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How Much Money Invested To Live Off Dividends? - YouTube
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so in this video today we are going to
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be answering the question of how much
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money do you need to have invested in
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order to live off of the dividends
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now most people invest in the stock
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market as a means for retirement income
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so when they reach a certain age and
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they don't want to work anymore they are
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able to draw a percentage from that
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account and when you combine that with
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social security and maybe some other
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type of retirement pension from their
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job that should in theory be enough to
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sustain you for the rest of your life
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but there's a whole movement of people
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out there that are taking a more radical
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approach to this equation and in
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particular this is called the fire
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community or financially independent
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retire early and these are people who
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are looking to retire at a much earlier
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age and live off of dividend income so
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that's what we're going to talk about in
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this video today guys is how much money
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you need to have invested to be one of
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these people and obviously guys this
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goes without saying I am NOT a financial
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advisor this is not financial advice and
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this is just for entertainment purposes
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only but that being said if you're
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excited about dividends and potentially
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living off of this income do me one
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quick favor and drop a like on this
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video just to show your support that
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being said let's get into the video
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all right see what I did there I'm in a
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different chair now where's my like but
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first of all for those who are not
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familiar let's talk about what a
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dividend actually is so a dividend is a
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way that a large company can share a
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portion of those company earnings with
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the shareholders so let's take coca-cola
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for example they've been paying
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quarterly dividends since the Year 1920
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so if you own shares of coca-cola stock
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for every one share that you own you
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earn 40 cents of dividend income per
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quarter and that is them sharing a
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portion of Coca Cola's earnings with the
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shareholders now what's more impressive
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is that these companies try to grow
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these dividends over time and this is
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called the company's dividend growth
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streak coca-cola having a very impressed
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fifty-five year dividend growth streak
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so every single year for the last 55
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years coca-cola has grown and paid that
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dividend now most companies out there
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and most investment funds are going to
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pay dividends on a quarterly basis
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however there are some odd balls out
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there like Walt Disney stock that pays
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an annual dividend or you have Realty
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income that pays a monthly dividend but
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for the most part you should anticipate
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a quarterly dividend from an investment
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that pays a dividend
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now some people take that dividend and
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reinvest it which is the smart thing to
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do if you're looking to grow your money
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as that allows you to earn compound
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interest if you want to learn more on
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that topic guys check out that video in
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the corner other people for example who
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are retired may take that dividend
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income and use that money to live off of
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which is exactly what we're talking
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about in this video here all right so
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now what I want to talk about is how
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people actually earn dividends and it's
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typically one of two different
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approaches the first approach is the
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more passive investing approach and that
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is where you are investing in what is
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called an index fund or some people will
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accomplish this through a mutual fund
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but essentially what that is is a
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collection of in some cases hundreds of
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different companies so rather than
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investing in one particular dividend
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stock you invest in hundreds of dividend
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stocks through this fund and then that
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fund as a whole pays out a quarterly
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dividend so one popular example out
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there of one of these funds is the
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Vanguard high dividend yield ETF which
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pays around a three percent dividend
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yield and this fund holds over 400
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different companies that pay high
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dividends now the advantage to this
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approach is that you are well
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diversified across 400 different
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companies so if one or company in
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particular or a couple of them cut their
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dividend or eliminate it well you're not
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going to be in as much trouble as you
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would be if you own that stock directly
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and the other advantage to that is you
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don't have to spend time you know
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researching investments
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listening to earnings reports you can
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literally just toss your money into this
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fund dollar-cost average and just do
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nothing after that
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and then collectively earn your
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dividends from these hundreds of
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different dividend companies now the
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second method for doing this is where
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you invest in individual dividend paying
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stocks so rather than investing in a
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fund of hundreds of different companies
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you pick a handful of companies that you
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personally want to invest in and then
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you take those dividends and need to
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reinvest them or eventually you may live
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off of that as your source of income so
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for example a couple of popular dividend
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stocks right now are AT&T which pays
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around a five percent dividend yield
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southern company which pays around a
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3.75 percent yield Exxon Mobil which
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pays around a five percent dividend
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yield and so what you may find is that
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it's possible to build a dividend stock
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portfolio with a collective dividend
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yield of four to five percent now most
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people would not recommend that because
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you want to have a mix of both growth
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dividend stocks and more well
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established dividend companies because
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there's always that risk of companies
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cutting or eliminating that dividend the
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General Electric sorry about that I had
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something caught in my throat there
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anyways that fund we talked about
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earlier that Vanguard fund pays around a
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three point two percent dividend yield
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so some people looking for a higher
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yield from their dividend stocks will
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instead build a dividend stock portfolio
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and maybe find that they can build a
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portfolio with a four to five percent
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yield however this is higher risk
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because you're not diversified across
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many different stocks you just have a
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handful of them in your portfolio now
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what I want to talk about is what is the
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average income that we are looking to
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replace with dividends and obviously
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guys this should go without saying but
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I'm gonna say it anyway it would be a
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lot easier to replace your monthly
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income with dividend income if you
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needed let's say $2,000 of monthly
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income versus 20,000
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and most people who follow this fire
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movement live on a very small amount of
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money in some cases something like you
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know 1,500 to 2,000 dollars per month so
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the less money that you spend the easier
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it is to replace that money with
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dividend income but what we're going to
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do for this video is use the average
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salary out there for a single person
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because let's be honest guys if you're
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trying to replace your income with a
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family good luck with that
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okay so let's assume that you're single
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and you're looking to replace your
[434]
income with dividend income instead well
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in 2017
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the average salary was 61 thousand three
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hundred seventy two dollars so we're
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going to go with that figure and it's
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actually a pretty simple calculation to
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figure out how much money you need in
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dividend stocks roughly to replace that
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income now this is assuming that that
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dividend yield does not change and as
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we're going to discuss later on that
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dividend yield can in fact change but
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assuming it does not change the way you
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would figure this out is you would take
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the income you're looking to replace and
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divide it by your dividend yield that
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you anticipate earning so for example
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that Vanguard ETF we talked about pays a
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dividend yield of three point one nine
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percent so we would take sixty one
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thousand three hundred seventy two
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dollars divided by point zero three one
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nine and that tells us we would need 1
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million nine hundred twenty-three
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thousand eight hundred eighty seven
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dollars and fifteen cents invested in
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that ETF earning a three point one nine
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percent dividend yield to earn just
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about sixty two thousand dollars per
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year in dividend income now let's assume
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you follow the second approach and
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instead of investing in a fund you build
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a dividend stock portfolio with a higher
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yield of 4.5% well again you take that
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salary number or the number you're
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looking to replace divide that by your
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anticipated yield so if we divide that
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out we end up with a number here of one
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in 360 3,800 $22.22 to earn again
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roughly sixty-two thousand dollars per
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year of dividend income so short answer
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here you need like one to two million
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dollars invested to earn a basic salary
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from dividend income alright so now
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let's answer the question of how much of
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your dividend income do you have to give
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over to the government yes let's talk
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about taxes alright so here's the thing
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there are two different types of
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dividends out there and this brings you
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down a complicated rabbit hole of you
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know jargon that really your tax advisor
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in your financial advisor are the only
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people who really understand that but we
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have both a qualified dividend and an
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ordinary dividend so ordinary dividends
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are pretty simple because this is just
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money that is being paid out from the
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earnings of a company and it's called an
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ordinary dividend because it gets taxed
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as ordinary income so essentially the
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same rate that you pay for taxes at your
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job on the other hand you have something
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called a qualified dividend which is
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earnings paid out from a company that
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meets the following requirements first
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of all the dividend must be paid by a US
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company or a qualifying foreign entity
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second of all the dividends are not
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listed with the IRS as those that do not
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qualify now a couple of examples of
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popular dividend stocks that don't
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qualify by IRS standards are MLPs or a
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master limited partnership or a REIT
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which is a real estate investment trust
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now what we're getting at here is that
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these qualified dividends are taxed at a
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lower tax rate so it is an advantage
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where you can basically have more income
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from these dividend stocks than you
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would from the income from your job
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because you're taxed at a lower tax rate
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alright in the third and final
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requirement here for a qualified
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dividend is that the holding period is
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met now that holding period explanation
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is extremely complicated but in most
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cases it is a 60 to 90 day holding
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period so most long term dividend in
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unless you're investing in an MLP or a
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REITs or a non-qualifying company than
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you are in fact earning qualified
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dividends which are taxed at a lower tax
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rate and that tax rate is either 20% 15%
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or 0% depending on how much money you
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make so if you're in the higher tax
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brackets or the very bottom ones it can
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save you a significant amount of money
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on taxes by having qualified dividends
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instead of ordinary dividends and
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because of this lower tax bracket you
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may not need as much money as you
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thought you would in order to live off
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of dividends but wait a second guys I do
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have to burst your bubble here there are
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a couple of problems with trying to live
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off of dividend income and I want to get
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into those right now first of all we
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have something called inflation which is
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the general increase in prices of things
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over time now as we said earlier
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companies try to increase their
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dividends over time but there's no
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guarantee of this and there's also no
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guarantee that the dividend increase
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will outpace inflation so that being
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said the buying power of your money
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could deteriorate in $60,000 today will
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not buy the same amount of goods or
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products or services as $60,000 in 30
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years another big problem is that
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dividends themselves are not guaranteed
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so companies tend to pay dividends
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consistently and grow them consistently
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as that keeps shareholders around but
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during bad economic conditions or a
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company falling under financial hardship
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they can cut or eliminate that dividend
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at any time for example I know I
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mentioned it earlier General Electric
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used to be a high yielding dividend
[775]
stock and then there was a change in the
[777]
CEO the company was doing terribly
[779]
financially and the new CEO slashed
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their dividend down to just one penny
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per share so they went from a high
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yielding dividend stock of above 5% to a
[790]
company that barely pays a dividend at
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all so if you followed this strategy and
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invested a boatload of money in GE and
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then all the sudden your dividend income
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disappeared
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well then you would be in some trouble
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and there's another issue here as much
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as people complain about their jobs they
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do supply you with some pretty useful
[807]
stuff one of these things being health
[810]
insurance because if you were living off
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of your dividend income you would
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essentially be unemployed and you
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wouldn't have health insurance through
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your job so you would have to pay for
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your own policy which could cost you for
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a single person five hundred to a
[824]
thousand dollars per month and there's
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also a lot of other reasons why this is
[829]
not an exact science or necessarily the
[832]
best strategy to follow but the last one
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I want to cover here is that a job will
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also provide you with a consistent
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payment of weekly or bi-weekly payments
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in most cases dividend stocks on the
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other hand to pay dividends on a
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quarterly basis so if you for example
[849]
invested in a dividend fund you would
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earn four paychecks per year and you
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would have to manage that money well and
[856]
spread it out over those 13 week periods
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now for some people that wouldn't be an
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issue but for a lot of people if you
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handed them a check for you know fifteen
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thousand dollars they may spend that on
[867]
things that they weren't wouldn't
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ordinarily spend it on just because they
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see how much money they have even though
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that would have to last them for many
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weeks so living off of dividends isn't
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all it's cracked up to be as you guys
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can see so what I want to share with you
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right now is what I believe to be a
[883]
better strategy rather than living off
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of dividends it's this idea of
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eventually supplementing your income
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with dividends because this idea of
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having enough dividend income to retire
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in your 30s while it is possible it's
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kind of a long shot but the idea of
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building $500 a month of passive
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dividend income in your 30s now that's a
[908]
much more attainable goal and something
[911]
that is going to be much easier to
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accomplish because as you understand now
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living off of dividend income is not an
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exact science and there are many factors
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that can affect your level of income
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when you are living off of dividends and
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the other thing we have to mention here
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is that doing nothing all day would
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honestly be extremely boring I can tell
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you guys this from firsthand experience
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I've taken time off where
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you know I'll go on a vacation and I'll
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do nothing and by the third day I am
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literally bored out of my mind
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so the idea of living off of dividend
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income never working again and sitting
[946]
on the beach and drinking you know
[947]
Malibu Bay Breeze that sounds like a
[950]
great idea until you actually try it and
[952]
you realize that it sucks and nobody
[954]
would actually want to do that so
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instead of having that goal in mind I
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think a better goal is to reinvest your
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dividends in your 20s and 30s and then
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supplement your income later in life
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maybe with that dividend income because
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for most people you know five hundred
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dollars per month in dividend income
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that's a substantial amount of money and
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that could be huge for whatever your
[977]
goals are long term so anyways guys that
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is my video here I hope you enjoyed it
[982]
if you're new to the channel make sure
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you subscribe and if you want to learn
[985]
more about dividend investing like I
[987]
said I have a portfolio through m1
[990]
finance where I'm building up a $100,000
[993]
dividend a stock portfolio and I'm
[995]
reinvesting those dividends to earn that
[997]
compound interest if you want to check
[999]
out that video I'll pop a card up in the
[1001]
corner or there's a link down in the
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description below
[1004]
I personally invest through m1 finance
[1007]
it's a commission free brokerage that
[1009]
has portfolio level dividend
[1011]
reinvestment automated portfolio
[1013]
rebalancing and a lot of awesome
[1015]
features I'll drop a link to them down
[1017]
in the description below as well if you
[1020]
want to check them out full transparency
[1022]
I am affiliated with m1 finance so I do
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earn a small Commission if you use my
[1027]
link but thanks so much for watching I
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hope to see you in the next video see
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you then
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