Do you have a goal to live off dividends? Perhaps you’ve seen other videos on the topic or read other blog posts about how you’ll need millions of dollars to get there. But how is that possible today? This article will cover generating $50k, 100k, $500k+ in dividends a year. Now, it’s not something that’ll happen overnight, but depending on the goal, this plan will help get you there as fast as possible.
According to census.gov, in 2019, American households had a median income of $65,712. Of course, that was pre-pandemic, and between the great resignation and inflation, today, that number is certainly going to be higher.
Unfortunately, thanks to inflation, the cost of practically everything is going up too. Between the world opening up after the pandemic and the war in Ukraine, analysts expect gas to approach $5 a gallon. Unfortunately, it means higher prices for pretty much anything that needs transportation from one place or another.
Even toothpaste costs $10 for a tube – can you believe it? That means we have less money at the end of each month to buy what we’re used to.
Is Living Off Of Dividends a Dream?
So the idea of living off dividends, well, it’s a pipe dream, right? I mean, all these increases eat into our wallets. So, I wouldn’t blame you if you were ready to throw in the towel. But you don’t have to. You can live off dividends, and there’s even a fast way of doing it. Living off dividends doesn’t need to be a dream if you do it correctly.
When I was younger and learning about investing in dividends, I initially thought going for high dividend stocks would be best. I didn’t understand that, in many cases, a high dividend was unrealistic. For instance, it’s very rare to find a company that has a 5 or 6% dividend. It happens. But, it’s not the norm.
So what’s wrong with a high dividend? If the company has a high dividend, it could be that they are paying out too much of their profits. And, this is called the payout ratio. Let’s say we have a company with $1 Million in earnings. If they paid out $100,000, you could say their payout ratio is 10%. Astute investors might infer the company is reinvesting the rest in growing the business. However, companies with 100% payout ratios will not be able to sustain the dividend. The payout ratio sweet spot will be around 65-75%. These companies will exhibit a healthy balance of paying a dividend while reinvesting their profits.
Apple (APPL)
I wouldn’t blame you if you thought it was impossible to live off dividends. If you look at blue-chip dividend stocks like Apple, which cost $174 a share and pay a measly 0.51% dividend a year, you will get just 88 cents a year for each share of Apple you own. If your cost of living is $50,000 a year, you’d need more than 56000 shares of Apple at $174 each to live off your dividends. Now sure, you could find other strategies to increase yield, like, selling covered calls to make a little extra income. But, still, it amounts to a $9,886,363 portfolio. If you’re reading this article, I’m sure you’ll agree a $9.8M portfolio is unrealistic for most investors.
Proctor and Gamble (PG)
Now, that was an extreme example. But, other dividend companies aren’t much better. Let’s take Proctor and gamble, for example. They are a dividend king, and their shares cost $152, and they pay a 2.3% dividend. Okay, it’s better than Apple, but you’d still need more than $2,173,913 in Proctor and Gamble stock at the current stock price to live off dividends.
Sound unrealistic? For most, this is just a dream. But, it doesn’t have to be. Here’s a secret no one tells you about public companies. These companies want you to keep their stocks. They don’t want you selling them. When you sell the stocks, the price goes down. So they want shareholders to keep the stocks. And the best dividend companies do whatever they can to build value for the shareholders – in other words, shareholder value.
The Fastest Way To Live Off Dividends
The fastest way to live off dividends is to find and invest in companies that:
- Have a dividend reinvestment plan,
- Increase their dividends, and
- Repurchase their shares.
It doesn’t matter if you’re 20, 30, or even 50 years old. Living off dividends is not impossible. The key is having a plan and sticking to it.
Dividend Reinvestment Plan
A dividend reinvestment plan (or DRIP) is a service that some companies offer to shareholders that allows them to reinvest their dividends into additional shares of stock rather than receiving the cash. Many companies offer this service, and it’s usually free to participate.
I want you to stop and ask yourself a question. You may have heard it before, but it’s essential.
Which would you rather have?
- A Million dollars or
- A penny that doubles every day for a month?
I wouldn’t blame you if you said, I’ll take a cool million. But, a penny that doubles every day for 30 days is worth $5,368,709.12 on the 30th day.
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it earns it; he who doesn’t pays it”. And if you’re looking to live off dividends, compounding is the fastest way to get there!
Two benefits of DRIPs
Investors who participate in dividend reinvestment plans enjoy two main benefits.
First, they get to reinvest their dividends automatically to buy more shares of stock without paying a commission, which would eat into their returns.
Second, they can dollar cost average their way into a position over time, which smooths out the effects of volatility. In other words, when the markets go down, and stocks are cheap, the dividend yields usually go up!
Think of it like a snowball that gets bigger and bigger as it rolls down a hill.
When you own a stock, and your dividends get reinvested, you get more money each quarter or each year, as your dividends go towards buying more dividend-paying stocks!
Abbvie (ABBV)
Suppose you owned 100 shares of Abbvie – a gigantic drug company. Today, the company pays dividends totaling $5.64 a year or 3.52%. Sound exciting?
Let’s say you owned 100 shares of Abbvie and did nothing with them. You put them “under your mattress.” If all else were equal, no matter what happens to the stock price, at the end of 10 years, you’d have received $5,640 in dividends in 10 years.
But, let’s say, for instance, you reinvest those dividends over ten years. Reinvesting the dividends means you’re buying more Abbvie stock with the dividend. Well, in that case, at the end of the ten years, you’d now end up with 141 shares and more than $6,600 in dividends. ($6,615.26). Now might say, $6,600 in 10 years isn’t enough to live off. I get it – but it’s only half the equation. The next part makes your dividends explode.
Increasing Dividends
Dividend increases are exciting because when companies increase dividends, they give you, the investor, a raise. You get more money, meaning an even faster path to living off the dividends! Dividend growth investors know about the dividend aristocrats and the dividend kings. Dividend aristocrats are S&P 500 listed companies that have increased their dividends for at least 25 consecutive years. And dividend kings have increased their dividends for more than 50 consecutive years. It’s like getting a salary increase every year for 25 or 50 years or more.
Can you imagine owning a stock that increases its dividend each year? Well, with the right dividend stocks, it’s a reality!
So, we know that being enrolled in a dividend reinvestment plan is the way to go. Let’s look at a few dividend companies that have raised their dividends and how dividend increases can help you live off them even faster.
Enbridge (ENB)
Here’s another company, Enbridge – a Canadian oil giant. Five years ago, the company paid 37.9 cents a share in quarterly dividends. Today, Enbridge pays 67.4 cents a share, and since oil companies make more money when oil prices are high, this dividend likely doesn’t even consider the extreme growth in oil prices we’ve seen as of late!
Altria (MO)
And here’s another – Altria group. Altria is the company behind so many popular names like Marlboro cigarettes and Budweiser beer. Five years ago, this company paid a dividend of 56 and a half cents a share – and today, it’s 90 cents – a 60% increase. When was the last time you got a 60% raise for doing nothing?
Share Buybacks
The last way companies give shareholder value is through share buybacks. When a company is successful, it can use its money to buy back its shares from the market and effectively burn them. Doing increases the share price. But here’s the kicker. The dollar amount of dividends that get paid usually doesn’t go down! And when companies both increase dividends and repurchase their shares, you get a recipe for explosive growth.
Here’s a hypothetical example of ABC company. Suppose the company has 1 million shares and pays a total dividend of $1,000,000. That works out to $1.00 a share. If the company buys back half their shares, they now have 500k shares in the market. Yet, the $1,000,000 dividend payment now gets divided by 500,000, giving each shareholder $2.00 a share.
| # Of Shares | Total Dividend Payout | Dividend Per Share |
| 1,000,000 | $1,000,000 | $1.00 |
| 500,000 | $1,000,000 | $2.00 |
This is precisely how it works in the real world today! Let’s look at Abbvie again. This company frequently buys back its stock, 5 billion dollars at a time. And sometimes more. And not only that, but they also recently raised their dividend by 8.5%. Their dividend was $0.57 a quarter, or $2.28 a year five years ago. Today, it’s $5.68 a year. So, in this case, their dividend nearly tripled in just five years! Imagine all the extra shares you’d get to buy thanks to all the buybacks and three times the dividends?
The Case for $600,000/yr on Just $200/mo
Now, let’s have a little fun with this. You’ve stayed with me this long, so I’m leaving the best for last. Suppose you’re looking to live on $50,000 a year in dividends. It’s not a bad goal. In the last five years, Abbvie’s stock price has gone from $65 to $161 – that’s a 19.85% annual compound ROI. It was a kind of perfect storm for Abbvie – in a good way.
Suppose you have 100 shares of Abbvie. And, we plug in these numbers, say, into an advanced dividend calculator. In that case, we input the share price, today’s dividend yield, expected dividend yield increases, and stock price increases (based on past performance). After ten years, we get a balance of over $157,000 in stock and a little over $10,000 a year in annual dividend income. But what if we double the holding time to 20 years. Boom! The portfolio now explodes to over $2.7 million and more than $386,000 a year in annual dividend income! We were only talking about replacing $50,000 a year.
And other than reinvesting dividends, none of this takes into account adding to the portfolio. If you invest an extra $100 a month, the portfolio jumps to over $3.5 million after 20 years, just shy of $500k a year in dividends. Invest an additional $200 a month, and now you’ve got a portfolio worth over $4.3 million and more than $600k in annual dividends, just by investing an extra $200 a month!
Final Thoughts
Now, look, past performance isn’t necessarily what’ll happen in the future. But, past performance is how financial advisors base investment decisions. And with a $4.3 million portfolio generating $600k a year in dividends is just an example with Abbvie. Model portfolios contain stocks in multiple industries, and not everyone will have the same performance. But, now you get the idea why reinvesting dividends, increasing dividends, share buybacks create the backdrop to a perfect portfolio. And putting this plan in place is the fastest way to live off dividends.
