Living off Dividends 101 (The Magic Number)
Today we'll discuss what it takes to live off dividend income and what strategies you can use to make sure your portfolio is generating enough returns.
I will provide detailed numbers and calculations to give you a better understanding too.
Dividends are really the truest form of passive income in terms of you not needing to do any work once it’s been set up.
This is because dividends are a relatively stable source of income.
Although it is true that there are other opportunities out there for passive income, such as owning real estate properties, selling your own book, or starting a blog, there is really nothing out there that requires so little work to maintain as being able to live off dividend distributions from your investment portfolio.
If you buy rental property with the intention of earning money from renters, you will still be responsible for building maintenance, finding tenants, and evicting people as the need arises.
If you want to be successful with a blog, you will need to spend years cultivating an audience that is interested in reading your blog on a consistent basis.
If you want to license your own music, for example, you still need to compose songs that people not only want to listen to, but also want to pay money for.
You see where I am going with this.
On the other hand, when you invest in dividend stocks, you automatically receive dividend payments deposited directly into your brokerage account or bank account on a monthly or quarterly basis.
It is the least difficult way to make a living possible, as you won't have to do anything other than check your portfolio once every couple of months.
Benefits
Even if you couldn't live off of dividends alone, the extra money you get could be the difference between staying in a job you hate and switching to one you enjoy.
Alternatively, it could be the difference between working full-time and working part-time, with the remainder of your free time being spent with family, friends, or doing whatever you want.
However, the amount of money that you’re gonna need to invest is the primary obstacle in your ability to survive solely off of dividends.
There is a way where significantly more people can achieve the goal of living off of dividends without the need to invest one million dollars or wait decades until you're 65 years old.
In order to determine the total amount of capital that will be required in order for us to survive solely on dividends, we are going to investigate a number of distinct types of investments.
For this example, let's say you want to live on $5,000 dollars a month, which, depending on your lifestyle, may or may not be a lot.
If you have four children and live in an urban area, you are going to need a lot more than this, but if you live in a rural countryside and are willing to commit to a frugal lifestyle, you can actually get by with a lot less than this every month.
Dividend Aristocrats
Let's begin by investigating some of the most well-known dividend growth investments, which are the benchmark that all of these videos and articles use to conduct their analysis.
The Dividend Aristocrats list is a great place to find top dividend stocks.
Dividend Aristocrats are companies that are both in the S&P 500 index and have paid and raised their base dividend for at least 25 consecutive years.
For the first example, we are gonna look at Johnson and Johnson, ticker symbol JNJ, which is probably one of the most popular dividend stocks.
Johnson and Johnson owns a portfolio of excellent brands that make products people need -- specifically healthcare items.
In addition to its well-known consumer brands, it has massive and steadily profitable operations in pharmaceuticals and medical devices.
This combination has allowed the company to increase its dividend for 60 years in a row.
With a dividend yield of 2.57% and paying out a quarterly dividend of $1.13 a share.
If we want five thousand dollars every month or fifteen thousand dollars every quarter, we'll need to take fifteen thousand dollars and divide that by $1.13, which gives us 13,274 shares that we need to own.
This is the number of shares we need to make a passive income of $5,000 dollars a month.
Since it trades at $162.15 per share as of the writing of this article, if we buy 13,274 shares at this price, we need to fork over $2,150,000 dollars.
If you follow the dividend growth strategy of consistently investing, you will eventually be able to live off of your investment in Johnson and Johnson.
The truth is you won't literally have to invest 2.15 million dollars; you just need to keep investing a good amount every single month in order to achieve this goal.
Wait at least 20 or 30 years for the value to increase, and you will eventually have a nice nest egg that you can use to support yourself.
Drawbacks
This method of investing does have a few drawbacks, despite the fact that what you're doing is not in the least bit problematic.
The first step, which is waiting, is almost certainly the most difficult part.
Because Johnson and Johnson only yields 2.57%, you will need to wait a really, really, really long time before you have enough shares to live off dividends, even if it is assumed that a stock will be able to increase its dividend each year for decades.
It is a very long process, and it typically takes the majority of your working life to accomplish this goal, so during that time, a lot of people simply give up because they lose the motivation to continue.
Not to mention that investing so much money in a single stock and relying on it for your livelihood is usually a bad idea.
Income investors need to diversify their investment portfolio to ensure that one of their holdings doesn’t slash their dividends too dramatically.
If Johnson and Johnson were to cut their dividends in the future, it would adversely impact your income and lifestyle, which happened before to AT&T investors.
So the next logical step would be to identify a strategy with a higher yield that is able to address both of these problems, the first being the sheer amount of time and investment that it takes, and the second being the risk of investing in a single stock.
Covered Call ETFs
So, what exactly can people invest in that pays out very high dividends that often keep growing?
People who want to live off dividends sooner and are looking for investments that offer excellent dividend yields may want to consider Covered Call ETFs.
These are distinguished by their steadily growing distributions in addition to their monthly dividends.
If you're not familiar with options, these are relatively newer kind of investment that haven't been around for very long but are experiencing significant growth in popularity.
It might be difficult to understand if you are not familiar with options, but I will try to break it down for you to understand.
When a covered call investment strategy is used, the fund buys a basket of stocks and then also sells call options that correspond to that basket of stocks.
These options are sold on a monthly basis, and the premiums from those sales are distributed among investors in the form of dividends.
As a result, the dividend yields that we receive as investors are extremely high.
Best ETFs To Invest In
Having said that, the most popular covered call ETF in the market currently would be QYLD in my opinion.
It currently offers a distribution yield of 13.03% according to its website as of the making of this video.
There are two additional covered call ETFs available, both of which enjoy significant demand.
The first one is called JEPI, which uses covered calls in addition to holding equity linked notes for stability.
The second one is called NUSI, and it uses covered calls in addition to protective puts, which means that it helps prevent the fund from falling by a significant amount in a bear market.
As you can see, both JEPI and NUSI have dividend yields that are lower than QYLD's, but in exchange, JEPI and NUSI have much better long-term price appreciation.
Although QYLD has had the worst performance of the three in terms of its share price;
however, QYLD does have a higher dividend yield.
How Much Do You Need?
Now let's figure out how much money we need to invest in order to make $5,000 dollars per month.
First, we'll use NUSI.
If we divide $5,000 dollars by this fund's last monthly dividend, which was $0.12394, we'll get 40,342 shares of the fund.
When we multiply that by its share price of $19.14, we get $772,000, which is significantly less money that you need to fork out compared to Johnson and Johnson.
However, it’s important to keep in mind that this is a diversified ETF and is not invested in just one company.
Finally, let's take a look at QYLD.
To calculate how many shares we need, we divide $5,000 dollars by its most recent dividend, which was $0.1696.
This gives us 29,481 shares.
If we multiply this by the stock's current share price, which is $16.99 per share, we find that we need $500,000 to be able to live off of the dividend income of $5,000 dollars per month.
However, keep in mind that you don't actually have to invest this entire sum of money.
You'll actually need to invest a lot less than this if you let the snowball effect take place and reinvest those dividends on a monthly basis.
The amount you'll need to invest will be determined by how long you wait.
If you are able to maintain your lifestyle on just $2,500 dollars per month, you most likely receive social security, have a retirement account, or have some other form of income that is passive.
You would need a total of only $250,000.
This seems to be a lot more achievable than Johnson and Johnson type stocks now, doesn’t it?
An Alternative Strategy
If you ask me, writing a best-selling book or making a significant amount of money from selling stock photos or jewelry on Etsy are not feasible for making a living compared to investing in Covered Call ETFs and living off of dividends.
Even if you are unable to reach the goal of being able to survive entirely off dividends, having the ability to earn an additional thousand or two thousand every month can certainly help you pay for a lot of things you need in your life.
Now I am not saying you should sell off your entire holding and put it into Covered Call ETFs now, but what I am presenting to you is an alternative strategy that you can potentially use after doing your own research.
It is slightly riskier compared to just investing in conventional consumer staples stocks, but I believe it can be a viable strategy provided that you keep a diversified portfolio.
Now, what do you think?
Is it actually a viable strategy? If so, do share this article with your family and friends!
- Ivan