Making a sufficient dividend income that you can depend on as your main source of income is the ultimate dream of any dividend investor. You do not have to buy and sell shares, constantly monitor the stock market, or worry about the share price ups and downs when you rely on a dividend income. Sounds too good to be true, right?

Can You Life off Share Dividends?

As much as it sounds like a dream too good to be true, living off of share dividends is a reality. There are plenty of people doing it, and no, you don’t have to be an investing guru to get there.

You just need to pick a bunch of stocks that pay a good dividend and start investing in them.

However, reaching this milestone is not an overnight gig or even a couple of years of work. Building a dividend income that can support your life/lifestyle can take years. So, one of the most important prerequisites for you is patience.

The earlier you start, the better off you would be. It will give you enough time to build up a sufficient investment in dividend stocks without adding strain on your daily expenses. And this will stop demotivating you to continue building the investment.

How to Start Building Your Dividend Income?

As mentioned above, the earlier you start, the better off you would be. Your early 20s would be the best time to start. And no, you don’t have to invest thousands of dollars in the beginning. Just $100 per month would be enough.

Picking appropriate stocks is the next main target. If you are a novice investor, you can quite safely invest in blue-chip companies. These are companies with a good reputation, financial structure, positive future outlook. Don’t worry, these companies are tagged ‘blue-chip’ for you.

Next, find out if these companies pay out dividends. A simple Google search for “does company X pay dividends?” will give you the answer you are looking for.

Now, start investing… You can invest by yourself or through an investment broker. There are different platforms and applications that allow you to invest in your local stock market and international markets. If you are worried about investing on your own, reach out to a reputed stockbroker in your country.

An important point to remember when investing in these dividend stocks is, diversifying your investments. Never invest everything you have in one company even if it is a blue-chip with the highest dividend payment. Being too greedy in the stock market never has a happy ending. So, pick about 15-20 different companies and build a dividend portfolio.

How Much Money Do You Need to Live off Dividends?

This is the big question! And sorry to say that there is no specific answer. But I can help you find the right amount for you.

The main concern for not having a specific answer for the investment amount you need to live off of dividends is because everyone has different money requirements depending on your lifestyle.

One person could live off of a $1,000 income and another might need $2,000. So, first of all, figure out how much of an income you need to sustain your lifestyle.

For the sake of this example, we will set the standard at $1,000 per month. To make this thousand dollars income off of dividends, the metric you need to be looking at is the ‘dividend yield’ of your investments.

‘Dividend Yield’ is the value of dividends issued by a company over the market value of its share. To understand this better, we will use a simple example. Let’s assume Company X issues $1 dividends per annum. The Company’s shares are trading at $40 per share in the stock market. For this company, the dividend yield would be $1/$40 = 0.025 or 2.5%. You can find this number for each company is your investing platform/application or on Google or Yahoo Finance.

We already know that ‘how much to invest’ depends on this dividend yield. So, how do we calculate how much money we actually need?

The simplest way to calculate this is by dividing your target annual income by the annual dividend yield or target monthly income by the monthly dividend yield.

= annual income / annual dividend yield
= (monthly income * 12 months) / 2.5%
= ($1,000 * 12) / 0.025
= $12,000 / 0.025
= $480,000/-

According to our example, an investment of $480,000 in companies that pay at least 2.5% dividend is required to reach a monthly income of $1,000 or an annual income of $12,000.

This may seem like a massive investment for a decent return! This is why it is very advisable to start investing as early as possible. And, you need to pick companies with a higher dividend yield than our example.

As a rule of thumb, you should target companies that pay at least a 4% dividend yield per annum. Also, since you have a dividend portfolio, it would not hurt to have some high-risk investments with high dividend yields around 7% mixed with much more reliable and low-risk investments with dividend yields around 3%.

The dividend yield number for you would be the average of all dividend yields of the companies in your portfolio. Try to have an average dividend yield of around 5% in your portfolio. Let’s look at the money needed at this rate;

= annual income / dividend yield
= $12,000 / 5%
= $12,000 / 0.05
= $240,000/-

So, when the dividend yield doubles up, the investment requirement cuts in half. There is an inverse relationship between the two. The higher the dividend yields of your portfolio, the less money you would have to invest. But, don’t forget the golden rule of investing: higher the return-higher the risk!

Let’s look at some common examples;

How much money do I need to invest to make $500 a month in dividends?

Also, one final point to remember is that dividend yields can sometimes change favorably or unfavorable through the years. Some companies can increase dividend yields and others could decrease. So, inherently these investment requirements could change slightly. However, as long as your portfolio average dividend yield stays constant, the investment needed will align with the above numbers.

Disclaimer: I am not a licensed investment Advisor or Tax professional; therefore all content posted on this blog represents my personal views and opinions and should never be considered as professional advice.  This blog should be viewed for entertainment or educational purposes only; not a recommendation to buy/sell certain stocks.  Please do your own research before buying/selling stocks.