look at the historical dividend yields for any given asset. This isn't a guarantee of what you'll earn, but it will give you an idea of what it might pay out in the future.

Then, try running some scenarios to figure out how much to invest.

For example, if you invest $1 million in a dividend-earning portfolio that has a dividend yield of 6%, your math would look like this:

$1,000,000 x 0.06 = $60,000
In this situation, you would be able to live off of your dividends if your living expenses are less than $60,000 per year.

You can also start with your cost of living and do the math in reverse to figure out how much you'd need to invest to support yourself. Say your cost of living is only $50,000 a year:

$50,000 / 0.06 = $833,333.33
Divide your annual needs by the dividend yield as a percentage to get the necessary investment.

That said, not everyone will be able to get a 6% dividend yield. For the same lifestyle, as the yield drops, the size of the initial investment dramatically increases. Here's what it looks like at a 2% yield:

$50,000 / 0.02 = $2,500,000
As you can see, the yield is a big factor. Even a small decrease in the dividend yield more than doubled the necessary investment.

Are Dividend Stocks High Risk?

Stocks that pay high dividends often carry high amounts of risk.

This is because dividends are often used by the company as an incentive to get investors to buy them. So a generous incentive might indicate that the company itself isn't as stable as you'd like.

In many cases, the dividend yield goes up when the value of a stock goes down. So while you're optimizing your portfolio for the highest-paying dividends, you may also be selecting stocks that will drop in value, which means losses for you in the end.

That's why it's important to consider the sustainability of a dividend stock before buying it. When you're researching stocks, consider the difference between their dividend payouts and their net income.

If too much of their net income is going to investors, their business model may be unsustainable in the long term.

How Do Dividends Affect Taxes?

You'll need to take taxes into account as part of your cost of living when planning to live off your dividends.

It is possible to take earnings tax-free from dividends if your investments are in an after-tax account, such as a Roth IRA or 401(k). However, other brokerage accounts will incur taxes at different rates.

You'll need to know whether your dividends are qualified or ordinary. Qualified dividends are usually taxed at the same tax rate that applies to capital gains, while ordinary (non-qualified) dividends are generally taxed as ordinary income.

Qualified dividends may be taxed at rates of 0%, 15%, or 20%, while ordinary dividends are taxed between 10% and 37%.[1][2]

You won't pay taxes on your dividends as long as you reinvest them in typical retirement accounts.[3]

If you are paying taxes on your dividends, that's a fair chunk of your income, so be sure to plan carefully to deal with the expense.

Bottom Line

The cost of living varies widely from place to place and person to person. In Mississippi, the state with the lowest cost of living in the U.S., the median household income was $46,511 per year, while in California, it is just $78,672.[4]

Depending on the lifestyle you expect and where you live, as well as how many people you need to support, living off of dividends may or not be possible.

Remember to plan carefully and to take all of your expenses into account before investing all of your savings in dividend stocks. And always remember that every investment carries some degree of risk.

References

  1. ^ Internal Revenue Service. Investment Income and Expenses, Retrieved 5/5/2022
  2. ^ Internal Revenue Service. IRS provides tax inflation adjustments for tax year 2022, Retrieved 5/5/2022
  3. ^ Internal Revenue Service. Traditional and Roth IRAs, Retrieved 5/5/2022
  4. ^ US Census Bureau. QuickFacts: Mississippi; California Median Household Income 2020, Retrieved 5/5/2022

Jeremy Harshman is a protector of art and writing at CreditDonkey, a personal finance comparison and reviews website. Write to Jeremy Harshman at jeremy.harshman@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.

Read Next:

Best Dividend Trackers

Best Dividend Trackers

The Best Way to Invest $100

How to Invest $100

Small Investments That Make Money

Small Investments That Make Money

Income-Generating Assets

Income Generating Assets

How Much Interest Does $1 Million Earn?

How Much Interest Does $1 Million Earn

Passive Income: Practical Ideas to Build Wealth

Passive Income


Investing

How to Buy Stocks Online

Buy Stocks Online

How to Sell on eToro

How to Sell on eToro

Augusta Precious Metals Review

Augusta Precious Metals Review

M1 Finance Alternatives

M1 Finance Alternatives

How eToro Copy Works

eToro Copy Works

Stocks for Kids: Invest in Your Kid's Future

Stocks for Kids

Leave a comment about How Much Money to Live off Dividends?



How to Get Free Stocks

Free Stocks

Looking for ways to get stocks without spending a fortune? You may be surprised to find there are places where you can get stocks for free.

About CreditDonkey
CreditDonkey is a personal finance comparison website. We publish data-driven analysis to help you save money & make savvy decisions.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed on this page are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

†Advertiser Disclosure: Many of the offers that appear on this site are from companies from which CreditDonkey receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). CreditDonkey does not include all companies or all offers that may be available in the marketplace.

*See the card issuer's online application for details about terms and conditions. Reasonable efforts are made to maintain accurate information. However, all information is presented without warranty. When you click on the "Apply Now" button you can review the terms and conditions on the card issuer's website.

CreditDonkey does not know your individual circumstances and provides information for general educational purposes only. CreditDonkey is not a substitute for, and should not be used as, professional legal, credit or financial advice. You should consult your own professional advisors for such advice.

About Us | Reviews | Deals | Tips | Privacy | Do Not Sell My Info | Terms | Contact Us
(888) 483-4925 | 680 East Colorado Blvd, 2nd Floor | Pasadena, CA 91101
© 2022 CreditDonkey Inc. All Rights Reserved.