How to Live off Your Dividends as Fast as Possible
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Living off dividends as fast as possible takes planning and won’t happen overnight but it is something anyone can do if you follow these steps.
Of all the questions I get from investors, the one most often asked is, “How do I live off my dividends?” It’s the dream of nearly all investors and only equaled to questions like, “How do I live off dividends as fast as possible?”…it seems investors’ dreams of living off dividends is only rivaled by the hope to do it NOW!
The good news is, living off dividends is not only possible but easy to do with a little planning. I make over $42,000 a year in dividends. Understand, I’ve been investing for 20 years but you can be making $1000 a month in dividends within 10 years and even faster with what I’ll show you in this article.
How Much Do You Need to Live off Dividends?
This is usually the first question investors ask me and it’s always confused me a little. My reply is usually something like…”well, how much do YOU need to live on?” That’s my answer. You can create a portfolio of dividend stocks to make any amount of money each month so the question becomes, how much do you need to cover your expenses and how do you get there?
Getting there is a little more than just asking the question. Let’s start with how to calculate dividends and find out how much you need to invest. Then I’ll show you some ways to live off your dividends faster and a few of the best stocks with high dividend payments.
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How to Live off Dividends Calculator
We have some great investing calculators on the channel but are still developing an easy-to-use dividends calculator. Fortunately, the math is extremely easy and I can show you how to calculate how much you need to invest for any amount of dividends.
First is to find out how much you need to live off each year. You’ll need to do add up your monthly expenses into a yearly amount because dividend yields are always shown by year. For example, on Yahoo Finance you’ll see that Realty Income, symbol O, pays a $2.96 dividend per share and a 4.2% yield. That means, you’ll get a total of $2.96 per share in dividends paid out over the year and that is 4.2% of the current stock price. Even though Realty Income pays dividends every month, the numbers you see are always yearly.
Finding how much you need to invest in a stock to earn $1000 in dividends (or any amount you need) is easy then. You just take the amount you need to live on over the year and divided by that percentage yield on the stock. For example, if you need $1000 a month or $12,000 a year then $12,000 divided by 0.042 is $285,714 in shares of Realty Income…that will pay you approximately $1000 a month in dividends.
Of course, you don’t want your entire savings in just one stock. To do this calculation for all your stocks, you first find the average dividend yield. Do that by adding up all the yields for the individual dividend stocks and dividing by the number of stocks. Then you use this average dividend yield in the calculation above, instead of the dividend yield on the single stock.
It may seem like a lot of money but next I’ll show you a few ways to live off dividends as fast as possible.
Fastest Way to Live off Dividends
The fastest way to live off dividends…and I’m sorry to be Donald Downer here but the truth is, the fastest way is to cut how much money you need to live. Even the best dividend stocks with the highest yields are only going to pay you around 10% a year. That means you’d need $120,000 in your account to receive about $1000 a month in dividends.
It may seem impossible, especially for someone living on the coasts, but there are places even in the United States where you can live comfortably on less than $2000 a month. It gets even easier if you’re willing to travel farther from home. As a single person living in Colombia when I turned 30, I lived very well on $1200 a month.
If you’re not able to cut the budget though, and it might not be reasonable if you have a family to support, then you’ll have to find other ways to build your portfolio to make more money off dividends. You can’t change how much dividend stocks pay you, between 5% and 10% a year, but you can change how much you have invested to make enough to live on.
The surest way to do this is to reinvest your dividends while you grow your portfolio. For most people, it’s going to take at least 10 years to build up a portfolio large enough to live on. If you reinvest your dividends back into more stocks each year, you’ll earn dividends on that money and get there even faster.
Another way to speed up the clock is to not just invest in the highest-paying dividend stocks but also those with the strongest returns. For example, the Nasdaq 100 Covered Call ETF, symbol QYLD, pays an amazing 11.8% dividend annually but the stock price has actually lost 10% over the last five years. You may be earning money off the reinvested dividends but you’re not really growing the portfolio very fast. On the other hand, shares of the Invesco QQQ Trust, symbol QQQ, which holds the same stocks as the QYLD, only pays a 0.46% dividend but the stock price has surged 169% over the past five years. A $5,000 investment in the QQQ five years ago would now be worth $13,466 and could now be invested in higher dividend stocks to live off.
The fastest way though to live off dividends is to find ways to invest more money. This could mean starting a side hustle of five- or ten-hours a week or starting your own online business. Investing an additional $200 a week grows to over $200,000 in ten years and that’s on top of what you were investing already. That $200K alone is enough to produce $20,000 a year in dividends with the right stock.
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Best Dividend Stocks to Live off Dividends
The best dividend stocks to live off dividends will usually have a few things in common.
- They pay dividends monthly. You can live off dividends with stocks that pay every three months but it takes more planning. It’s just easier when the dividend payments and your bills match up.
- They offer dividend yields between 5% and 10% a year. Less than 5% and it’s going to be very difficult to build a portfolio big enough to live on. More than 10% and you run the risk of the share price falling or the dividend being cut.
Check out this video for 7 of My Favorite Monthly Dividend Stocks to Pay the Rent!
A few examples include,
- Horizon Technology Finance, symbol HRZN, a business development company that loans to small- and mid-size companies and pays a 7.9% dividend yield.
- Prospect Capital Corporation, symbol PSEC, also a BDC with a 9.1% dividend and a good share price return of 23% over the past five years.
- Aberdeen Income Credit Strategies, symbol ACP, is a leveraged bond fund and pays a 12.3% dividend. I like adding these funds to a portfolio for safety and diversification from individual stocks.
How Can I Earn $1000 a Month in Dividends?
Earning any amount from dividends is possible but it’s always easiest to start with a small goal in mind and work to it. Earning $1000 a month in dividends might not be enough for most people to live off completely but it does pay a lot of bills. In fact, earning $1000 a month in dividends may be all you need to work part-time instead of full-time.
I shared a video last week on how to earn $1000 in dividends with a portfolio of stocks that paid an average 6.3% dividend yield. To make $12,000 a year on this portfolio, you would need to have invested $190,476 in the stocks mentioned.
Let’s say you want to build to that portfolio in five-years, how much would you need to invest each month to do it? Building a $190,000 portfolio in five years, at a 12.5% annual return and reinvesting dividends, would mean investing $2,500 a month. Not impossible but it’s tough for most people to find an extra few grand a month to invest. Easier though would be stretching the goal out to ten years. That would mean investing just $875 a month over the decade, something anyone can do!
You can live off dividends but it takes planning and a little honest practicality. Anyone can earn $1000 a month in dividends within ten years and even less with some of the highest-paying dividend stocks. The fastest way to live off dividends takes one part budgeting and one part smart investing over time but that’s what we’re here for!
Check out the Entire Live off Dividends Series
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