How much $ do you need to live off dividends?
Dividends are payments made out of the business net income to stock shareholders. It is a way for a business to use capital and a way to reward shareholders for owning the stock.
Not all businesses pay dividends and not all businesses pay dividends on regular basis.
The dividend aristocrats are businesses that have paid out dividends for the last 25 years and increased those dividends over time.
Dividends are paid out generally every 3 months, but the payout schedule is determined by that business and it is different for each one.
1. How much are your expenses?
Fixed and variable.
How much money do you need each year to survive? That is the first number you need to figure out.
2. How old are you?
If you are in the majority of workers, then someone in the age of 62-70 you will start to receive fixed income from social security. A lot of teachers and government workers do not pay into social security. Keep that in mind.
Social Security along with dividend income may cover all your fixed costs or you may need to reduce your fixed costs to stay within your budget.
If you 'retire' early then you will need to have more invested into stocks to get your higher dividend payments.
3. Every 3 months
Stocks pay dividends every 3 months. Are you able to budget 3 months at a time and stay within those boundaries. If not maybe a dividend strategy is not for you.
4. A stock's Dividend Yield
If a stock pays a dividend then that stock has a dividend yield this is the amount on money a business pays annually compared to its stock price.
In general, a good stock yield is between 2-4%.
5. Not too high, or too low
If a stock is paying a really high dividend then it may be endangering future net income. Money that is paid out in dividends is money not being reinvested into the future growth of the business.
If your dividend payment is too low then you will never be able to live off that payment.
6. Let's say your annual expenses are $50,000
Which means that each month you need to earn at least $4,200.
Johnson and Johnson's stock price is currently $171/share.
JNJ has a dividend yield of 2.67%. Which equals an annual dividend per share of $4.56.
You need $50,000/year.
50,000/4.56 = 10,964 shares needed.
10,964 X 171 = $1,874,844
In order to earn $50,000/year in dividends you need $1,874,844 invested into JNJ.
7. What if I want to get there faster?
Choose stocks with a higher dividend yield.
A lot of oil/energy stocks pay much higher dividends, but they are also much more volatile stocks.
Keep in mind that the higher the dividend yield the easier it is for a stock to get into financial trouble.
8. There are also ETFs that focus on dividends
Dividend artistocrats.
High-yield dividend ETFs.
Energy ETFs.
9. You can invest in a diverse group of stocks to get payments on a more regular basis
If you want to make your dividend payments more consistent than every 3 months invest into a diverse group and you will receive more regular payments
10. Reinvest your dividends
You will reach you goal faster if your reinvest your dividends back into share of the same company. A DRIP program.
11. Invest into business that are still growing their net income and their dividends
Many businesses increase their dividend payout over time.
Apple is a good example of a business that is both returning capital to shareholders and growing the business revenue.
12. Is a dividend strategy better than a growth strategy?
It could be.
Warren Buffett's Berkshire Hathaway is notorious for not paying a dividend and that business has incredible returns. Many of the tech companies like Google and Amazon do not pay a dividend.
But then when a like Apple and Microsoft pay a dividend investors get the best of both worlds: cash flow and stock price appreciation.
During economic downturns lots of investors still receive dividend payments which can compensate for the falling price of stocks.
People also reinvest dividends, they get more ownership of a business and more dividends. Growth investors have to earn money to reinvest into those stocks.
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