How to Live Off Dividends (What the Rich Don’t Want You to Know)
First thing’s first: is it possible to live off dividends?
The short answer is yes.
The longer answer is yes, but it depends on three variables. Those three variables will come later down the article.
Before that, I want to show you how living off dividends works.
Living Off Investments
Have you ever noticed this about the very rich?
They have their mansions, their sports cars, their country club memberships…
And they don’t seem to actually work at all?
Well, that’s because they live off the income that their investments generate.
In other words, their money makes more money!
Without getting political, this is how capitalism is designed to work.
In my opinion, you can either embrace it or fall behind.
Since you’re here reading this, I reckon you’re part of the former, and you want to learn how to invest your money, make it grow…
..and then live off your dividends for the rest of your life.
Get Rich with Dividends
Now, as you’ll probably know, the concept of earning money from your money is called passive income.
That means that you don’t have to actually work – or do anything – to earn that money.
It’s 100% passive.
The most famous ways to earn passive income are:
- Owning real estate and earning rent
- Leaving money in the bank and earning interest
- Investing in stocks that pay dividends
Now, unless interest rates increase incredibly quickly, keeping your money in the bank is not going to make your money grow by much…
…let alone let you live off interest!
However, renting properties out and owning stocks that pay dividends will.
In this article I’ll focus only on dividend stocks, though.
How Much Do You Need to Live Off Dividends?
The next question is how much money does one need?
It’s a good question.
I definitely asked the same question when I was starting out and dreaming of, one day, retiring early and living off of my dividends.
As a rule of thumb, you should multiply your yearly expenses by 25.
That will give you a rough idea of the amount of money you’ll need to be able to cover all your expenses.
This assumed a dividend yield of 4%.
(Hence 4%*25 = 100% of your expenses!)
Let me give you an example.
Let’s say your annual expenses are $60,000, which is the average US household yearly expenditure according to the Bureau of Labor Statistics.
If you wanted to generate $60k in dividends a year at a more realistic 3% dividend yield, you’d need a portfolio worth around $2,000,000.
Now, before you despair and dismiss the possibility of ever living off of dividends, there are several tricks to seriously reduce how much you need.
How Most People Live Off Dividends
If you’ve ever read the Millionaire Next Door, you’ll know that most millionaires are self-made and never earned large salaries.
The average millionaire doesn’t drive a Ferrari and splash out on fine dining and luxury items.
The average millionaire actually looks like this:
See what I’ve done here? 😉
If you’re on mobile, you should see your reflection…
You have the potential to be a millionaire!
There are 3 keys to building a large enough portfolio that pumps out enough passive income to live off:
- Live below your means
- Save aggressively
- Give it time
Let’s stick with the previous example of $60k yearly expenses.
The truth is that you wouldn’t have to save anywhere near the 2 million you’d need.
Not even close. This is what you’d need:
- A portfolio consisting of high-quality dividend growth stocks
- To save $1,000 per month
- To keep doing this for 30 years
In this example, you’d end up with a portfolio worth $2,171,000.
Just by investing 1,000 a month for 30 years, for a total investment of $360,000.
In other words, the vast majority of the money would come from the growth of your stocks!
NOTE: If you want to run the numbers yourself, I’ve just used a simple compound interest calculator to work this out, assuming a 10% yearly rate of return, which is in line with what dividend growth stocks have returned long-term.
This is the real power of compound interest. It’s mind-blowing.
As Einstein famously (and allegedly) said:
“Compound Interest is the 8th Wonder of the World. He who understands it, earns it. He who doesn’t, pays it.”
Dividends Pay The Bills
So what happens when all your expenses are fully covered by dividends?
Live unlocks itself. Completely. You become the master of your time.
This is commonly known as Financial Independence.
At that point – when you didn’t have to work for money ever again – what would you do?
Spend more time with your loved ones?
Go sailing around the world?
Devote your life to a good cause?
Those options would all work, because your dividends would keep being deposited into your account whatever happened.
In fact, if you buy the right kinds of stocks (dividend growth stocks) you’d actually earn more every year.
Your income could easily double every decade with a decent dividend growth rate.
Follow These Steps
Ok, I bet you’re now realizing that living off of dividends doesn’t actually take as much as you thought…
I mean, don’t get me wrong…. it’s by no means easy.
But it’s definitely within your reach, as long as you are able to live relatively frugally, invest well and remain patient.
While personal finance is outside the scope of this article, investing psychology and techniques are very much what I can teach you. 😉
If you’d like to learn the process to find and analyze stocks which will allow you to live off dividends, then I’ve created a free PDF guide that shows you exactly how to get started.
Just let me know where to send it below!
Want to learn how to get started with Dividend Growth Investing? Then this PDF guide is the perfect place to start.