I started investing in earnest back in 2010. At the time, I was making about $40,000 per year as a service advisor for a car dealership. As a guy who grew up on welfare and didn’t have a college degree, I felt pretty fortunate to make what I did.
It wasn’t a huge amount of income. But I was determined to save and invest as much as I possibly could. Because I had a dream.
A dream to retire early and live off of dividends by the time I turned 40 years old.
I started blogging about my dream in 2011, which eventually got me featured in mainstream media like the Today Show and led to all kinds of fantastic opportunities online.
And now here I am, more than 10 years later, living off of dividend income. A dream come true.
Better yet, I actually quit my job at only 32 years old. I decided at that age to concentrate on my online ventures and use the invested savings from these endeavors to get me the rest of the way there. And by 33, my passive income was enough to cover my bills.
All well and good, but this does beg a question. How much money do you need to live off of dividends?
Well, I’m aiming to answer that question today. Let’s dig in.
It’s a simple question. How much money do you need to live off of dividends? But simple doesn’t mean easy. This is actually a complicated question that demands a unique answer that’s customized to each individual.
What do I mean by that? People are different, portfolios are different, life situations are different, etc. Most importantly, how much money you need depends on how much money you spend.
It comes down to your lifestyle. What kind of life you live and how much you spend will determine everything.
In order to achieve financial independence and retire early – also known as FIRE – I had to live super frugally. This was in part due to the fact that I simply wasn’t making that much money at my day job. But I realized something very important when I started to spend less money.
Spending less money does two things for you. First, it allows you to invest more money.
This helps you to compound your wealth snowball at a faster rate.
But there’s a hidden benefit to spending less.
One you might not initially realize.
Spending less money means you need less dividend income to cover your bills.
Someone who goes from spending $40,000/year to $20,000/year didn’t just double their available investing capital. They also halved the amount of dividend income they need to live off of. And that makes things much easier.
So how much money do you need to live off of dividend income?
Well, like so many things in life and money, it depends.
It depends on how much money you spend. The more you spend, the more money you’ll need to save and invest, and the more dividend income you’ll need to live off of.
Likewise, it’s vice versa if you spend less.
Obviously, in this case, it’s best if you spend less. That gets you to your goal faster twice over – both by way of the additional investment capital and the lower dividend income hurdle you need to clear.
What am I trying to say? I’m trying to say that you can figure out right now how much money you need.
All you need to do is figure out how much money you’re spending.
Track your spending, down to the penny, over the next few months. I mean it. Track every single penny. Most people don’t know how much they spend, which means they don’t know how much money they need to live off of.
To prove it, I’ll give you an experiment.
Ask someone exactly how much money they make. I’ll guarantee you they could answer in a nanosecond. Now ask them exactly how much they spend. Watch as a blank stare washes over their face.
I’ve been tracking my expenses for more than a decade now. I track every single penny. Because I started tracking every cent, I was able to quickly cut out a lot of fat from my budget.
Once it became a choice of needless spending or financial freedom, the choice was clear.
And I think you’ll find the same thing when you track your spending. You’ll see the fat, cut it, and then get to your goal so much faster because of the increased savings and the lower threshold.
Once you know spending, you can match dividend income to it. From there, it’s just a matter of doing some math to arrive at an ending portfolio value, which can vary depending on its yield.
Now I’ll give you two numbers that I think will help guide you.
The first number is 50%. This should be your targeted net savings rate. If you can save 50% of your net income, you should be able to achieve financial independence and retire early by living off of dividends within a reasonable time frame. Think 12-15 years, depending on your investments and yield. I can tell you that I routinely saved over 50% of my net income to get here. Sometimes even more than 70%.
The second number is $20,000.
In my mind, that’s a reasonable annual dividend income target for most people. That’s for one person. If you’re making a fairly average US income of $50,000/year and saving half of it, this is the kind of money you’d already be used to living off of and also a number that’s realistic to attain within a sensible time frame.
If you want more dividend income, you’ll have to earn more money, save more money, wait longer, and/or stretch for yield on your investments.
For perspective, a $500,000 portfolio yielding 4% can generate $20,000 in annual dividend income. So can a $400,000 portfolio yielding 5%.
As it happens, this was the initial target number I had in mind for myself when I first started investing in 2010. But I later figured out that I could make do on less and still be incredibly happy because I didn’t have to spend most of my waking hours at a day job I didn’t like. Just getting rid of the job made me a lot happier. It was addition through subtraction.
That might not seem like a lot of income. But keep a few things in mind.
First, like I said, you’ll get used to living below your means. When I started to do this, I realized it wasn’t that bad. There’s a lot of stuff people are spending their money on that simply does not improve quality of life or add to happiness. It’s just a lot of waste. Once you cut the waste out and get to the things that matter, you’ll find that life isn’t that expensive.
Second, dividend income is intrinsically advantageous relative to job income. This makes it deceptively powerful in terms of purchasing power.
Qualified dividends are tax-free at the federal level up through the 15% tax bracket. So you can make $20,000 per year in qualified dividends and pay $0 in federal income tax. Also, no FICA tax. This makes $20,000/year in dividend income equivalent to much, much more W-2 day job income.
Also, just think of how much money you spend just by having a job.
Transportation costs, food costs, clothing costs, etc. A job costs money. Transportation costs alone can add up to thousands of dollars per year.
Dividends, on the other hand, cost nothing to continue receiving once you own stock.
And they can be received from anywhere in the world, which is great. Once you’re physically untethered from a job, you could potentially take advantage of geographic arbitrage and move somewhere that offers you a better tax situation and more value for money.
I wake up almost every single day to fresh, new money I didn’t have the night before. And I pay $0 for this to happen. Dividends are awesome.
After factoring out federal income taxes, FICA, savings, and the costs associated with having a job, $20,000/year in pure dividend income can be a lot like someone else making $50,000 per year in disadvantageous W-2 income and still saving toward financial independence. That goes pretty far for someone who’s creative and open-minded with spending.
And here’s my third and final point. Financial freedom isn’t the end. It’s the beginning. Likewise, hitting your number isn’t the end. Whatever passive dividend income goal you have in mind is really just the start in a lot of ways.
I’m talking about investing in high-quality dividend growth stocks on this website.
If you build a portfolio chock-full of high-quality dividend growth stocks, your passive dividend income should be growing year in and year out, like clockwork. And this dividend income isn’t just growing. It’s often growing faster than inflation. That increases your purchasing power.
What might start out as tight coverage between dividend income and expenses can start to loosen up quite quickly. Eventually, it turns into a runaway snowball of passive dividend income that you can’t reasonably spend.
I think almost anyone can become financially independent, retire early, and live off of dividend income.
I say that as a guy who was born in Detroit, grew up on welfare, lost his parents at a young age, dropped out of college, and never had some great job.
I’m just a regular guy who was dedicated, educated himself, saved, invested, and achieved financial freedom at a very young age. And I’m here to inspire you all to do the same.
You just have to make the right choices as it pertains to your money. It’s absolutely critical that you do this. If you delay gratification, you’re making a hard choice for an easier life down the road. If you instead make the easy choices, you’ll end up with a harder life.
We all have our choices to make. Your choices are your own. But choices have consequences. The most important thing for you to do now is to track every penny you spend. You should know exactly what you spend. Then you’ll know exactly how much money you need to live off of dividends.
So get busy tracking, saving, investing, and building that passive dividend income. And then enjoy the sweet, sweet life of living off of dividends.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.