Every stable dividend-paying stock = fruit-bearing tree
I see every dividend stock I buy and own as a fruit tree, and every fruit tree will produce a dividend fruit for me; and my overall goal is to have a big enough orchard of dividend-paying dividend stocks to live off the dividends on.
If you’re like me, there are 3 key items to consider to know how much you need to live on your dividends and retire early or do something you like, be it paying off debts of your family, retiring your wonderful wife, or marry and even having more kids.
3 important factors that affect how much you need invested to retire on dividend stocks
- how much do you need a month to spend on
- how much you can invest a month
- how much returns on investment you can get from your dividend stocks
They all affect each other, so it’s best to see them as a combined trinity.
Example if you spend a lot, you need to invest more every month, for a long time with high returns. Conversely, if you spend less, you can retire much faster, take less risk too.
An example, say you spend $3K a month, and take home $4.5K a month. That’d mean that
- Your yearly expenses = $3K x 12 months = $36K/year
- You can invest $1.5K/month
How much do you need to retire?
Using the same example of monthly spend of $3K/month, that’d mean you need $36K/year.
This means is that your investments eventually need to at least pay you $36K/year.
Unfortunately, because every dividend-paying stock is different, it makes things a bit more complex AND make you second guess yourself waaaaaaaay more than you should (this is the dilemma of only 1 option versus choosing from 1000+ options). The more you have to choose from, the harder it is.
Low yearly dividends = need more capital
For now, let’s assume you find a dividend stock that pays 3% per year, you’d need $36K/3% = $1.2M, which is A LOT. No one has a spare $1.2M lying around to invest.
Even if you invest $1.5K/month every month, and reinvest every single 3% dividend, it’d still take you 36.5 years to reach $1.2M!
This is very painful…so how? Does that mean we give up on our desire to retire on dividend passive income from dividend stocks? Of course not!
Higher dividend yields = less capital needed
The next and better step would be to find better, higher dividend paying stocks.
Let’s again, use back the same example of needing $36K/year to retire. If you find a dividend stock that pays 10% per year, that’d mean you “just” need $36K per year / 10% = $360K.
$360K is 30% of $1.2M.
That’s muuuuuuuuuuch easier to achieve. If you invest $1.5K/month PLUS reinvest the dividends it’d take you about 11 years to achieve your goals of amassing $360K.
For a 30 year old dude, that’s like retiring at 66.5 years old versus retiring at 41.
I will definitely choose to retire at 41 compared to retiring at 66 eh.
Is it so easy to retire on dividends? What are some problems that I may face?
Technically, yes. It is mainly a numbers game, so it’s doable.
And I’m not the only one sharing about this. Google ‘financial independence retire early’ (FIRE) and you’d see that there are tens of thousands of people like me, who dont want to be stuck in a job and retire at 70.
That doesn’t mean it’s easy and linear. Of course, there are variables that can happen. Kinda like preparing for doomsday, likewise, I believe in being prepared.
Some variables and the ways I can anticipate and overcome them are:
What if the stock fail?
This is a real risk, so the issue is to either (1) not go all into just one dividend stock, which isn’t smart at all. I would have at least 15+ dividend stock and rebalance yearly to weed out poor performing ones; AND/OR (2) go into Vanguard stocks, which have historically been giving a return of 10% per year.
There are literally hundreds of other instruments out there other than dividend stocks, so find what you’re comfortable with.
What if I dont have enough?
Ah, this is an eternal dilemma, so back to maths of current expenses AND project to include inflation and increased spending PLUS keep costs low. So if I can keep my lifestyle yearly expenses to $3K/month, I will over-buffer a 30-50% at least into investment, so my investments need to payout at least $4K/month. I will reinvest the $1K/month. Depending on how safe is your number, you should buff it at least 50%. I personally will over-buff by at least 100% and diversify into different asset classes eg dividend stock, rental properties, crypto, insurance etc.
What if I die earlier than achieving this? Wont my effort be in vain?
From a practical standpoint, if you die earlier, then you dont have a problem anymore with regards to money. However, that’s if you’re single and have no one or no causes you care for. If you’re like me, having a plan, will leave a legacy (cash and more) to them, rather than leave them a pile of bills to clear. The real question is if you live and spend wantonly…but find yourself outliving your money, that would be a nasty place to be. Lastly, this is why I always recommend to “eat” and enjoy a portion of your dividends and passive income, because we need to live too to make it sustainable.
What if I lose my job / source of income midway?
Okay, that’d suck, but it wont suck as bad as losing your main source of income and have zero passive dividend income. If say your goal was to amass $360K on 10% return, midway means that you’d amassed $180K and at 10% return per year, you’d have $18K/year or $1.5K/month dividend to tide you over. Not bad, and it’d allow you some breathing space as you source for your next job. You may be able to retire in a cheaper country with $1.5K/month too.
A more important question: WHY
It’s one thing to talk about the numbers and the how, which is easy to talk about and can be easy or moderately hard to do over a period of time. A bigger and more important thing to consider is why.
What would retiring at 45 years old mean to you? It can mean different things to different people, such as
- spending time pursuing people and projects you care about. Finally, you can pickup something you put down decades ago. Could be photography. Could be drawing.
- travel
- taking care of loved ones who may be sick and need you
- retire your wife and spend more time with her just being with the woman you fell in love with all those years ago
- take your kids to school and back, and being a dad who is present. Like really, really present.
- and much more
The why is infinitely more important.