Live Off Dividends: How Much Money Should You Invest?

Living off dividends

Wouldn’t it be nice to not have to worry about maintaining a job to get paid? As much as it may sound like a fantasy for some, it is possible and something that a lot of people have managed to do by knowing how to make it happen and having enough discipline.

In this post, you will learn exactly how you can achieve this goal and we will leave it up to you to make it happen.

How much money do you need to live?

Before we get into how you can make enough money from dividends to cover your expenses, the first thing to do is understand how much money you need to support your lifestyle. This is the most important part of the process as it gives you a tangible target to aim for, which you can then breakdown and start progressing toward.

The simplest way to answer this question is to determine your monthly expenses. This includes the cost of living expenses such as rent, food, transportation and entertainment. It also includes your debt repayments if you have any outstanding debts.

Living expenses

Once you have your total monthly expenses, simply multiply it by 12 to get your yearly budget.

Now that you know how much money you need each year to cover your costs, the next step is figuring out how much of this amount can be funded through dividend income. This isn’t an exact science and will vary depending on how aggressive or how conservative you are.

The Magic Formula

Once you figure out the target income that you need to receive from your stock dividends, it is time to apply the magic formula that tells you how much you would need to invest to achieve this amount.

Investment required to live off dividends = desired annual dividend income/stocks average dividend yield.

Note that there are other factors to consider such as taxes and the natural growth of dividends which will be discussed below.

Let’s break this down, say that you want to make $60,000/year from dividends. Now let’s say that you are investing in stocks that are paying a 5% annual dividend yield.

60,000/0.05= 1,200,000

With these numbers, it will require you to have $1,200,000 invested to achieve your target of $60,000/year.

You may ask, "what if I make more than 5% from dividends?". In that case, the amount you will have to invest will be lower. It is important that you keep in mind that when it comes to investing in dividend stocks, the higher the yield the more risky the stock is. For this reason, if you see stocks whose yield seems too good to be true, it’s probably because they are risky companies that are paying too much in dividends and may run into liquidity problems.

Outside of this formula, discussed below are additional factors to consider when determining how much money you need to invest to live off dividends.

Taxes

Unfortunately, you can’t keep all the money you earn from your dividend stocks. Like with other types of income, you have to report it and pay tax, or else you can get in trouble with your tax agency.

The amount of tax depends on what country and state you live in. It is best to look online at what the tax rates are in your location. The way dividend taxes usually work is you have to pay the government a percentage of your dividend. For example, if you made $100 in dividends and the tax rate is 22% you would have to pay the government $22 and you would take home $78.

If you want to apply taxes into the magic formula you can do it in the following way:

Investment required = (60,000/(1 – tax rate))/dividend yield

Dividend Growth

If you invest in good dividend stocks or ETFs over time, dividend payments tend to increase as the company makes more money and decides to distribute it amongst shareholders. Therefore it’s common to see your dividend payments increase over time.

Here is a list of the famous dividend aristocrats who are companies that have increased dividends for 25 consecutive years or more. You can see how their dividend payments have increased over the years:

COMPANYSECTORYEARS OF DIVIDEND GROWTHDIVIDEND YIELD (AS OF OCT. 29)
3M Co. (MMM)Industrials633.3%
A.O. Smith Co. (AOS)Industrials281.5%
Abbott Laboratories (ABT)Health care491.4%
AbbVie Inc. (ABBV)Health care494.5%
Aflac Inc. (AFL)Financials382.5%
Air Products and Chemicals Inc. (APD)Materials392.0%
Albemarle Corp. (ALB)Materials270.6%
Amcor PLC (AMCR)Materials383.9%
Archer-Daniels-Midland Co. (ADM)Consumer staples472.3%
AT&T Inc. (T)Communications services368.2%
Atmos Energy Corp. (ATO)Utilities342.7%
Automatic Data Processing Inc. (ADP)Information technology461.7%
Becton, Dickinson & Co. (BDX)Health care491.4%
Brown-Forman Corp. (BF-B)Consumer staples371.1%
Cardinal Health Inc. (CAH)Health care344.1%
Caterpillar Inc. (CAT)Industrials272.2%
Chevron Corp. (CVX)Energy344.7%
Chubb Ltd. (CB)Financials281.6%
Cincinnati Financial Corp. (CINF)Financials612.1%
Cintas Corp. (CTAS)Industrials370.9%
The Clorox Co. (CLX)Consumer staples452.9%
The Coca-Cola Co. (KO)Consumer staples593.0%
Colgate-Palmolive Co. (CL)Consumer staples592.4%
Consolidated Edison Inc. (ED)Utilities474.1%
Dover Corp. (DOV)Industrials651.2%
Ecolab Inc. (ECL)Materials290.9%
Emerson Electric Co. (EMR)Industrials592.1%
Essex Property Trust Inc. (ESS)Real estate272.5%
Expeditors International of Washington Inc. (EXPD)Industrials270.9%
ExxonMobil Corp. (XOM)Energy375.5%
Federal Realty Investment Trust (FRT)Real estate493.6%
Franklin Resources Inc. (BEN)Financials403.6%
General Dynamics Corp. (GD)Industrials302.3%
Genuine Parts Co. (GPC)Consumer discretionary652.4%
Hormel Foods Corp. (HRL)Consumer staples552.3%
Illinois Tool Works Inc. (ITW)Industrials502.1%
International Business Machines Corp. (IBM)Information technology255.2%
Johnson & Johnson (JNJ)Health care592.6%
Kimberly-Clark Corp. (KMB)Consumer staples483.5%
Leggett & Platt Inc. (LEG)Consumer discretionary503.6%
Linde PLC (LIN)Materials281.3%
Lowe's Companies Inc. (LOW)Consumer discretionary471.4%
McCormick & Co. (MKC)Consumer staples351.7%
McDonald's Corp. (MCD)Consumer discretionary442.3%
Medtronic PLC (MDT)Health care432.1%
NextEra Energy Inc. (NEE)Utilities251.8%
Nucor Corp. (NUE)Materials481.5%
Pentair PLC (PNR)Industrials441.1%
People's United Financial Inc. (PBCT)Financials284.3%
PepsiCo Inc. (PEP)Consumer staples482.7%
PPG Industries Inc. (PPG)Materials491.5%
The Procter & Gamble Co.(PG)Consumer staples652.4%
Realty Income Corp. (O)Real estate264.0%
Roper Technologies Inc. (ROP)Industrials280.5%
S&P Global Inc. (SPGI)Financials480.7%
Sherwin-Williams Co. (SHW)Materials420.7%
Stanley Black & Decker Inc. (SWK)Industrials531.8%
Sysco Corp. (SYY)Consumer staples412.4%
T. Rowe Price Group Inc. (TROW)Financials352.0%
Target Corp. (TGT)Consumer discretionary491.4%
VF Corp. (VFC)Consumer discretionary492.7%
W.W. Grainger Inc. (GWW)Industrials501.4%
Walgreens Boots Alliance Inc. (WBA)Consumer staples454.1%
Walmart Inc. (WMT)Consumer staples481.5%
West Pharmaceutical Services Inc. (WST)Health care280.2%

Since you already have invested at a specific price, if a company increases their dividend your dividend yield instantly rises. For example, say that you invested in a company at $100 per share. If the dividend at that time was $5, your dividend yield is 5% (5/100). However, if the dividend payment increases to $10 per share your dividend yield would be equal to 10% (10/100).

Therefore oftentimes you can invest less than what you thought was required and still achieve your goal over time because your dividend stocks increased their dividend payments. This is part of what some call the "eighth wonder of the world", compound interest.

I don't have the money, what do I do?

If you run the magic formula and find yourself needing a lot of money that you don't have, don't worry. Instead, breakdown the amount further and find a reasonable amount you can invest every month. If you stay disciplined, you can accomplish your goal a lot faster than you think.

In the end, how much money you will need to invest is something that depends on your personal situation, therefore it may seem complicated. However, if you use this formula and play around with some numbers then I’m sure that in no time at all you can figure out how much money to invest every month so that you can live off your dividends.

How do I find good dividend stocks?

Finding good dividend stocks is often tricky. There are many different methods you can use but here is the best method we have found to find good dividend stocks.

  1. The first step is to look for dividend aristocrats (the list of them is above)
  2. Look for those that you can understand with some basic research (without understanding the business, it will be very hard for you to asses how good the company actually is).
  3. Do more in-depth research to understand the direction in which the companies are going and the current market trends. This is the most important part is you are using your judgment to assess if a company is actually worth investing in.
  4. If you like spreadsheets, use Wisesheets so you get all of the financials and key metrics going back 20 years on your Excel spreadsheet by just entering the ticker.
  5. The last step is to value the stocks. that is to find how much you should pay for them. Valuing stocks is often complicated and there are many ways of doing it. However, for dividend stocks, you can do it using the following formula. Stock value = curret dividend/(required retrun – expected growth in perpetuity)

We hope this guide helps you to achieve your financial freedom goals through dividend investing.

To your investing success,

The Wisesheets Team

Guillermo Valles

Guillermo Valles

Hello! I'm a finance enthusiast who fell in love with the world of finance at 15, devouring Warren Buffet's books and streaming Berkshire Hathaway meetings like a true fan.

I started my career in the industry at one of Canada's largest REITs, where I honed my skills analyzing deals and learning the ropes.

My passion led me to the stock market, but I quickly found myself spending more time gathering data than analyzing companies. That's when my team and I created Wisesheets, a tool designed to automate the stock data gathering process, with the ultimate goal of helping anyone quickly find good investment opportunities.

Today, I juggle improving Wisesheets and tending to my stock portfolio, which I like to think of as a garden of assets and dividends. My journey from a finance-loving teenager to a tech entrepreneur has been a thrilling ride, full of surprises and lessons.

I'm excited for what's next and look forward to sharing my passion for finance and investing with others!

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