Living off Income from Dividends

by Scott Sery on December 5, 2012

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.

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Scott Sery

Scott Sery is a native to Billings, Montana. Within an hour in nearly any direction he can be found fishing, hunting, backpacking, caving, and rock or ice climbing. With an extensive knowledge of the finance and insurance world, Scott loves to write personal finance articles. When not talking money, he enjoys passing on his knowledge of the back country, or how to live sustainably. You can learn more about Scott on his website Sery Content Development
  • FrugalPortland

    Interesting! I’d love to live off dividends one day — or heck, buy groceries from dividends!

  • Mo cdnbudgetbinder

    Thanks for sharing this post I really want to learn more about investing in stocks that pay dividends especially since the mortgage is done and we have a few thousand sitting around each month. What do you suggest? Mr.CBB

    • for dividend stock I like companies that typically make it through market downturns a little better. Companies like Johnson & Johnson, P&G. There are companies that offer Dividend yield of 10%+ but you take on much more risk.

  • I’m not sure I’m going to live off of dividends one day but I’ll definitely be on some sort of income based off of investments!

  • I’d love to live off of dividends one day. I remember seeing my grandparents do it and was intrigued. I plan on investing in stocks as well as using rental real estate to help pay for my retirement.

  • Eddie Kadic

    It be my dream to live off of dividends one day….but one can dream about it for now!

  • My one word of caution that I don’t see mentioned above is that dividends should not be a replacement or compared to fix income. A 2% cd has nowhere near the same risk as a 4% dividend yielding fund. But with that being said, they are definitely a nice option to get your money out without having to sell your stocks.

  • I would love to have a sizable dividend income one day…but realistically that won’t be for years.

  • I drip in Canadian dividend stocks and track them with the iDRiP app for iPhone

  • Jason @ WorkSaveLive

    I think dividend income will be a portion of my retirement plan, but I’m leaning much more towards rental income to fund the majority of my retirement needs. While I realize a lot of things can go wrong with real estate, I’m also a little weary of having my money in single stocks.

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  • Kim

    I’m a bit concerned about what might happen to taxes on dividends. If it eventually equals to regular income, I guess you can live with that, but I’m afraid all the spotlight on Romney’s millions might make taxes higher for those who live off dividends only. I hope to have some, but also have real estate to provide passive income.

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