Living off Income from Dividends

The goal of retiring some day is to be in a position where you no longer have to earn a living.  While some people do so by creating passive income from affiliate marketing (or multi-level marketing), and some people have a knack for creating websites that can basically run themselves, most people get to the position by investing their money and someday having enough so they do not need to earn an income any longer.  For those who would rather retire sooner than later, the best way to get that passive income is to invest in companies that pay dividends, and then live off the income from dividends.

While not all companies will pay dividends, there are those that do so.  The dividend is simply a surplus of profits that the company returns to the shareholder.  If you take a look at stocks like Google (GOOG), they do not issue dividends, but rather reinvest the profits into the company.  The result is the value of their stock keeps going up and up.  But if you look at companies like Wal-Mart (WMT) and Microsoft (MSFT), their stock prices remain relatively steady, but they pay regular dividends to their shareholders.  While there are some small cap companies that issue dividends, it is usually the larger companies, the blue chip stocks, that do so.  It is important to note, however, that the dividends are not guaranteed, the company can reduce them, or eliminate them completely, if they so choose.

The math to figure out how to live off of dividends is fairly simple.  You must first start with how much you need to live.  If you need $40,000 in annual living expenses (before taxes), then you will need to accumulate $1 million to survive off of dividends (assuming a dividend rate of 4%, which during good economic times is a reasonable assumption).  There are a great number of calculators online that will help you reach your investment goals.  The Millionaire Calculator from Investopedia shows that if you are age 30, desiring to have $1 million by age 50 (assuming an 8% rate of return and a foundation of $25,000) you will need to set aside $1,500 per month to get there.  (inflation will throw a wrench into the simple math, so you will actually need a little more than $1 million).

Theoretically you should never have to touch the principal of your investments, but in those years where dividend rates are lower, you might have to dip into it.  The amount taken should remain small enough that it will not make much of a difference, and even though the majority of the gains in the account are distributed to you, there will be some that increase the value of the account.  Meaning your principal should remain in tact.

Saving money should not be a difficult thing.  You can use your miser techniques to save more, and a few minutes thinking about your skills will let you land on a way you can earn more on the side.  Then being a dedicated saver, in the hope of soon never having to work for your income again, and you can quickly get to a point where you are living just off the dividends you receive.  Living on passive income will clear your schedule to do more of the things you love.

Tagged as: money management