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But how much money do you realistically need to be able to drop out of the workforce and get by on dividend payouts alone?
While you will have to start by honestly assessing what you can live with — and without. But there’s a simple formula and some less simple risks you’ll need to consider when making the big dividend-dependency decision.
Dividends are great tools for investors
Dividends are payments made by publicly traded companies to their shareholders. They’re typically used to communicate strength about the company’s financial position. Steady dividends — even low ones – often signal a company’s positive projection of its long-term outlook.
Many dividends are paid in cash. For investors with 401(k)s or IRAs, dividends are often automatically reinvested and, through the power of compounding, offer a powerful tool to grow a nest egg.
For straight-up equity investors, those cash payouts fuel dividend income — where passively generated payouts cover your living expenses.
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How much you’ll need
How much you’ll need exactly depends on your income, spending habits and living expenses. Which means the answer is highly personal.
But once you know how much you’ll need to live, here’s a simple formula to apply that to sort out how much you need in total.
Desired Dividend Income / Dividend Yield (%) = Estimated Portfolio $ needed
Let’s consider a desired dividend income of $37,522, which was the real median single-person income in the U.S. in 2021 according to data from the St. Louis Federal Reserve.
Next, consider what you can reasonably expect from dividend yields. It’s fair to plan on yield rates between 1% and 6%.
Using our formula mentioned above, here’s how yields translate to required portfolio size:
- 2% yields require a portfolio of $1,876,100
- 3% yields require a portfolio of $1,250,733
- 4% yields require a portfolio of $938,050
- 5% yields require a portfolio of $750,440
- 6% yields require a portfolio of $625,367.
Yet as we’ll see, these numbers need further refinement thanks (or really, no thanks) to taxes.
Weighing the risks of this approach
There are three potential consequences that should be considered before you commit fully to this income strategy.
Taxes. Dividend payments from a taxable brokerage account, or traditional 401(k) and IRA accounts, are considered taxable income.
Downside risk. Dividends aren’t a slam dunk. High-yield dividends may not be sustainable and a company too focused on returning profit to investors could lose out on growth later. And sometimes without warning, today’s higher dividends tank.
If you plan to pay your bills with dividends, you’ll need to feel the risk is both reasonable and worth it.
Too-tight budget. If you think you can manage expenses at a median dividend income, then planning is everything. High inflation, rising interest rates and global turmoil can do a number on your portfolio: You’ll need a strong stomach and stronger strategy.
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Handled carefully, the pursuit of steady, sustainable dividend income can be a winning play.
For older Americans, living off dividend income could make sense, especially if it delays taking a Social Security benefit. The longer you wait, the more money you’ll get when you collect.
Yet as with anything investment related, risk never goes away. History is littered with companies whose high yields indicated looming weakness.
And when in trouble, companies often ditch the dividends first. So in crafting a strategy, it helps to remember this truism: Powerful dividends and portfolio diversification make for a great combination.
Pour your portfolio a glass of recession resistance
Fine wine is a sweet comfort in any situation — and now it can make your investment portfolio a little more comfortable, too.
Ownership in real assets like fine wine could be the diversification you need to protect your portfolio against the volatile effects of inflation and recession. High-net-worth investors have kept this secret to themselves for too long.
Now a platform called Vinovest helps everyday buyers invest in fine wines — no sommelier certification required.
Vinovest automatically selects the best wines for your portfolio based on your goals, and it tells you the best times to sell to get the best value for your wine.
Source: moneywise
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