How Much Money Do You Need Invested To Earn $1,000 Of Dividends?

First things first, most people are wondering, is it possible to live off dividends entirely?

Yes, it is.

However, it will require some strategic planning and other factors to consider if this is something that is of interest to you for the long term.

Why dividend investing income is attractive?

If you think about it, every source of income that you generate requires you to be actively involved to pursue that income.

For example:

• Job income- It requires you to actively work at a job laboriously for many hours.
• Business income- It requires you to generate leads and market your business for sales generation and growth.
• Rental income- This is relatively passive but usually requires huge upfront capital and maintenance of the property that you own.
• Commission income- May become passive in the long term, but getting those initial commissions requires getting those first few leads and building a community around it.

Then there is inheritance income that you get, royalty income or capital gains which is usually one-off and most people may not get that type of income.

What makes dividend income attractive is :

1. The ability to generate it passively even when you sleep. Anyone can easily buy a dividend-paying stock and sell it should they decide to in future. Hence, it provides ease of access and liquidity to its owners.

2. Next, the best part is that it's 100% passive meaning you do not need to actively work on it or generate leads as you would a job or business.

3. Dividend-paying stocks provide a way for investors to get paid during rocky market periods when capital gains are hard to achieve.

4. They provide a nice hedge against inflation, especially when they grow over time.

5. They are tax advantageous as usually taxed at a lower rate than other earned income.

6. Tend to be less volatile than non-dividend-paying stocks.

Living off investments

Have you ever noticed this about the very rich?

They have their mansions, their sports cars, their country club membership. And they don’t seem to work at all?

Whereas, the poor person works 2 jobs but still barely gets by. Well, that’s because the rich live off the income that grows passively.

“Formal education will make you a living; self-education will make you a fortune”. — Jim Rohn

The most famous ways to earn passive income are usually:

1. Owning real estate and earning rent
2. Leaving money in the bank and earning interest
3. Investing in stocks that pay dividends

In this article, we will focus only on dividend stocks, though.

Just remember you too have the potential to be a millionaire!

How Much Do You Need to Live Off Dividends?

I have asked the same question when I was starting 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 assumes a 4% dividend yield
• 4%x 25=100%

The magic formula

Annual Income You Want / Dividend Yield = Amount You Need Invested

Lets’s look at an example

If you wanted to generate $60k in dividends a year at a more realistic 3% dividend yield, you would need a portfolio worth around $2,000,000 ($60,000/0.03).

Annual expenses are around $60,000, which is the average US household expenses according to the Bureau of Labor Statistics.

• If you wanted to generate $40k in dividends a year at a more realistic 3% dividend yield, you would need a portfolio worth around $1,333,333 (40,000/0.03).
• You can adjust your desired annual income to find out how much you need invested.

Annual Income You Want / Dividend Yield = Amount You Need Invested

What is a good salary in 2021?

The weekly median earnings for full-time wage or salary workers in the United States according to the Bureau of Labor statistics in the second quarter of 2021 amounted to $990. It translates to a yearly income of approximately $51,480. Any amount above that should theoretically be considered a good salary. However, what’s considered a good salary varies from country, state, education level and sadly even race and gender.

There are 3 keys to building a large enough portfolio that pumps out enough passive income to live off:

1. Live below your means
2. Save aggressively
3. Give it time

How to start

1. Focus on growth and value stocks
2. Find stocks that are of interest to you with a favourable dividend yield.

Let's look at some companies Altria (MO), Abbie (ABBV), Coca-cola (KO), JPM, McDonald's (MCD), UPS, Kroger (KR), Ecolab (ECL), Dominos (DPZ) and Apple (AAPL).

The above image gives you an idea of how much you need to invest to get a $1,000 dividend income annually. If the share price goes down you will be able to buy more shares at a discount and get to your $1,000 dividend goal sooner. However, if the share price goes up it will cost you more money to buy a stock and require more money for you to buy shares to get to your $1,000 dividend goal.

Higher dividend yields are viewed as more favourable to getting higher dividends, however, most investors would look at other ratios as well and not just the dividend yield alone when accessing whether to invest in a company or not.

Let's look at Altria

To get a $1,000 annual dividend you would need:

Annual Income You Want / Dividend Yield = Amount You Need Invested

$1,000/0.07= $14,285

That would be around, $14,285/ $51=280 shares that you would need to buy +/- depending on the share price.

Coca-cola

To get a $1,000 annual dividend you would need:

Annual Income You Want / Dividend Yield = Amount You Need Invested

$1,000/0.0275= $36,364

That would be around, $36,364/ $61=596 shares that you would need to buy +/- depending on the share price.

McDonald's

To get a $1,000 annual dividend you would need:

Annual Income You Want / Dividend Yield = Amount You Need Invested

$1,000/0.0214= $46,729

That would be around, $46,729/ $257=182 shares that you would need to buy +/- depending on the share price.

Apple

To get a $1,000 annual dividend you would need:

Annual Income You Want / Dividend Yield = Amount You Need Invested

$1,000/0.0051= $196,078

That would be around, $196,078/ $173=1,133 shares that you would need to buy +/- depending on the share price.

Conclusion

Dividend investing can be a great option for your investment portfolio especially when you let it grow passively and compound for you. The compounded returns that you generate can provide you with a stream of income in the long term.

If you buy the right kinds of stocks (dividend growth stocks) you would actually earn more every year.

Your income could easily double every decade with a decent dividend growth rate if you build to maintain the same level of consistency.

Don’t let the fear of losing be greater than the excitement of winning. — Robert Kiyosaki

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