It’s a worthy goal, but it takes some time to achieve it.
It’s not enough to simply invest in dividend stocks. Unless you have a large amount of savings, you’ll need to invest progressively over time until you finally have a dividend stock portfolio that you can live off of.
In this article, I will share a four-step process that can ramp up your dividend income to the point that you can live off dividends.
The first step in dividend investing — or any kind of investing — is to save money. How much money you’ll need to live off of dividend income depends on your expenses. If you have, say, $35,000 in annual living costs, you’ll need to get at least that much in dividends (less any CPP or other pension income) per year to live off passive income.
If you invest your money into a TSX index fund, you’ll need to invest over $1 million to get to $35,000 per year in dividend income. That might sound like a lot, but as I’ll show in an upcoming section, you can get to $35,000 per year in dividend income with a lot less than a million invested by investing in high-yield stocks.
Step #2: Open a brokerage account
Once you’ve got some money saved up, your next step on your journey to passive dividend income is to open a brokerage account. Head down to your bank or use an online service like WealthSimple and request a brokerage account. If you go with your bank, they’ll have you sign some forms. If you use an online service, you do not even need to book an appointment; you just visit the service’s website, sign up there, and then download the app.
Step #3: Invest in high-quality dividend stocks
Once you’ve got some money saved, it’s time to start investing. Here, you have many opportunities available to you. There are Guaranteed Investment Certificates (GICs), which, these days, yield as much as 5.5%. There are index funds, which provide diversification that reduces your risk. Finally, there are individual stocks, which sometimes offer very high yields.
Consider Toronto-Dominion Bank (TSX:TD), for example. It’s a $78.71 stock with a $0.96 quarterly payout. That’s $3.84 in dividends per year, which, when divided by the $78.71 stock price, gives us a 4.8% dividend yield. At a 4.8% yield, you only need to invest $718,000 to get to $35,000 in annual passive income rather than a million.
TD Bank stock has a high yield, but amazingly, its dividend is fairly safe. TD Bank has a 48% payout ratio, meaning that its profit could fall by 50%, and it would still be able to keep paying its dividend. Fortunately, investors probably don’t need to worry about TD’s profit falling 50%. U.S. banks recently released their third-quarter earnings and delivered high, positive growth. TD’s earnings will likely be similar to those of U.S. banks, as it earns 40% of its profit in the United States.
Step #4: Repeat steps 1-3
Once you’ve begun buying dividend stocks, the only step left is to repeat steps one to three until you’re left with a dividend portfolio that can pay all your expenses. It may take a few decades to get there, but get there, you will!
Before you consider TD Bank, you'll want to hear this.
Our market-beating analyst team just revealed what they believe are the 5 best stocks for investors to buy in October 2023... and TD Bank wasn't on the list.
The online investing service they've run for nearly a decade, Motley Fool Stock Advisor Canada, is beating the TSX by 25 percentage points. And right now, they think there are 5 stocks that are better buys.
Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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.
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.
Creating a diversified portfolio, understanding the implications of dividend reinvestment plans (DRIPs) and being aware of tax efficiency are vital steps in maximizing dividend income while minimizing risks. The dream of living off dividends is attainable with the right financial planning and investment strategy.
This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.
One way to start receiving dividends is to buy stock in a company that pays them. Many companies pay dividends and several have long histories of raising payouts annually.
A well-constructed dividend portfolio could potentially yield anywhere from 2% to 8% per year. This means that to earn $3,000 monthly from dividend stocks, the required initial investment could range from $450,000 to $1.8 million, depending on the yield.
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.
By investing in quality dividend stocks with rising payouts, both young and old investors can benefit from the stocks' compounding, and historically inflation-beating, distribution growth. All it takes is a little planning, and then investors can live off their dividend payment streams.
Naturally, one of the main advantages of dividends is their potential to provide a steady stream of income, regardless of market conditions. Dividend-paying stocks are often viewed as less volatile than non-dividend-paying stocks, offering a degree of stability and predictability to your portfolio.
You can divide $68,000 by an estimated dividend yield to calculate a targeted portfolio size. So, if you're earning 2% in dividend yields, you'd divide $68,000 by 2%. The answer, $3.4 million, is the size of the portfolio needed to produce your income target.
However, this isn't always the case. If you're looking to generate $300 in super safe monthly dividend income (note the emphasis on "monthly" income), simply invest $43,000, split equally, into the following two ultra-high-yield stocks, which sport an average yield of 8.39%!
With a 10% yield and monthly payout schedule, you can get to $500 a month with only $60,000 invested. That is, $6,000 per year paid on a monthly basis. Unfortunately, most stocks don't have yields anywhere near 10%. Many do have high enough yields to get you to $500 a month with diligent savings, but don't pay monthly.
A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.
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.
How much do you have to invest to get $500 in dividends each and every month? It all depends on your portfolio's dividend yield. With a 10% yield and monthly payout schedule, you can get to $500 a month with only $60,000 invested. That is, $6,000 per year paid on a monthly basis.
This means you can secure $1,000 of annual-dividend income by investing about $11,765 spread evenly among them. Here's why they look like a good deal that could get much better by the time you're ready to retire.
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