How Big A Portfolio Do You Need To Live On Dividends?

We often hear people talking about living off dividends, but is it really achievable?

How much initial capital do you have to pump in so that you can live comfortably on dividends?

How much do you need to live comfortably on dividends?

First, we need to determine what is an estimated average amount of expenses we will spend in a year. The basic monthly expenses for Singaporeans after retirement for now, is about mid $1,000. Let’s just throw in some numbers, for instance, say I spend about $2,000 a month, so for a year, the estimated annual expenses will be $24,000. ($2,000 x 12 = $24,000)

Next, we can calculate the initial capital sum required by taking the estimated annual expenses divided by an average dividend yield you would expect to earn. So if I expect that I would get about 5% yield per annum, then by taking $24,000 divided by 5%, we arrive at $480,000. It means that if we earn 5% yield per year, we will need to invest $480,000 worth of investment capital to receive $24,000 of dividends per year to cover our living expenses.

Likewise if you require a slightly higher amount of expenses per month, say $3,000 instead of $2,000, then following the same steps, you will need $720,000 of investment funds to receive $36,000 of dividends for a year such that you can live off the dividends. ($3,000 x 12 ÷ 5%)

So if you are thinking of retiring and just living off dividends, you would first need to build up a considerable amount of investment capital to put them to work.

On a practical note, it would also mean that it may take you a rather long period of time to build up that amount of capital through savings alone, even if you maintain consistent saving habits. This is why investors may consider starting off with growth investing to grow their money faster before they make a transition to dividends investing at a later stage of their life.

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How long would it take to achieve that?

Using the $480,000 of investment capital computed above, and you decide to accumulate that amount through savings alone, this is how long it takes.

Accumulation method #1 through savings:

Assume every month you can save $3,000.

You will take about 14 years to accumulate $480,000.

Workings: $480,000 ÷ $3,000 = 160 months = 14 years (rounded up)

In comparison, if you attempt to accumulate the investment capital you need to build a dividend portfolio through other forms of investments, here is how it will look like.

Accumulation method #2 through investments:

Assume you can save $3,000 a month and you put all of that to investing in the S&P 500. You have also already separately set aside sufficient emergency funds.

You started investing initially with $10,000 and top up the $3,000 every month to passively invest in an ETF that tracks the S&P 500 such as SPY.

Using an average annualised return of 10%, you will take approximately 9 years to accumulate $480,000. That is a lot faster than if you depend on just savings alone to accumulate the $480,000 that you need!

If you learn to properly stock pick, you may even be able to generate a higher ROI which translates to a shorter period of time required to build up that $480,000 of funds.

Just tweak those numbers around according to your own lifestyle and expenses and you would be able to have a rough target to work towards. These calculations will give you a better idea on how things work in practice and how much time and money you would require.

Practical considerations

It is important to do the math for yourself because for things to work out well in practice, you do need to put in some work and time before you can live comfortably off the dividends.

I’m not putting off the idea of living on dividends, in fact, I think it is a good approach but I just want to point out that as investors, we need to have realistic expectations of what we are in for, which includes how much money you would need and how long it might take to achieve that.

That said, all big things have small beginnings. Everyone who got to where he is had to start from where he was.

For young adults who may just be getting started, if you construct a REITs portfolio of say $50k, at 5% dividend yield, we are looking at about $2.5k of dividends a year, or just slightly more than $200 per month if you average it out. It is definitely not a life changing amount but a good extra money to have to cover the expenses we spend at Starbucks, our sim only mobile plans and possibly our Spotify or Netflix subscription.

Hence while it never hurts to start early in building your dividend portfolio towards retirement income, it is important to have a realistic expectation in the short to mid term that the dividends received are not that sizable. For those who can accept delayed gratification, you might even reinvest these dividends back into the REITs so that you can get more money working hard for you.

If you are now ready to start on dividend investing, watch out for our next blog post as we are going to be sharing about the key considerations to look out for when setting up your own dividend portfolio!

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