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.
If, for example, your portfolio gets to a value of $1.5 million, you could invest in a fund or multiple investments that yield an average of 3.3%. At that rate, you could generate $50,000 in annual dividends. With a lower portfolio balance of $1 million, you would need to target an average yield of 5%.
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. $1 million invested would generate about $27,000 per year or $2,250 per month.
If you are considering a dividend-focused strategy, you should carefully assess your income needs and risk tolerance. For example, if you require an income of 100,000 per year and were looking at a dividend yield of 10%, you would need to invest 1,000,000.
Let's consider an investment in dividend stocks for $3,000 a month. If the average dividend yield of your portfolio is 4%, you'd need a substantial investment to generate $3,000 per month. To be precise, you'd need an investment of $900,000.
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.
To have a perfect portfolio to generate $1000/month in dividends, one should have at least 30 stocks in at least 10 different sectors. No stock should not be more than 3.33% of your portfolio. If each stock generates around $400 in dividend income per year, 30 of each will generate $12,000 a year or $1000/month.
That's right; you save over $30,000 if you want to create $400 per month in passive income. Furthermore, this could be cash set aside in your TFSA, meaning it would be all tax free, with plenty left over for other investments.
A dividend is typically a cash payout for investors made quarterly but sometimes annually. Stocks and mutual funds that distribute dividends are generally on sound financial ground, but not always. Stocks that pay dividends typically provide stability to a portfolio but may not outperform high-quality growth stocks.
Image source: Getty Images. About $11,900 spread evenly among these stocks is enough to secure $1,000 in annual dividend income. Moreover, there's a good chance they will be able to raise their dividend payments, and your income stream, for many years to come.
It is possible to achieve financial freedom by living off dividends forever. That isn't to say it's easy, but it's possible. Those starting from nothing admittedly have a hard road to retirement-enabling passive income.
Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.
To live off of dividend income alone, you need to receive enough dividend payments each year to cover your expenses. Once you know how much income you need to cover your expenses, you can divide that by the average dividend yield of your portfolio to get a rough estimate of how much you need to invest.
And if you pick companies with attractive yields, the income can really add up as you grow your portfolio. For example, investing $15,000 evenly across these five high-quality, high-yielding dividend stocks would, at their current payout rates, generate almost $1,000 of annual dividend income.
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.
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