How Much Money Do You Need To Live Off Of Dividends?

Living off of dividends is a dream come true. And it’s easier than you think to make that happen. I’d know. I’ve been living off of dividends since 2016.

And I made this happen for myself after growing up on welfare, not having a college degree, and never having a high-paying job. In fact, I went from below broke at age 27 to financially free at 33.

By the way, I explain exactly how I achieved financial freedom in just six years in my Early Retirement Blueprint. If you’re interested, you can download a free copy of my Early Retirement Blueprint here.

So how much money do you actually need to live off of dividends? That’s what we’re here to talk about.

Today, I want to tell you how much money you might need in order to live off of dividends. Ready? Let’s dig in.

Before I begin, I just want to point out that it’s impossible to give you a universal number that would apply to every single person out there. We all have different situations. While the question – how much money do you need to live off of dividends – is a simple one, the answer isn’t. That’s because the answer would have to be customized to an individual’s own situation. It all comes down to exactly how much money you spend, which in and of itself will depend on your lifestyle.

How much money you need to live off of dividend income will depend on your lifestyle and how much you spend on that lifestyle.

The more money you spend, the more dividend income you’ll need to live off of. And vice versa. Obviously, the lower you can get your expenses, the faster you can achieve financial independence and retire early – also known as FIRE.

My job – when I still had one – was as a service advisor at a car dealership.

This was not a high-paying job. I averaged about $50,000/year in my fast-paced, high-stress role, which I performed for over 50 hours per week. I also built some side hustles to help me save and invest more, but the vast majority of my income came from the day job. In order to go from in debt to financially independent quickly, I had to live extremely frugally. I’m not kidding around here. I was living on less than half of my net income, which allowed me to save and invest the rest.

And since I wasn’t making a lot of money, achieving a 50%+ savings rate required some serious curbs in the lifestyle.

I focused on what I call the “big three” – housing, transportation, and food. I approached things using the 80/20 rule. It occurred to me that 20% of my expense categories were costing me 80% of my money. So I attacked those categories ferociously. This allowed me to save, at times, more than 70% of my net income. Cutting out the daily latte sounds nice, but that’s just not gonna get the job done. You need to take big swings at big expenses.

If all you have is a hammer, everything starts to look like a nail. Well, I saw my biggest monthly expenses as nails, and I started to hammer them.

Housing? I moved into a dated, drab condo in Florida with my significant other. Our total rent was less than $1,000/month when we first moved in, which we split evenly. Transportation? Easy. I sold my car in 2011. I haven’t owned a car for the better part of a decade. Frankly, I love the car-free lifestyle. That dropped my transportation budget down to nearly $0/month. Food? Well, I naturally gravitate toward foods that are inherently cheap. It’s what I like. I could eat peanut butter and jelly every day. I’m just that kind of person.

Warren Buffett, who has a famous penchant for junk food, will tell you that he discovered all the food he likes by the time he was six years old. I feel the same way. So I was able to spend just a few hundred dollars per month on food. Adding in a couple hundred dollars per month for necessities like utilities, as well as miscellaneous odds and ends, brought me to about $1,000/month. This low spending base on the essentials allowed my savings rate to skyrocket. And I realized two important things when I started to save more.

First, it allows you to invest more money.

That means you’re accelerating the compounding process. Warren Buffett analogizes his wealth to a snowball, which he started to roll at the top of a long hill many decades ago. Compounding allows that snowball to grow ever-larger, and roll ever-faster, over time. But you need to gather some snow in order to get started, which is where your savings comes in.

The more money you can gather at the beginning, the larger that snowball can become, and the faster it can get there. As the old saying goes, “you need money to make money”. Also, as your dividend income starts to grow from investing, that’s another income source that can drop straight down the bottom line. This boosts your savings rate, as it’s more fresh capital that can be invested. But wait, there’s more.

Spending less money also means you need less dividend income to cover your bills and live off of.

If you go from spending, say, $40,000 per year down to $20,000 per year, you didn’t just double the amount of money you’re able to save and invest. You also halved the amount of dividend income you need to live off of, which makes things much easier.

For instance, a $1 million portfolio yielding 4% will produce $40,000 year in dividend income, which would cover $40,000 per year in expenses. But if this expense base can be cut in half, down to $20,000 per year, you’d only need a $500,000 portfolio yielding 4% in order to produce enough dividend income to live off of. You need half as much money, all while also being able to save and invest your way much faster toward that lower threshold. Mastering this dynamic supercharges your ability to achieve FIRE in a short period of time.

So how much money do you need to live off of dividend income?

Well, as you can see by everything I’ve been talking about, it depends.

It depends on you.

It depends on your lifestyle and how serious you are about living off of dividend income.

If you’re serious about it, and if you’re willing to make the lifestyle adjustments necessary to save and invest aggressively, you probably need less than you think.

And you can probably get there faster than you think.

You can figure out, right now, exactly how much money you need to live off of dividends.

All you need to do is figure out how much you’re spending. Track your spending down to the penny over the next few months. I mean it. Track every single red cent. Most people don’t know how much money they spend. This means they don’t know much money they need to live off of. If you ask someone how much money they make, they almost always know the answer right away. But if you ask them how much they spend, they usually don’t have a clue.  Fix this by tracking expenses religiously.

It’s only because I was tracking every single penny that I knew how much dividend income I’d need to live off of.

Furthermore, and more importantly, I was able to figure out a reasonably accurate time frame as to when I could hit that number. And once I was actually in the journey to FIRE, I noticed something. The more I saved and invested, the more I wanted to save and invest. That’s because I was seeing the benefits in real-time, which served as a self-reinforcing loop of saving and investing begetting more saving and investing.  I became even more extreme with things over time, which sped up my journey to FIRE. I was originally planning on making it within 12 years, by the time I was 40 years old, which was admittedly a rather conservative estimate. But I ended up getting there in half the time.

When it came down to needless spending or financial freedom, the choice was clear.

I believe you’ll experience the same thing. When you see how much you’re spending, how much it’ll take to live off of, and how long it’ll take for you to build enough wealth to make that happen, you’ll see a lot of your expenses as nails to hammer. Then you can get to your goal so much faster because of the increased savings and the lower threshold. Once you know your spending, you can match dividend income to it. From there, it’s just a matter of doing some math to arrive at an ending portfolio value, which can vary depending on its yield.

Let’s use $20,000/year in dividend income as an example.

That’s a reasonable annual dividend income target for most people. That’s for one person. If you’re making a fairly average annual US income of, say, $50,000/year, and saving at least half of it, which you should be if you’re serious about achieving FIRE, this is the kind of money you’d already be used to living off of. It’s also a number that’s realistic to attain within a sensible time frame. If you want more dividend income, you’ll have to earn more money, save more money, wait longer, and/or add risk to your investments by stretching for yield.

For perspective, a $500,000 portfolio yielding 4% can generate $20,000 in annual dividend income. So can a $400,000 portfolio yielding 5%.

Keep in mind, though, higher yield usually means more risk. And it can lead to underperformance. So be careful with stretching for yield. But to give you some specific stock ideas that could work and provide that kind of income, dependent on further due diligence on your part, we recently highlighted the following dividend growth stocks as undervalued long-term opportunities to consider: AbbVie (ABBV) which yields 4.8%, Huntington Bancshares (HBAN) which yields 3.8%, and Philip Morris (PM) which yields 5.2%. Those three stocks, only as examples, offer a blended yield of 4.6% right now. A portfolio is, of course, generally more than three stocks, and that’s why we cover many stocks every single week.

$20,000/year might not seem like a lot of money. But keep a few things in mind.

First, you’ll likely get used to living below your means. When I first started doing it, I realized it wasn’t that bad. There’s so much stuff that people are spending their money on that simply does not improve quality of life or make them happier. If anything, it’s the opposite. They get on this hedonic treadmill of consumerism and materialism that continuously speeds up as they attempt to keep up with everyone else, only to find that they’re stressed out and unhappy for it. They try to own things, only to find that the things own them. Once you cut out the waste and get to the things that matter, you’ll find that life isn’t that expensive.

Second, dividend income is tax-advantageous relative to typical W-2 job income. This makes it deceptively powerful in terms of purchasing power.

Qualified dividends are tax-free at the federal level up through the 15% tax bracket. So you can make, say, $20,000 per year in qualified dividends and pay $0 in federal income tax. Also, no FICA tax. This makes $20,000 per year in pure dividend income equivalent to much, much more W-2 day job gross income.

Also, how much money do you spend just by having a job?

Transportation costs, food costs, clothing costs, etc. A job costs money. Transportation costs alone can add up to thousands of dollars per year. Dividends, on the other hand, cost nothing to continue receiving once you own stock. You don’t need to commute to an office to collect them, which makes that aforementioned car-free lifestyle a lot easier (wink-wink). And dividends can be received from anywhere in the world. Once you’re untethered from a job and a physical location, you can potentially take advantage of geographic arbitrage and move somewhere else with a better tax situation and more value for money.

I wake up almost every single day to fresh, new money I didn’t go to sleep with. And I pay $0 for this to happen. Dividend are awesome.

After factoring out federal income taxes, FICA, savings, and the costs associated with having a job, $20,000/year in pure dividend income can be a lot like someone else making $50,000/year in disadvantageous W-2 income and still saving their way toward financial independence. That kind of money goes a long way for someone who’s creative and open-minded with spending. Here’s my final point.  Financial freedom isn’t the end. It’s the beginning.  Likewise, hitting your number isn’t the end. Whatever passive dividend income goal you have in mind is really just the start in a lot of ways.

I cover investing in high-quality dividend growth stocks on this channel.

If you build a portfolio chock-full of high-quality dividend growth stocks, your passive dividend income should be growing, year in and year out, like clockwork. And this dividend income isn’t just growing. It’s often growing faster than inflation. That increases your purchasing power.

What might start out as tight coverage between dividend income and expenses can start to loosen up quite quickly.

Using the rule of 72, dividend income growing at a rate of 7% per year will roughly double after a decade. That turns that $20,000 per year in passive dividend income into approximately $40,000 per year in passive dividend income 10 years down the road, meaning you’re positioned to cover higher expenses in the future – with room to spare. I’ve personally experienced this. My dividend income is already up about 50% compared to where it was in 2016, when I first achieved FIRE. I’m confident that it’ll grow faster than my expenses over the long run and eventually turn into a runaway snowball of passive dividend income that I can’t reasonably spend.

I think almost anyone can become financially independent, retire early, and live off of dividend income.

I say that as a guy who was born into deep poverty in Detroit, grew up on welfare, lost his parents at a young age, dropped out of college, and never had a great job. I’m just a regular guy who passionately dedicated himself toward achieving FIRE. And I’m here to inspire you all to do the same. So get busy tracking your expenses down to the penny, whittle these expenses down to only the essential, and then you’ll know exactly how much money you need to live off of dividends. From there, it’s all about investing the savings so that you can match expenses with dividend income. Almost all of the content I put together here on the channel is designed to provide you with high-quality, long-term dividend growth stock ideas toward that end, so stay tuned!

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

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Source: DividendsAndIncome.com