How Much Do I Need To Invest To Live Off Dividends?

How much do I need to invest to live off dividends? Working out the math to know how much money you need to invest to cover your expenses with dividends.

I have been blogging my dividend income updates since 2017 to chronicle the journey to financial independence. 

Ultimately, my goal is to earn approximately 19k per year in dividends. It works out to $1,583 per month. I increase that target by 2% annually to account for inflation.

Obviously, that is not a lot to live on per year. But I expect blog income to double my income. 

Blog income is already on par or more than monthly dividend income, and it is growing at a faster rate. So, it’s entirely possible that I will be able to earn around 38k from blogging and dividend investing combined in the future.

The only questions now are how long will it take and how much money do I need to invest?

Because I chose the Barista FIRE route and work a part-time job, I expect the journey to take longer than originally expected.

At the very longest, I plan to live off dividends within the next 20 years.

In order to achieve my goal in 20 years or less, I must know how much I need to invest.

By the end of this post, you will know how much money you need to invest to live off dividends and I will show you the calculation to find that number.

Let’s dive in.

How Much Do I Need To Invest To Live Off Dividends?

The amount you need to invest to live off dividends depends on two factors: 

• your expenses
• dividend yield

In other words, the amount you need to invest can be determined by how much you spend, and by how much dividend income a stock pays for investing in it.

Your Expenses

To figure out how much you need to earn, track your spending or use your current annual income as the target.

For the sake of this post, let’s say you need to earn $50,000 annually to cover your expenses.

So, to cover your expenses, you need to earn at least $50,000 in annual dividend income.

At this point, the amount you need to invest to live off dividends depends on the stock’s dividend yield. 

Dividend Yield

Dividend yield is a measurement of how much dividend income an investor will earn for investing their money.

To calculate dividend yield, you need to know the share price and the amount of dividend income the stock pays per share annually.

To know the dividend yield, divide the annual dividend amount by the stock price.

Let’s use Telus (T.TO) as an example. Currently, the annual dividend is $1.24 and the stock price is $26.80. If you divide $1.24 by $26.80, you will get a dividend yield of 4.63% (rounded).

Now that you know the dividend yield, you can calculate how much money you need to invest.

How To Calculate How Much Money You Need To Invest

Let’s say you need to earn $50,000 annually to cover your expenses.

At an average dividend yield of 5% annually, you will need $1,000,000 to live off dividends.

If you invest $1,000,000 in stocks that pay a 5% dividend annually, you will earn $50,000 annually.

To calculate how much you need to invest, figure out the average dividend yield of the stocks you own, and determine your annual expenses.

Then, divide your annual expenses by the dividend yield.

For example, $50,000/0.05 = $1,000,000.

If you need to earn $50,000 annually and your stocks earn 5% on average from dividends, you need to invest $1,000,000.

You Need $1,666,666.66 Invested At A 3% Dividend Yield to Earn $50,000 Annually 

If your goal is to earn $50,000 annually but you are more cautious with your investments, your dividend yield might be lower.

In turn, you will need to invest more money to earn $50,000 annually. 

At a 3% dividend yield, you would need to invest $1,666,666.66 to earn $50,000 annually. 

Why Not Just Pursue High Dividend Stocks?

At this point, you might be wondering how much money you need if you invest in high dividend stocks?

For example, what if you invest in stocks that pay a 8% dividend yield?

To earn $50,000 annually with stocks that pay 8%, you only need to invest $625,000, which is significantly less. If you invested the same as before, you could double your income to $100,000 annually.

If it seems to good to be true, it’s because it is.

Simply put, stocks that pay a high dividend are usually at risk of cutting their dividends. Either that or the market is historically low and stocks are on sale.

So, if you are going to buy stocks that pay higher dividends, you should be careful. Pay attention to the dividend payout ratio and cashflow per share.

Dividend Growth Stocks – Yield On Cost

Although it can be tempting to buy stocks that pay the highest dividends, there is a safer way to obtain high dividend yields.

It’s super easy to do, too. All you have to do is find quality stocks with long histories of paying and raising dividends for years. As long as they have earnings growth and low payout ratios to continue raising dividends, you can just hold those stocks for years.

Eventually, the stock actually pays you a higher yield than what the market currently pays. 

This is referred to as yield on cost (yoc). YOC is a measurement of the dividend yield that measures the current dividend yield divided by the stock’s original price you paid for.

To use the Telus example again, Telus currently pays $1.24 annually, which works out to a dividend yield of 4.63% based on the stock price of $26.80.

But if you purchased shares at $22 annually, your yield on cost is 5.63% annually. So, you earn 1% more annually on your money. 

In turn, you need to invest less to afford to live off dividends. 

The dividend growth, which is also a hedge against inflation, increases your dividend income annually on its own.

Hence why dividend growth stocks usually outperform the market in the long term.

How Much Do I Need To Invest To Live Off Dividends? Approximately $250,000 to $1,000,000

Based on an annual income of $25,000 to $50,000 annually, you need to invest anywhere from $250,000 to $1,000,000 to live off dividends.

On the low end, if you invest $250,000 at a 10% dividend yield, you could earn $25,000 annually. Although it is a risky endeavour to invest in stocks that pay a 10% yield, a high yield on cost could be achieved in a 10-year period with quality dividend growth stocks that raise dividends by 10% annually.

Alternatively, if you need more money annually, you could earn $50,000 annually by investing $1,000,000 in dividend stocks that pay a 5% dividend.

If you need more annually, just do the math to scale up:

Desired annual salary/dividend yield = amount you need to invest.

Final Thoughts – I need at least $397,489.54 to Live Off Dividends

Now that I understand the calculation, I can apply it to my own plan.

If my goal is to earn 19k annually from dividends, and my average annual dividend yield on cost last year was 4.78%, I will need to invest $397,489.54 to achieve my goal.

If my blogging business does not grow earnings as expected, I will need to rely entirely on dividend income to reach financial independence. 

In which case, I need around $40,000 annually to live comfortably. To earn $40,000 from dividends at an average yield of 4.78%, I would need to invest $836,820.08.

The only other factor to consider that could lower the amount you need to invest is dividend growth. 

If a company grows its dividend by 10% annually for 10 years, the dividend payment will be much more than double what it was when you originally bought the shares. Your yield on cost will be much higher. As such, it may be possible to achieve financial independence through dividend investing with a lot less money invested. 

For example, if my average yield on cost is 8% in 10 years, I will only need to have $500,000 invested to earn $40,000 annually.

In conclusion, I need between $397,489.54 to $836,820.08 invested to live off dividends.

As a recap, the formula for how much you need to invest to live off dividends is the following:

Desired salary divided by dividend yield = amount you need to invest (desired salary/dividend yield = amount to invest).

Related Posts

Live Off Dividends – Planning to Live Off Dividends and Blog Full-time

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