When Can You Retire on Dividend Income?

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Wouldn’t it be great to build multiple income streams that were mostly passive … that you could use to reach financial independence? For years, my wife and I have been making plans to do just that.

One of the most sustainable income streams that we have been focusing on is earning dividend income from stocks we own.

Our long term goal is to eventually earn enough dividend income each year to cover our expenses. People often refer to this as their dividend crossover point.

Now, I will point out that covering all our expenses from dividend income is not a quick and easy task. And we may not be able to hit 100% of our expenses … but even 25% or 50% of our expenses sounds great.

What is the Dividend Crossover Point?

Just a quick recap on the definition of the dividend crossover point.

Basically, it is when your dividend income equals or exceeds expenses. And as we know in the personal finance world, there are two equally important ways to hit this point.

The first is simply saving (and then investing) as much of your regular income as you can. It doesn’t matter if you are investing in dividend stocks, index funds, rental properties, etc. – the more you save and invest the easier it will be.

The other way to reach dividend crossover is to spend less. Cutting back on expenses will reduce the amount of dividend income (or whatever investment income you are working towards building) you need.

So when it comes to our portfolio of stocks … I want to know how close we are to hitting our crossover point and can we eventually retire and live of our dividends?

My Dividend Income Portfolio

Just to be clear, when I say “my dividend income portfolio” … I am referring to my family’s investments … not just me.

When it comes to discussing our investment strategy here, we almost always talk about our taxable brokerage account … which we refer to as the Money Sprout Index. We have been investing in this account for the past 10 years and have documented most of it.

But there are also tax deferred accounts we are building that will also produce dividend income now and in the future.

When it comes to building dividend income to help us get to FI … we need to consider both our taxable and tax deferred accounts in our calculations.

Below is our best estimate at where we are at …

Taxable Accounts

We currently have close to $63,000 invested in dividend stocks from our taxable accounts. Basically, these are normal brokerage accounts where dividends and capital gains can be taxed.

Since we are only interested in a buy and hold (long term) strategy … we are not so worried about capital gains. Our philosophy is to buy quality dividend paying companies and hold them forever … if need be. We have only sold a handful of stocks in the past 10 years … and usually at a loss because of a dividend cut.

At the time of this writing, we own 33 stocks in our brokerage accounts (Robinhood, Fidelity, Computershare, AmStock, and CapitalOne Sharebuilder) which will bring in at least $2,500 (probably close to $2,600) of income this year.

Because these stocks are held in our taxable account, they are considered to be part of our income for tax purposes. The good news is that because we stay in the 15% tax bracket and most of our dividends are qualified … they are not taxed.

For example, in 2016 … we earned $1,886 in dividend income that was reported on our federal tax return. But because we stayed in the 15% tax bracket, $1,635 of those dividends were qualified and not taxed.

When it comes to projecting our dividend income for next year (2018), we project to earn at least $3,000 in our taxable accounts. So we can use that $3,000 as part of our overall dividend crossover calculation.

Projected Dividend Income = $3,000

Note – As our taxable dividend income continues to increase each and every year, we need to keep a close watch on it as to not push above the 15% tax bracket (or eventually 12% bracket?). For now though … we are in good shape.

Tax Differed Accounts

Over the past several months, my wife and I have been moving funds from several past employer retirement accounts into a Rollover IRA.

We did this for several reasons. First, we were tired of paying high fee’s for the mutual funds we owned in these accounts. For years we were lazy and didn’t touch these accounts. We also want the flexibility of buying dividend paying stocks … instead of just mutual funds.

Since doing our rollover, we have invested just over $60,000 in 9 quality dividend stocks … which should generate $2,000 in income next year.

And with another $50,000 or so to invest at a 3% average yield … we should be able to earn an additional $1,500 annually (at least).

In addition to our taxable dividend income … our tax deferred dividend income could reach $3,500 next year … which we can use as part of our dividend crossover calculation.

Projected Dividend Income = $3,500

Additional Taxable Investments

My wife and I have been debating for awhile now on what to do with our emergency fund. We have close to $50,000 in this fund … that is currently earning .75% interest. Investing a portion of this money into dividend stocks could certainly make our money work harder for us.

We have decided to invest about $40,000 of these funds into safe and reliable dividend stocks. The other $10,000 or so will keep earning that .75% return.

In addition to our emergency funds, we also plan to continue growing our taxable dividend income portfolio next year. Our goal is to continue investing $10,000 of new money every year.

Combining these funds, we will have another $50,000 to invest in dividend stocks before the end of next year. If we earn an average yield of 3%, that is another $1,500 of dividend income we will generate. And yes, this will be part of our dividend crossover calculation.

Projected Dividend Income = $1,500

Calculating Our Dividend Crossover Point

From our analysis above, I know that we can likely earn $8,000 in dividend income next year. But that $8,000 won’t be used to cover any of our expenses. Instead, each and every dollar will be reinvested back into more dividend stocks … that will grow our income further.

But if we did need those dollars to pay some of our expenses … how much would it cover? Our current spending runs around $60,000 per year … give or take. That includes all of our normal expenses like – mortgage, car payments, insurance, food, utilities, etc.

So for next year, we will have about 13% of our current expenses covered from dividends.

Dividend Income Will Cover 13% of Our Expenses Next Year

That wasn’t quite the number I was hoping for at all to be honest. We would need another $42,000 from dividends to hit our crossover point.

The good news is that we should be able to knock down that $60K in spending by the time we plan to reach financial independence (FI). Hopefully no mortgage payment if things go well … and only one (or maybe none) car payment.

Plus … by using the Rule of 72 formula, we should be able to double that dividend income within 9 years. So in about 10 years from now, we should be earning over $16,000 in dividends.

This also doesn’t factor in the new money we plan on saving during the next decade. We are a long ways off right now from Dividend Crossover and FI … but at least we have a place to start and plan from.

Note – I should have a pension when I retire as well … which is not included in the numbers.

Do you plan on using dividend income to pay for a portion of your expenses in FI? Have you calculated your dividend crossover point?

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