Here I am, scrolling through my retirement portfolio when I think to myself, ‘how do you live off dividends?’
So, how do you live off dividends?
In order to live on dividends, it is important to first go through how much you need in dividends to cover their living costs.
Costs – Your total costs are really the basis for your need for revenue. Ie About your total costs (rental, loans, electricity, food, travel, car, gadgets, clothes, etc.) are $1000 a month so your total dividends need to be 1000 or more on average per month for you to live on them.
The lower the costs you have, the more can you save. Lower costs also make you do not need as much capital in order to live on the dividends.
Low costs make you economically free faster.
Here’s a video explaining how to live off dividends
5 steps to be able to live off dividends
Step 1 – Build a tax-free dividend portfolio
The foundation is in having a stock portfolio that is optimized for dividend.
The dividend is intended to serve as income while retiring and should be able to finance the lifestyle you want to create.
Therefore, shares that provide returns are preferred by dividends before price gain. The point is to ensure your cash flow, when you have the ambition to work less or nothing at all, instead “the salary” from the dividend portfolio.
Step 2 – Count on future costs
With the right goal, you can motivate yourself to achieve the possibility of living wholly or partly on the dividend.
Start by counting on how much costs you are expected to have in your future lifestyle. Merge all your costs today and see how much it represents in a whole year.
Keep in mind that counting all, both food, accommodation, entertainment, interest and other costs. Say it would amount to $20,000 per year, which is not completely unreasonable.
If you then build a portfolio of direct yield of 3 percent, you need 670,000 in equity. (670,000 * 0.03 = 20,100). Turn these parameters to your own calculation.
Now I have counted on 3 percent in yield, if you can find shares that give a higher, you need less money in equity.
Remember, however, to choose shares that can provide the same dividend or higher coming years. In other words, you do not want shares that provide a high one-time dividend today.
At first glance, it can be removed to save 670,000. But if you hang out in the subsequent steps, see that this can be significantly faster than you think.
What you need to do right now is to determine goals and sub-goals.
Step 3 – Share Distribution & Reinvestment
The time before, that is, when you build the portfolio, do best to reinvest the dividend you get.
This allows you to get more shares and thus more dividends on the next occasion.
This is precisely that creates the coveted compound intrest effect. This in turn does that time it will take for you to achieve your goal will go faster than you spend the money.
If you aim at shares that have good potential to raise their dividend, it will also reduce the time until the goal is achieved.
If the dividend is raised, it means more revenue for you to cover the future cost. Look for shares that have a high dividend growth.
Step 4 – Use long-term fluctuations on the stock exchange
You need to expect that the stock market will swing with time and even so the dividend you get into the account.
Until the day you should live on the dividend, you can use the fluctuations and increase more shares from the income you have today. Meanwhile, when the stock market rises, also increase with more shares.
When there is a crash on the stock exchange, it is usually the best opportunity to buy more shares and get even more dividends in the future!
Also take height for the dividend to be lowered or abolished during inferior financial times.
If you intend to live on the dividend, you do the right thing in having a buffer in your calculation. Of course, it is possible to sell your shares and in the example above, you would have $670,00 to live for.
However, this means that you strangle your dividend, so selling the shares to finance the lifestyle should only be done in emergency.
Step 5 – Stay to the strategy
Put up your target image and how the road will look.
It will take a few years and your lifestyle and your consumption pattern will change over time.
Your calculation will need to be revised at regular intervals, but start by putting clear objectives already now to keep you motivated.
Another good tip is to look for other sources of income.
The sharing economy is growing and this you can use. You may be able to rent your home or a room and get income on it.
Or look out other projects that can create small extra currents of income.
Diversification is the key to a good share saving. You can also diversify you with income from elsewhere than the stock exchange to increase your chances.
What a dividend level is reasonable if you will only live on a dividend portfolio?
Low interest means high values of shares, when you are willing to pay more for a given level of return.
This truth is likely to affect stable dividend shares to a great extent and means that it has historically been interesting dividend companies to invest in, which has given about 4% in yield, today is likely to have a lower yield.
See the video below for a compilation of the current dividend level of some classical dividend shares that are so-called dividend listocrats with a long history of stable and increasing dividends.
How much capital is needed to live off dividends solely?
I think the point is clear. For those who want to live on a dividend portfolio’s dividends, this with high corporate valuations / low yield a challenge.
If we invest in shares with a direct yield at 2%, we can find good and prosperous companies, but the direct return becomes relatively low and the capital requirement therefore high.
Expecting that we can fully live on dividends, while assuming that we get 2% in direct yield, the freedom is likely to shoot well in time.
A monthly requirement of $2000, then, for example, $1,200,000 in capital base.
The common is because those who want to live on dividends invest in shares with high dividend levels.
But as we already touched: If we are looking for companies with 6% in direct yield in order to live on dividends, we are likely to choose from companies facing a tough or uncertain future.
The high yield signals that investors do not believe that the companies are interesting as investments, probably on good grounds.
If you want to be financially free quickly, you should ensure that low cost in terms of your income. You should invest the money and quickly make sure they work for you.
Collect the dividends and reinvest in new shares. Repeat this until you are financially free, your savings ratio determines how many years it will take.
The big difference is that you when you have a freedom, sell of parts of your investment to live on instead of collecting dividends.
Buying shares or funds is a matter of taste and changes nothing in general.