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A Complete Guide To Building Your Dividend Income For Financial Freedom
Can you live off dividends? Let’s discuss this important topic.
Because many people ask the question.
And since the answer is yes. The purpose of this article is to provide a detailed explanation of exactly how to go about living off dividends.
Let’s get started…
Can You Live Off Dividends?
Yes. You can live off dividends.
However, it takes a combination of factors to make it happen. Specifically, you must:
- Think long-term
- Have the motivation
- Be disciplined
- Practice good money management
- Invest wisely in dividend stocks
- Manage a dividend stock portfolio
So, stick with me. Because I’m going to cover all of these points.
Then you will know exactly how to live off dividends too! Let’s keep moving…
PinDisclosure: At no cost to you, I may get commissions for purchases made through links in this post.
5 Step Guide To Living Off Dividends
Ready or not. Here’s your 5 step plan about how to live off dividends. It serves as an outline for the rest of this article.
1. Create The Right Mindset
We will start with some personal background information. Just in case you are wondering how we got to the point of living off of dividends.
This area will improve your understanding. About exactly how long-term thinking, and self-discipline come into play.
2. Develop The Motivation
Then, we will cover how to develop your motivation to live off dividends. And, why you should.
3. Practice Good Money Management
Next up, we will discuss how to manage your finances leading up to living on dividends. Plus, a way to calculate how much money you are going to need to save in advance.
My example will show you how to turn $575 into $1,000,000 and live off dividends forever.
4. Invest In Dividends Stocks
Fourth, we will cover investing in dividend stocks.
Specifically, how to go about it. Because buying only the best dividend stocks. And buying them at the right time is so important.
5. Manage And Monitor Your Dividend Stock Portfolio
Finally, you must know the best techniques. To manage your dividend portfolio before and during your dividend retirement years.
That’s it. Follow these 5 steps. And yes you can live off dividends!
We will cover each of these topics in greater detail.
But first…
A little personal background. To provide the proof that living off dividends is possible. And how thinking long-term and self-discipline come into play.
Here goes…
Example Of Living Off Dividends
We have been living off dividend income for several years. So yes, I think it is entirely possible to live off dividends.
Why? Because we are proof that it can be done. However, living off dividends takes knowledge, planning, and time.
But, you can do it too.
Not Just Living Off Dividends – Making Some Earned Income Too
PinNow, I will admit that both my wife and I also have earned incomes. Those incomes come from secondary occupations and part-time work.
We only do the work we choose to do now. Not the high-stress, long hours we did in the past. And of course, we make much less money.
Almost all the earned income we make goes into qualified retirement accounts. And, the rest of that income goes to pay taxes.
There may be a little money left. But what is left is much less than our expenses.
So, we aren’t living off earned income. We are living off investment income. More specifically, we are living off dividend income.
Generating an income from side hustling or working part-time is a good strategy for supplementing dividend income. Plus, we like staying busy.
You should consider it too. It can help you achieve your dividend retirement plans sooner.
But We Could Be Living Off Dividends – Honest
Even if both my wife and I quit working today, we could cover our expenses. And live off of dividends.
However, we could no longer fund our retirement accounts from our working income.
It is important to note that we didn’t create this situation overnight. We both started investing at a young age.
And, I focused on dividend growth stock investing more than 20 years ago.
With an eye toward funding early retirement with dividend income. That type of discipline and forward planning is what makes living off dividends possible.
As I said, you may want to consider having some part-time or side income too. It will accelerate your journey to living off dividends.
My Wife Didn’t Know We Were Living Off Of Dividends
PinNext, I want to further our personal story before I get started with the 5 steps for living off dividends…
And it may not surprise you. That I handle all of the personal-finance activities in our family.
As a result, I make sure the bills are paid on time. And verify we have enough money in our bank accounts to get through the month. Finally, I research, monitor, and manage our investments.
So, a few years ago my wife was working. And I was trying to get a part-time college teaching side gig off the ground. I wasn’t teaching a lot at the time. Therefore, I wasn’t making much money.
One day, my wife happened to look at her pay stub from her employer. And she noticed that the net pay from her 2 weeks of work was just a few dollars. As I mentioned, most of her income was going to an employer-sponsored 401(k) plan.
So she asked me, “What are we living on?” And, my answer was: “We are living on dividends”.
Okay. Enough about us.
Let’s transition to the 5 steps. Included in today’s guide to show anyone that is interested, that they too can live off dividends…
1. Create The Right Mindset For Living Off Of Dividends
PinI’m sorry to tell you that living off dividends takes time to accomplish. Unfortunately, it’s not a get-rich-quick scheme.
Think Long Term
That’s why it is important to think long-term. And start early for a successful dividend retirement plan.
Plus, living off dividends may require a large investment portfolio. Which takes time to build.
The size of that portfolio depends mostly on your living expenses. To make this point, I will show you how much money you need to live off dividends a little later.
Ready to live on dividends? Then, enough said!
Let’s keep moving along with the details of how to live off dividends so you can do it too.
Be Self-Disciplined
Let’s continue with the big picture view. Before we dig into the details…
In my opinion, to live off dividends you must be disciplined and consistent in your approach.
By taking action now with your finances. To prepare for living off dividends.
Then you must execute a dividend stock investing plan to achieve your goal.
Finally, time is your best friend when building a dividend income for early retirement. So, start early in life.
If you haven’t started yet. Then the best time to start is NOW.
Can you live off dividends? I think so. Let’s keep moving!
2. Develop The Motivation For Living Off Dividends
PinFunding retirement is not what it used to be. This is why a dividend retirement portfolio and strategy can be very useful.
Let’s explore what has changed with retirement planning. And why living on dividend income can fill the gap that has been created.
Because understanding the power of dividend investing. In my opinion, is very motivating.
Pension Plans & Social Security Vs. A Dividend Retirement?
Perhaps your parents or grandparents could rely on a company pension and social security to fund a comfortable retirement lifestyle.
PinBut, company pension plans are becoming a thing of the past. Hopefully, social security will be there for us?
I am planning on it. But you never know.
Living Off Dividends From Dividend Stocks
So, living on dividend income from dividend stocks can be a big piece of your retirement finances. However, living off of dividends doesn’t have to be an all-or-nothing deal.
For example, my wife and I work in 2nd careers. We plan to work at least part-time for the foreseeablefuture. And I think most of us can planon something from social security.
So let’s not make creating a dividend retirement plan harder than it needs to be. As a result, we will consider other income sources in our calculations.
The Benefits of Dividend Paying Companies
I have been investing in dividend growth stocks for many years. And before that, mutual funds that paid dividends.
I like buying and holding a portfolio of dividend-paying stocks. Here are several reasons why I like to do this. And why this approach supports a dividend retirement plan.
Plus, the motivation to get started. And keep going…
Real Cash For Living Off Your Dividends
With dividends you get real cash. You and I can spend that cash.
Or, reinvest it without touching the original investment. In learning how to live off dividends, I am going to show you how both aspects are important parts of the plan.
Good dividend growth stocks increase their dividends on an annualbasis. Dividend increases provide theinvestor with more cash flow each year.
By investing fresh capital in dividend stocks, reinvesting dividends, and receiving dividend increases you can create dividend income for life.
That is the goal.
Living off dividends in retirement provides cash without the need todecide which of your assets to sell and when.
Most noteworthy, history suggests that 40% of the stock market’s long-term total return comes from dividends.
Dividend-Paying Companies Work Hard For The Investor
By selecting solid dividend growth stocks and holding them for the long term, the company does most of the work; not the investor.
Dividend payments and dividend increases provide evidence of acompany’s financial strength.
Payment of consistent dividends often instills financial discipline within the company and its management team.
Finally, solid dividend-paying companies are frequently household names. We use their products and services each day.
Investment Costs And Inflation
PinBuilding and maintaining a productive dividend stock portfolio can be done for virtually zero investment costs.
Dividend increases by the companies we invest in will offset the effects of inflation.
Hopefully, you find the benefits of dividend-paying stocks motivating. I know I do.
However, to present a balanced view. There are risks to consider…
And, the strategy has its drawbacks and detractors.
Now, I think the benefits far outweigh the risks. But again, I want to present a balanced argument for your consideration.
Why? Because planning to live off of dividends is a big decision. And you should be armed with all of the facts.
So, let’s discuss the risks of dividend stocks and dividend investing next…
Diversification
Dividend-paying stocks tend to be clustered in only a few sectors ofthe stock market. This situation canmake it difficult to achieve proper investment diversification.
When calculating how much money to live off dividends, an individual may find they need to put all of their assets in dividends stocks. Once again, this can lead to inadequate diversification.
Dividend Yield & Risk Trade-Off
To achieve the goal of living off dividends, it is easy to fall into the high dividend yield trap. Yes. Higher dividend yields are nice.
In the short term, they can provide more dividend income for living expenses. And reduce the need for a larger dividend stock portfolio.
But higher dividends normally have a higher risk of being reduced. And dividend reductions in a portfolio will destroy a dividend retirement strategy very quickly.
So, it’s important not only to focus on dividend yield but dividendsafety and dividend growth potential. Besides,these other factors will lead to better long term investment returns.
Time, Skill & Discipline Required To Live Off Dividends
Running a do it yourself dividend stock portfolio takes time and skill.
Sure, you can live off dividends by investing in 1 or 2 exchange-traded funds. However, I think individual dividend-paying stocks offer higher dividends when taking into account investment risk.
Finally, you need to be disciplined. We covered this in step 1. But it deserves another mention.
Because you can’t bail out when the stock market drops. Or change your mind and start chasing the next hot investment.
If you do these things, living on dividends in retirement will never become a reality. Thus, you must have the discipline to make a plan and stick to it.
Step #2 Topic Area Recap – The Motivation For Living Off Dividends
We have covered a lot in step 2. So, allow me to summarize and recap…
PinCan you live off dividends?Yes. I believe so. Find your motivation to do so.
Dividends can be an important part of your retirement income strategy. Furthermore, dividends from dividend-paying stocks offer many important advantages for an investor.
Finally, there are some drawbacks to a dividend investing strategy. So, consider the pros and cons for yourself. The choice of living on dividend income is yours.
What is up next in learning if you can live off dividends?
Before we start investing in dividend stocks, it is important to consider some other areas of your finances. Let’s address them now.
3. Practice Good Money Management
PinWhen living off dividends, it is best to put the odds of success in your favor.
So, here are a couple of areas to consider while you are working and preparing for living off dividends in retirement.
Eliminate debt
PinIf you want to retire on dividends, it is important to avoid consumer debt. So, live within your means and get all credit card debt paid off.
Buy used cars and drive them for a long time. This will help to eventually eliminate car payments.
Your mortgage debt is okay. Shop around for the best rate when applying for a mortgage.
Interest rates are at all-time lows. So, if you already have a mortgage, consider refinancing to save money if you haven’t done so already.
However, do not refinance and take cash out. Your home is not an automated teller machine.
Ultimately, being mortgage-free will be a big plus when you are living off dividends. Pay your mortgage off based on its terms. And you should be fine.
Finally, keep a close eye on your credit score. Be sure to monitor it on a regular basis. You can check yours for free using Credit Karma.
Determine Your Annual Expenses
To know how much dividend income you will need, you need to know howmuch money you spend.
There are a couple of ways to determine what your expenses will be inretirement.
Living Off Dividends – Estimating Expenses Using The 80% Rule
This rule states that you need 80% of your earned income in retirement.
Why 80%? The rule assumes someof your costs will be eliminated once you retire. For example, you will not have the costsassociated with commuting to and dressing up for work.
The 80% rule is easy to apply.It can give you a quick answer. But,let’s look at another method.
How To Live Off Dividends – Better Yet, Track Your Expenses
Tracking your expenses monthly is a great habit. Expense tracking allows you to know exactlywhere your money is spent.
To estimate your expenses, review your annual expenses during yourworking years. Then remove expenses nolonger necessary in retirement. Ialready mentioned commuting and clothing costs.Perhaps you won’t be dropping $7 a day on lunch out with your co-workerseither.
Next, don’t forget to add in new spending now that you are free of that 9 to 5 job. Higher travel costs come to mind. Also, add in health insurance costs if you are not qualified for government-sponsored health care.
Will you still have debt payments?Hopefully not, but be sure to take those into account. Finally, don’t forget about income taxes.
Personal Capital is a great tool to track and manage your total financial picture. Best of all, Personal Capital is free to sign up and use.
How To Live Off Dividends – Other Income Sources
So now you know how much your expenses are. But before we move on, subtract from yourestimated expenses other sources of income you may have.
Consider social security income. And don’t forget pension income if you arelucky enough to have that. Maybe youwill have other sources of income, like a part-time job or a side-gig.
Remember that a little extra income can go a long way to being able tolive off your dividends sooner rather than later.
Living Off Dividends Calculator – An Example, Part 1
PinOnce you know your expenses and other income sources. Then you can determine how much stock you need to live off dividends.
I’m going to use an example based on an average US household to run my “live off dividends calculator”.
The Sources For Our Living Off Dividends Calculations
According to a USA Today study, the average US household spends $67,801 per year.
Furthermore, based on a US News report the average social security recipient receives $17,532 per year.
Finally, I’m going to assume this household preparing to live off dividends has a $10,000 income from part-time work.
Now I can figure out how much dividend income this family will need to live off their dividends. It is their expenses minus their social security income minus their income from part-time work.
The numbers in your calculations will be different. But, this will give you the idea of how to go about it.
The First Living Off Dividends Calculation You Need
To run the living off dividends calculations…
- Start with $67,801 estimated annual expenses
- Subtract out $17,532 in social security income
- Subtract out $10,000 income from part-time work
This gives us $40,269. I’m goingto round this answer to $40,000 to make it easier to remember.
So, our family requires $40,000of dividend income each year to cover their expenses and support their standardof living.
It is important to note that if our family can reduce expenses, the less money they will need to live off of dividends. And, the sooner our family can achieve dividends for life.
How Much Do YOU Need To Live Off Dividends?
The answer is, that it depends on your specific situation. Use the calculation model I just went through for our average US household.
Put in your own numbers. And then you will know exactly how much money YOU need in dividends for living.
Saving, Investing & The Power of Compounding Dividends To Live Off Of
PinAs I said at the beginning, living off dividends is not a get richquick scheme. It is important to start savingand investing as early in life as possible.
Rarely do good things in life come quickly and easily. The ability to live off dividends is no different.
Living Off Dividends Calculator – An Example, Part 2
Let’s run part 2 of the living off dividends calculator. This isn’t a perfect analysis, nor is itintended to be. Besides, everyone’ssituation is different.
The purpose of this example isto provide a thought process so you can do your living off dividendscalculation.
In that same USA Today study I just referenced, the average UShousehold has $74,664 of income. This serves their expense needs of $67,801.
The difference leaves $6,863, or $575 per month to invest in dividendstocks. We will get to investing individend stocks in just a moment.
Now, let’s invest that $575 per month.$575 invested monthly at a 9% annual rate return will generate aninvestment portfolio of $1 million in 29 years.
If our family can reduce their expenses and invest $750 per month at a10% annual return, the number of years to get a $1 million portfolio drops to25.
The Moral Of This Story About Living Off Dividends
PinYes. I know it seems like a long time. But, think of it this way…
If you are 30 years old and can generate a $1 million portfolio in 25 years, then you can retire and live off dividends at the age of 55.
So, starting earlier and saving more are the best things you can do if you want to live off dividends in the future. And, you have complete control when you start and how much you save.
Every dollar saved adds up. We save on all of our online purchases using Rakuten. By signing up and making your first purchase, Rakuten also gives you $10 cash. It’s free money.
Finally, you can’t control investment returns. But history shows that 9-10% annual return from dividends stocks is entirely possible over the long run.
Step #3 Topic Area Recap – Preparing To Live Off Dividends By Practicing Good Money Management
Can you live off dividends? Of course, you can. But you need to be motivated and you need to prepare.
Earlier, we talked about your mindset and motivation to live off dividends. Specifically, why and how dividends can be an important part of a dividend retirement strategy.
Then in this section, we discussed some important things to prepare for living off dividends. Specifically, good money management practices. They are:
- Eliminate consumer debt
- Calculate your annual expense requirements net of other income sources
- Establish a monthly investment amount and start investing in dividend stocks
- Spend less, save more to speed up your progress
Back To Our Example – Living Off Dividends Calculator
We walked through the calculations for a typical US household. Our make-believe family needs $40,000 individend income. Now they need to builda $1 million investment portfolio by saving and investing each month.
$40,000 of annual dividend income divided by a $1 million dividend stock portfolio tells us our family needs a 4% dividend yield. This is entirely possible.
If you run your calculations and the dividend yield is higher than 5%, the living-off dividends strategy becomes riskier and more difficult to achieve.
Making Living Off Dividends Less Risky & More Attainable
To reduce your dividend yield requirements or the amount you need to save to live on dividends, do a combination of the following:
- reduce your expenses
- save money and invest more
- start investing earlier
- work longer
All of the above actions will create a larger dividend stock portfolio for you to live off of.
And don’t forget to consider some part-time or side hustle income once you retire. By doing this you can reduce the amount of money required to live off dividends and retire on dividends sooner.
PinSo now, we are motivated and getting prepared to live off dividends. By setting the right foundation.
So, what’s next?
It is time to start investing in dividend stocks. I have many resources to help you with thisat Dividends Diversify. I will highlightthem as we go.
4. Invest In Dividend Stocks
PinLet’s get started with a few of the basics. It’s important to learn about dividend stocks and dividend stock investing if you are planning to live off of dividends.
What Are Dividends?
A company can do several different things with the cash they have frommaking a profit. They can
- Payoff debt
- Reinvest in their business
- Buyback their stock in the stock market
- Pay their investors a cash dividend
So, a dividend is a cash payment to you as an investor in a company’s stock. That cash comes from the profits made by the business.
A company is not required to pay a dividend. And, before each dividend payment, thecompany’s board of directors must approve it and declare it.
What Types of Investments Pay Dividends
PinThere are several different types of investments that pay dividends. Funds that pay dividends are a good choice for some. So, let’s start there.
Mutual Funds & Exchange-Traded Funds
Mutual funds – Many mutual funds pay dividends. These funds hold a collection of investments that allows an investor to get instant diversification by purchasing just one investment holding.
Exchange-traded funds (ETFs) – Exchange-traded funds are similar to mutual funds. And there are plenty of good dividend-paying ETFs.
The main difference is that an ETF tracks an index. And, ETFs trade on the stock market like an individual stock.
You can learn more about ETFs and read about one of my favorite dividend-paying ETFs here.
Be sure to check these articles out. And learn more about how ETFs can be an effective part of your dividend growth investing strategy for income and income growth.
Special Types Of Stock
But, our real focus in this article is how to live off dividends byinvesting in individual dividend-paying stocks.
REITs – REIT stands for Real Estate Investment Trust. It refers to when a company owns, bankrolls, or manages income-creating real estate. The rent that is generated from each property is distributed to the real estate shareholders as dividends.
Some people try to live off REIT dividends. Because REITs offer higher dividend yields.
But, I think that is too risky. Living off REIT dividends alone does notprovide enough diversification.
You can read more about REITs below.With an article about a great real estate investment trust to invest in.
My favorite REIT: Realty Income – The Monthly Dividend Company
Preferred stocks – Preferredstock is a hybrid security that has a mix of bond and common stockcharacteristics.
The investor doesn’t have the capital appreciation or dividend growth potentiallike common stock. So, in exchange, theinvestor normally receives a higher dividend yield.
Common Stocks That Pay Dividends
By owning the common stock of a company, you are a part-owner in that business. And, participate in all the potential rewards and risks that go with ownership. One of those rewards includes dividend payments.
The best stocks that pay consistent dividends are the focus of this article.
In my opinion, this investment type is the best for living off dividends. Why? Because you get to pick the stocks that pay an appropriate dividend amount regularly. And you pick the stocks that increase those dividends each year.
So, we want to invest in and have a plan for living off stock dividends. Then, how do we find those stocks and how dowe pick them? We are going to cover thattopic now.
How To Find Stocks That Pay Dividends
PinI have an in-depth article on how to find and select the best dividend stocks. Here are some of the highlights from that article. Be sure to check it out later for more information.
To get started, here are a some sources to find good dividend-paying stocks.
Dividend Kings, Dividend Aristocrats, and the Dividend Achievers list– These groups of companies have increased their dividends many years in a row.
Simply Investing – Simply investing is a service that provides high-quality dividend stock recommendations. Including an interactive data base for finding, selecting, and buying the best dividend stocks.
Dividend stock screeners – Yahoo Finance has a dividend stock screener that I use periodically to generate dividend stock investment ideas.
Motley Fool – The stock advisor from Motley Fool is an excellent resource. They have a solid long-term track record dating back to 2002.
Morningstar – This premium investing service is hard to beat. I’ve been using Morningstar for about 20 years.
Their insight and analysis are right on for finding dividend stocks. And improving one’s investment knowledge. When it comes to investing, never stop learning.
Dividends Diversify model stock portfolio – Last but not least, my very own Dividends Deluxe model stock portfolio. It includes about 40 dividend stocks that I own and review on a periodic basis.
You can stop by here at Dividends Diversify anytime. I analyze and assess these dividend stocks soyou don’t have to!
How To Live Off Dividends – Picking The Best Dividend Stocks
Now, we know how to find a good dividend stock. But, we want to pick the best ones to achieve our goal of living off stock dividends.
Furthermore, I have several criteria I would like to share in order to select the best dividend stocks for your living off of dividends portfolio.
PinThe Business
Business model – How does the company make money? Typically, dividend-paying companies provide essential services and products. Food, beverages, electricity, water, and natural gas come to mind immediately.
Business strategy – How does the company plan to grow?
Dividend Metrics – Dividend Yield
Dividend yield – This is acalculation of the percentage of dividend per share received relative to thestock price. For example, if you buy ashare of stock for $80 and that company pays $2 a year in dividends yourdividend yield is $2 divided by $80, or 2.5%.
The dividend yield is a veryimportant metric. Remember ourexample family needs a dividend stock portfolio that yields 4%.
Pick dividends stocks with dividend yields that are too low and our family won’t have enough dividend income to live off of. On the other hand, picking dividends stocks with high dividend yields may be too risky. For these reasons, I prefer stocks that have a dividend yield of 3-5%.
Dividend Metrics – Dividend Growth
Dividend growth rate – By investing in stocks that continually increase their dividend, our cash flow goes up without needing to do anything. The dividend increases offset the effects of inflation on our expenses.
To calculate the dividend growth rate on an annual timeframe, take thecurrent year’s dividend per share divided by the prior year’s dividend pershare and subtract 1. This will give youthe dividend growth rate compared to the prior year.
I like to look at the historical dividend growth rate over 1, 3, 5, and 7 year periods to understand what has been happening with a company’s dividend growth both short term and long term.
These calculations are a little more complex. I use a financial calculator to perform them.
Consecutive years dividend growth – How many years has the company increased its dividend in a row?
Dividend aristocrats are companies that have increased their dividendsfor at least 25 years in a row. DividendKings have consecutive dividend increase streaks of 50 years or more.
Take note that the lists of Dividends Aristocrats and Dividend Kingsare great places to look for dividend stocks.
Dividend Metrics – Policy & Payout Ratio
Dividend policy – Some companies have a dividend policy statement or stated objective. This is helpful, but not necessary. Oftentimes the dividend policy is linked to a dividend payout ratio.
Dividend payout ratio – Thedividend payout ratio is a measure of how much a dividend stock pays individends relative to their earnings and cash flow. Thedividend payout ratio is another very important metric.
Lower dividend payout ratios are generally better. A lower ratio provides more dividend safety. Itdecreases the chance a company will cut their dividends when they have a badyear or two.
Look At The Business Fundamentals
Revenue growth trend – Higher dividends are paid from higher profits. And, higher profits come from a rising revenue stream.
You may be living off of stock dividends for a long time. So, you want companies that can grow over the long-term
Earnings trend – Higher profits can also come from other areas than growing revenues. More profitable products, cost reductions, and price increases can increase a company’s profits. These are all important factors that a good company will work on year after year.
Financial position – We wantto avoid dividend stocks from companies that are on shaky financialground. 2 things I look at are the company’slevel of debt and its credit ratings.Lower debt levels and higher credit ratings are generally better. They increase dividend safety.
Try Not To Over Pay For Dividend Stocks
Stock valuation – We don’t want to overpay for our dividend stocks. The value of a stock is important when we make our investments.
But, this is a tricky area. The best dividend growth stocks rarely come at cheap valuations.
So it is best to buy shares consistently every month. This is called dollar-cost averaging.
And, when the next bear market in stocks comes, keep buying. This is when you will get the best prices andthe highest dividend yields. If you havepicked solid dividend-paying companies, their stock prices will eventuallyrecover.
And remember, you will be living off dividends. Not ever selling your dividend stocks.
So, the only price that matters is what you pay when you buy a dividend stock. The price at any point in time after that is mostly irrelevant.
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PinHow Many Dividend Stocks Do You Need To Own If You Want To Live Off Dividends?
Okay, how many stocks are required in your portfolio? This is debatable. If you ask 3 different investors you might get three different answers.
Academic Research Suggests
Academic research suggests 20 – 25 stocks will achieve the greatest diversification with the least number of holdings.
Fewer than 20 dividend stocks and your investment risk gets significantly higher. But adding more than 25 stocks brings very little additional benefit from diversification. Also, more stocks increase the time and complexity required to manage your living off dividends stock portfolio.
Strive For Diversification Among Sectors
Just be sure to have 20-25 stocks from different industries and different sectors of the stock market. For example, do not buy all your stocks from the utility sector.
Invest in several industries and sectors. Here are some examples of different sectors where good dividend-paying companies can be found:
- Utilities
- Consumer goods
- Health care
- Technology
- Industrial goods and services (eg. machinery & equipment)
More of these sectors are understandable on the surface.
How To Buy A Dividend Stock
I get this question a lot. I will publish a dividend stock analysis about one of my dividend-paying companies. Let’s say, Apple, for example. Or, telecommunications company AT&T.
PinApple and AT&T are 2 stocks in the technology sector. And they are members of the Dividends Deluxemodel portfolio.
Apple has a low dividend yield and a higher dividend growth rate. On the other hand, AT&T has a much higher dividend yield and a lower dividend growth rate. But, both are suitable for a dividend growth stock portfolio.
For Beginning Investors
A new investor will read one of these reviews and get excited aboutinvesting in stocks for the first time.So they ask, how do I buy shares?
Here’s how to buy shares of stock…
Investors most commonly buy and trade stock through stockbrokers. The investor decides whether to go through anonline brokerage firm or a face-to-face broker.Most stock trades by individual investors are made online these days.
There are a couple of online stock brokers that I recommend. You just need to open up an account.
Then transfer some money into your newly opened brokerage account. Finally, buy shares of the dividend stock of your choosing.
You can buy as few as one share or buy more if you like. So you do not need a lot of money to getstarted.
Zero Commission Online Stock Brokers
As I said, you do need a brokerage account. Webull, Robinhood, and others allow you to trade stock for free. That means no commissions are charged for your purchase of shares.
Okay. We are ready for the 5th and final step in today’s guide.
Let’s do it…
5. Manage And Monitor Your Dividend Stock Portfolio
So, you are now buying and owning a portfolio of dividend stocks. Each month you are taking your extra cash andusing it to purchase shares in 1 or more dividend stocks of your choosing.
But there is a little more work to be done. First of all, you are going to startcollecting dividends. Hooray!
But you are still working and you are not living off dividends yet. So what do you do with the dividends that you are collecting? The answer is, to reinvest them.
Furthermore, as time goes on, your portfolio is going to get out of balance. And, you will need to handle that little task too.
I will explain that in a moment. But first, let’s fully understand dividend reinvestment.
Reinvesting Your Dividends
You have a couple of options for reinvesting your dividends.
Automated Dividend Reinvesting
First of all, you can automatedividend reinvesting. What thismeans is that you tell your brokerage firm to automatically reinvest thedividends paid by a company back into that company’s shares.
The advantage of automated dividend reinvesting is that once you setup, you can forget it. And your cashfrom dividends is put back to work in your dividend stocks right away.
On the other hand, investment decisions are taken out of yourcontrol. You may automatically reinvestin shares of an overvalued stock. Or, astock you own too much of already.
Manual, Lump Sum Dividend Reinvesting
The second option is to let your dividends accumulate in cash.
And then when you are making your monthly cash purchases add your dividends collected to the amount you are saving each month. Then, put that money into the stocks of your choice.
The Dividend Reinvestment Choice Is Yours
Either of these dividend reinvestment methods is fine.
It’s a matter of personal preference. And by all means, if you will be tempted to spend your dividends, reinvest them automatically.
Finally, when your dividends meet your expense needs, stop reinvesting them.
Why? Hopefully, this is obvious by now.
At that point, you will be able to live off your dividends. And, you will no longer want to reinvest them.
To sum up, reinvest dividends until you need them to pay bills. Then take them in cash.
Rebalancing Your Dividend Stock Portfolio
PinOnce or twice a year you should look at the values of the stocks inyour portfolio. You know that you needabout 20-25 stocks for adequate diversification.
So, make sure that no one individual stock makes up an oversized position in your portfolio. In a perfect world, if you had 25 stocks each would be worth 4% of the total value of your how-to live-off dividends stock portfolio.
But, it’s not a perfect world.So, it’s good to set a maximum percentage and make sure no individualstock exceeds that maximum level. Let’ssay 10% for sake of argument.
What do you do if a stock starts to reach its maximum percentage?
Either sell some shares and use the proceeds to buy other dividend stocks. Or, stop investing in it and try to increase the value of your other stocks with new money. That money can come from your monthly savings and accumulated dividends.
Protect Your Living Off Dividends Portfolio With Diversification
What you don’t want is one stock getting too big. If the company runs into business troubles, it can blow a hole in your dividend stock portfolio.
Diversification provides protection. And if you pick the right stocks, this probably won’t happen.
But it can. General Electric and Kraft-Heinz are recent examples of companies that ran into trouble and had to reduce their dividends.
Topic Area Recap – Building Your How To Live Off Dividends Portfolio
Can you live off dividends? Forsure you can. But, you must learn how tobuild and maintain a dividend stock portfolio.
And, we covered a lot about dividend investing in this section. But it comes down to just a few things.
First of all, identify, select and buy the right dividend stocks each month. Furthermore, reinvest the dividends youreceive. Finally, periodically rebalanceyour portfolio so no one stock becomes too large.
Let’s now wrap this up with a few key points to take away and remember.
Wrap Up & Key Success Factors For Living Off Dividends
PinFirst of all, here are the major topics covered in this article:
- Why you would want to live off dividends – your motivation
- Some steps necessary to prepare for living off dividends while you are working
- How to execute a dividend stock investing plan to achieve your goal of living off dividends
Furthermore, here are key factors that will lead to success in living off dividends in retirement:
- Start dividend stock investing when you are as young as possible
- Eliminate consumer debt while working
- Estimate the annual expenses you will need to cover with dividends
- Determine how much money you need to live off dividends and meet your income needs
- Learn how to identify and select the best dividend stocks for your investment dollars
- Save your excess cash and invest in dividend stocks every month
- Reinvest all of your dividends received back into your dividend stocks
- Rebalance your dividend stock portfolio periodically so no one stock gets too large
Then when you meet your goal and dividend income covers your expenses:
- Stop reinvesting your dividends
- And, enjoy living off your dividends
PinCan You Live Off Dividends?
Yes. You can live off dividends.
First of all, find your motivation and stay disciplined with your dividend retirement strategy.
Run your living-off dividends calculations. Find you out how much money YOU need to live off dividends. Practice sound money management.
Furthermore, get busy preparing to live off dividends today so you can do so in the future.
Finally, build and manage your dividend stock portfolio so you too can retire on dividends.
Further Reading To Make Your Dividends For Life Early Retirement Plan A Reality
- Learn about a soon-to-be dividend millionaire
- My friend Trent’s goal of living off dividends someday
My Favorite Dividend Retirement Planning Resources
Throughout this article, I mentioned many ideas, tools, and resources that have helped me on my journey to living off dividends. In different ways, products and services just like these provide so much value to your finances.
So, I have summarized them here for your convenience.
- Manage all your finances with Personal Capital for free
- The Simply Investing Report for dividend stock picks
- Morningstar investment research and analysis
- Motley Fool Stock Advisor
- Save money with Rakuten & get $10 cash now
- Check your credit for free with Credit Karma
PinAuthor Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.
Can You Live Off Dividends? I Say Yes You Can!
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