The short answer would be: it depends. It depends on how much an investor spends and other factors, which I go over below. A 3.5% dividend yield on $2,000,000 is $70,000 in annual dividend income or a 5% dividend yield on $1,500,000 is $75,000 in annual dividend income.
So there really isn’t a single answer to this question; it is relative to the individual investor.
Dividends are a great way to generate an income passively through investing in the stock market. A popular strategy in the dividend investing niche is called Dividend Growth Investing. This strategy involves investing in companies and/or ETFs that grow their dividends annually and increase an investor’s income over time.
Time and Patience
It takes time for dividends to compound and grow in the long term. Reinvesting dividends using a dividend reinvestment program can help compound the dividend income. In short, the dividends are used to buy more shares or (fractional shares) of the company, and those new shares earn more dividends.
Staying consistent is just as important as being patient; I am only five years into my dividend-investing journey. I have pivoted through various market conditions, but the overall strategy of finding growth companies that also payout and grow dividends has stuck with me along the way.
This dividend income doesn’t really require any active work after I do my due diligence and buy the stock. The only work is staying up to date on the company’s health, overall market volatility, and keeping track of the dividends coming in.
Cost of Living
The amount needed to live off dividends depends on the investor’s cost of living. The higher the cost of living, the more an investor would need to live off dividends. It sounds simple, but some factors, like inflation and rising living costs, could be unpredictable.
Some examples include rising rents, utility prices, gas, and transportation. Plenty of other factors could affect a rising cost of living, which is why measuring risk is important.
Check out this article to learn more about stock market risk and how it can be measured.
Dividends can be all or even a small percentage of an investor’s income, depending on their investment strategy. Some buy real estate, invest in stocks, or purchase other cash-flowing financial instruments. The point is everyone can have a different strategy regarding cash flow and investing.
The dividend income could be volatile depending on the market environment and the health of the companies in an investor’s portfolio. Some companies could potentially cut dividends or reduce the amount they payout to shareholders.
Cutting a dividend isn’t a good sign for a company, especially one that has been paying out consistently for an extended period of time. This article from Sure Dividend discusses why a company would cut its dividend. A company having too much debt was one of the reasons that stood out to me from this article.
Other factors to look out for include age, global economic factors, and other investment opportunities. Dividend investing isn’t the only way to make passive cash flow from investing. The benefit of dividend investing would be the low barrier to entry since an investor doesn’t need a large amount of capital to get started.
Yield on Cost
When a company’s dividend payment grows, the yield becomes higher on the initial investment. Simply Safe Dividends writes: “Yield on Cost only changes if a company raises or lowers its dividend…” You can look at the article linked above for a more thorough example, but I will put a short one below:
Cost Per Share:
Annual Dividend Payment Per Share:
Total Annual Dividend Payment:
200 shares x $1.50 = $300
($1.50 annual dividend payment /$50 cost per share) x 100 = 3.00%
The company increased the dividend payment a year later to $2.00 per share.
1 Year Annual Dividend Growth of 33.33%
The yield on Cost:
$2.00 per share dividend payment / $50 initial cost per share = 4.00% Yield on Cost
Here is an in-depth video talking about yield on cost.
Why did I spend so much time talking about yield on cost? At the beginning of the article, I spoke about inflation and other factors that can cause living costs to increase. Dividend income could also increase over time with companies that consistently grow dividends.
Although dividends and growth aren’t guaranteed, there are ways to understand the fundamental health of a company and how dividends are paid out. If you want to learn more about the basics of dividends, check out this article from Nerd Wallet.
Another point to bring up is tracking dividends. You can make a simple tracker in excel and use it to keep track of incoming dividends. Factors an investor can keep track of are the initial investment amount, dividend growth, and the yield on cost for specific companies.
When I started investing in dividend stocks, I would make graphs and charts displaying which companies take up a large portion of my portfolio and which have the highest yields (although the highest yield doesn’t necessarily mean it’s the best stock).
There are also software and other platforms online for keeping track of dividend payments and payout dates. Another way to keep track of dividends is your monthly brokerage statement. It should list your income and whether the dividend income was reinvested into the stock.
As spoken about at the beginning of the article, living off dividends can be possible but is relative to the individual investor. Higher living expenses may mean more dividend income is needed to cover the costs. An alternative would be to minimize costs and reduce living expenses.
If you’re researching dividend stocks, check out this article that covers free dividend screeners to find other stocks. Dividend screeners can help narrow down a list of potential investments by picking specific criteria.
Researching and understanding investing is the most effective way I’ve been able to grow my dividend income over time. I even pivoted my strategy slightly to just buying an ETF that pays dividends so I could have some diversification without researching numerous companies. To learn more about investing, check out other articles on Bookmark Investor.