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.
Step #1: Save money
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. How Can You Make $1,000 Per Month In Dividends? Here are the steps you can take to build yourself a sufficient dividend portfolio.
You can periodically sell some of your investments to supplement the dividend income. As long as you keep the withdrawal rate at or below 4%, your money should last for decades. To apply the 4% rule, divide your income requirement by 4% to calculate your targeted portfolio size.
This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.
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.
With a 10% yield and monthly payout schedule, you can get to $500 a month with only $60,000 invested. That is, $6,000 per year paid on a monthly basis. Unfortunately, most stocks don't have yields anywhere near 10%. Many do have high enough yields to get you to $500 a month with diligent savings, but don't pay monthly.
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.
Over time, the cash flow generated by those dividend payments can supplement your Social Security and pension income. Perhaps, it can even provide all the money you need to maintain your preretirement lifestyle. It is possible to live off dividends if you do a little planning.
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. To work out much you need, calculate your required income and then the percentage dividend yield you may be able to achieve.
However, this isn't always the case. If you're looking to generate $300 in super safe monthly dividend income (note the emphasis on "monthly" income), simply invest $43,000, split equally, into the following two ultra-high-yield stocks, which sport an average yield of 8.39%!
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.
But the truth is you can get a 9.5% yield today--and even more. But even at 9.5%, we're talking about a middle-class income of $4,000 per month on an investment of just a touch over $500K. Below, I'll reveal how to start building a portfolio that could get you an even bigger income stream than this today.
If you like the idea of earning passive income, one idea to make $5,000 per month is to rent out things for money. This is probably the best option if you're very busy with your job and don't have time to start a new side hustle.
One of the easiest passive income strategies is dividend investing. By purchasing stocks that pay regular dividends, you can earn $2,500 per month in dividend income. Here's a realistic example: Invest $300,000 into a diversified portfolio of dividend stocks.
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.
Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
The Coca-Cola Company's ( KO ) dividend yield is 3.09%, which means that for every $100 invested in the company's stock, investors would receive $3.09 in dividends per year. The Coca-Cola Company's payout ratio is 73.72% which means that 73.72% of the company's earnings are paid out as dividends.
Introduction: My name is Saturnina Altenwerth DVM, I am a witty, perfect, combative, beautiful, determined, fancy, determined person who loves writing and wants to share my knowledge and understanding with you.
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