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Can you live entirely off dividends? The short answer is yes … it is possible to live entirely off of dividend income. Although it depends on a lot of factors, not just dividend income.
How much do you spend a year? What are your housing expenses? How much do you spend on transportation and food each month?
These are questions that you need to answer first before you figure out what it would take to live off of dividend income.
Then there are questions about quitting your job (assuming that you have one) and the impacts it could have.
For example, dividends don’t have a healthcare plan. So if you rely on getting healthcare through your employer, then that is more spending you will need to cover each year.
What type of risks are you willing to take building a dividend income portfolio?
Depending on this answer … there are many different paths you could take to live off of a dividend income stream.
These are questions that I ask myself all the time … can our family live off dividends? And I have played out a thousand different scenarios in my head.
Today I would like to cover the path that my family is taking to live off of our dividend income … or at least cover some of our future expenses (likely not all).
Can You Live Off Dividends?
Or rather the question here is – can my family of five live off dividends?.
Technically … it would be possible for my family to one day live off of our dividend income … but it would take some sacrifice to get there.
At this point in my life … I am not sure it is worth the sacrifice. I have one child getting ready to go off to college in another year. Another starting high school next year … and a third who will soon be in middle school.
Instead of living 100% off of our dividend income … my wife and I have different plans to reach financial independence.
Now if I was 18 and just starting out … then I think things might be a little different. This is at the age where my oldest child (our son) is right now. And he has been asking me tons of questions about earning dividend income.
I can see the spark there for him when we have financial conversations. So I am laying out what it would take for our family to live off our dividend income … in theory.
Note – The plan below does not take into account any healthcare premiums … which I currently get from my full-time job.
So factoring out healthcare … what would it take?
The first step is to estimate our annual spending.
Annual Spending
I have been tracking our annual spending by category for the past 5 years. Typically, we try and stick to a annual spending budget of $60,000 per year for a family of 5.
Could we do better than that? Probably … but there are some categories of spending where we just don’t want to sacrifice too much. Buying healthy food for example is important to us. And vacationing has really been a factor in our spending.
Other areas like transportation we try and save on … although we could do better. And housing (renting or owning) is probably below what most of the families our size (in our town) spend.
Last year (2020) … we actually spent closer to $80,000 … which was a bit of an anomaly. For now we are trying to stick to around $60,000 though.
So now we know that in order to live of off our dividend income … we need to bring in $60,000 worth of dividends annually.
Note – Below I will share a bit more about why I am not concerned so much about inflation when it comes to building a dividend income stream.
The next thing we need to talk about is the yield (or return) on our investments … in this case dividend income.
Dividend Yield
The dividend yield is one of several metrics used by investors to build an income portfolio. But keep in mind … as soon as you buy a stock, the dividend yield is useless.
That is because it uses the current share price of the stock … which you already bought … at a different price (likely). At that point, you can use a slightly different metric called yield on cost.
I would also argue that dividend growth is much more important when building a dividend stock portfolio.
Note – Currently I focus mostly on dividend growth for our portfolio, mixed in a little with higher yielding companies.
For the purposes of this question (can you live off dividends) however … I am keeping it to a high level discussion. So for now, we will use dividend yield to show what we would need to earn $60,000 a year.
A slightly above average dividend yield in my portfolio right now (rounded up) would be 3% … which we will use for our discussion.
What does that mean?
For every $100 we invest in a stock with a 3% yield … we would receive $3 annually in dividend income.
It is just like earning interest from a savings account … just a LOT better.
Annual Dividend Income
So we know that our goal is to earn $60,000 a year in dividends with a 3% yield.
These two numbers tell us everything we need to know to get to how much money would be required to build this portfolio.
Total Investment = $60,000 / .03
In this example, we’d need $2,000,000 invested today earning a 3% yield. That seems like a lot of money … which it is.
If we needed to earn $80,000 in dividend income … that same yielding portfolio would need $2.7 million invested up front!
The point here is not to scare you away from earning dividend income. This type of portfolio is definitely possible … just not overnight.
Earning dividend income is a long term investment strategy … which is why starting young (like my almost 18 year old) is crucial.
Let’s talk a minute about inflation and tax concerns with dividend income.
Inflation Concerns
When it comes to inflation … I am not as concerned with our dividend income as much as other income sources like a pension.
Why is that?
Well … we try and invest in companies that have a history of raising their dividends annually by 6%. Of course in real life … this doesn’t happen with every stock we own every single year.
But overall, the averages work out to where our dividend income will increase each year by more than 2%, 3%, or 4% inflation.
I’m not saying it is always 100% full proof protection … but it is pretty dang close.
Income Tax Concerns
I am also not concerned with earning dividend income and paying more taxes.
The current tax laws in the United States are very favorable towards this type of income.
Because of current tax law and how we optimize our taxes … over 75% of our dividends each year are considered to be qualified dividends.
I won’t get into all the details here in this post … but based on our family’s tax optimization – we don’t have to pay much tax on our dividends.
Of course, this could all change at some point … but for now … dividend income is very tax friendly.
Living Off Dividends is Possible
Living off a dividend income portfolio is possible … but it will probably take decades to build.
Earning dividend income has a ton of benefits. But it won’t happen overnight … unless you suddenly inherit $2 million and invest it right now.
Of course, you could try and lower your annual spending … that would certainly help. But the longer you are invested, the more time your dividend income can compound and grow.
Dividend income (if built properly) is not only inflation protected … but also (currently) very tax friendly.
My wife and I started late building our portfolio of dividend income stocks. We have other retirement assets and likely a pension to help us live comfortably.
Our goal is a bit easier to reach than living 100% off of dividends.
Instead … we plan to cover a minimum of 25% of our annual spending from dividend income whenever I decide to retire. This is a goal that will require some sacrifice but not too much. And it is one that is achievable at this point in our lives.
Can you live off dividends? Depending on your spending, timeline, and patience … yes you certainly could. But it will take sacrifice and focus over decades to get there.
