How to live off of dividend income
How to live off of dividend income
There is no debate that dividend income is one or maybe the best source of passive income for retirement. And one way to reap the benefits of dividend is to invest in dividend-paying stocks.
Can you count on dividend income as a retirement plan for the rest of your life? Yeah absolutely, but the key is to focus on dividend growth and do your researcher for each investment you’re whiling to take.
Furthermore, it is all about dividend growth and over time the cash flow will supplement your expenses and with a little planning, it can provide all the money you need to live off dividend income for the rest of your life.
This article will provide you all what you need to know about how you live off dividend, so you can live your pre-retirement lifestyle sooner than you think.
Living off dividends is possible..learn below
Dividend portfolio – dividend income
Dividend portfolio is one of the best ways to increase dividend income. In an audition, investors see it as their favorite way for wealth creation due to their ability to realize a long-term total return as companies increase their earnings.
How to build your dividend portfolio?..First open a brokerage account I suggest that you use one that offers the lowest commissions’ fee trading available. by doing that you will be able to reinvest the dividend in existing stocks in your portfolio.
Brokerage account: is an online broker with the lowest pricing, this account helps you to keep transaction costs low without hindering your action to trade stock, so down here are the best brokerages out there that offer small commission trading.
- Merrill Edge
- TD Ameritrade
- Interactive Brokers IBKR Lite
Making your commissions as low as possible is the key to maximize your earnings potentials for every cent you have.
Dividend portfolio allocation:
If you want to live off of dividend income I suggest you diversify your allocations to a robust dividend growth portfolio.
- Have a robust list of 25–30 good dividend stock, don’t run into dividend kings focus on receiving dividends not only growth. That’s mean a 20% of your Dividend growth.
- Diversify 35% of your dividend growth portfolio to at least 5 to 7 dividend Aristocrats to avoid dividend cut, dividend stability and growth that’s your priority.
- About 30% of your dividend portfolio should be e allocated to up and coming dividend stocks.
- Stability overgrowth, you don’t want to risk now there will be a risk but meanwhile focus on stability, all investors and money advisors say that having financial stability is much better than financial growth.
- Target companies with a modest payout ratio of 60% or less. And companies with a history of raising their dividends.
- Now you are left with 15% of dividend growth portfolio, so the remaining asset should be international dividend growth.
- Reinvest dividends, it could add a huge dividend income with a little effort.
If you are seeking a potential dividend income growth, so the key is a good mix of dividend-paying stock along with dividend growth. Your portfolio value will increase and your income will increase significantly.
Before you start earning your priority should be to learn the essential dividend calculations to consider. And this will be our next point to discuss.
The essential Dividend Calculations every investor must be familiar with
If you want to live off dividends, start early, sooner than later and do the math, in other words, you don’t want to start investing without having a small knowledge about what are the dividend calculations you must consider.
Dividend income and dividend growth are all about calculations, these calculations will help you to make sure that your dividend value will not decrease, so here are the only essential dividend calculations to consider.
Annual dividend yield
The annual dividend yield is a formula used to calculate the percentage return on a stock based solely on dividends. investors use this calculate formula as an indicator for increasing or declining trends, in other words, to keep an eye on the annual dividend income they receive from an investment.
if you want to live off of dividend income, high dividend yield should be one of your top concerns, look for the highest dividend yield as possible.
For example, your stock investment is $100 and the stocks paid a total annual dividend of $5 per share, to know your annual dividend yield just divide $2 by $100. Therefore you will have of 5% annual dividend yield.
The related formula’s to an annual dividend yield
- Dividends Per Share used by investors who want to evaluate several stocks to invest in.
- Capital Gains Yield calculates the return on a stock-based only on the appreciation of it.
- Total Stock Return used to calculate the percentage return.
Dividend payout ratio
It’s the percentage of dividend income paid to shareholders, plus this great barometer will help you to measure how much a stock pays in dividends.
Why this formula is so important?. If the payout ratio of a company is high it’s considered as a red flag, because it tells us that the company is retaining limited cash to be reinvested in the industry.
The difference between low and high payout ratio, if the payout ratio is low that means the company is reinvesting the bulk of its earnings into growing the business.
On the other side, a high payout ratio indicates that the company is paying out more in dividends than it is earning.
Dividend growth rate
Make no mistake; the dividend growth rate is very necessary for a dividend stock also so important for using the dividend discount model, which is a type of security pricing model.
The dividend growth formula refers to the annualized percentage of a growth that a security’s dividend undergoes over a specific period. And the calculation is not complex just divide the current year’s dividend per share by last year and deduct 1.
When it comes to living off dividend income, the formulas above could be very strategic once you mentor them, and they are at the core of every page on Dividend.com.
Now let’s get in-depth on how to live off investing income. The best is yet to come.
The world’s best investor Warren Buffett made 99% of his wealth by 50, and he shared a little pic of advice for the younger investors, I quote by my words: invest in stocks that you understand.
If you want to be a long-term investor, identifying your long-term stocks for the dividend is your next move. This section will share with you two working tools.
DRIP refers to an investing strategy plan, this tool can be extremely helpful in the long run, and how does it work? It will automatically buy more shares of yours when a dividend is receiving.
Furthermore, investing plan strategy gives you the advantage to buy lesser shares of a stock and put 100% of your dividend on work. But there is a downside with DRIP, If you work with this tool you won’t be able to choose how your dividend gets invested.
And this gets against our rule to maintain dividend income stability.
You remember the little advice I quoted from Warren Buffett, well the Yes/No strategy will help you to understand what you are investing in and help you further to stabilize your dividend income.
I found this strategy in other related article and I get so fond about it, basically, you ask yourself a yes-no question AND ANSWER BY YES OR NO
- Financial health; Does the company have a high payout ratio?
- Shareholders; has the company decreased its dividend
- Company management; does the company plans to grow its net worth and dividend
- Company growth; do the company’s operational keep track reports on revenue and growth income.
As you can see this strategy was built to help you understand the business model, therefore understanding what are you investing in.
Invest, and maintain a stable dividend income
Type of investments that pay in dividend
Now you had done all the previous steps, your next step is to look for potential investments for income investing portfolio. There are many approaches you can hold in but this article will focus on the major ones.
- Dividend-paying stocks
investors’ favorite source of passive income, dividend income refers to a payment made by a company or individual corporations to its shareholders, these companies are known to be very large been in the business for too long well organized.
Dividend’s payments will be based on the number of shares the shareholders won; some companies pay annually, other quarterly and some even monthly.
- Mutual funds
Not all mutual funds pay in dividends, and not all mutual funds mean to invest in a stock, you can also invest in Bonds.
There are many types of bonds, government bonds, agency bonds, savings bonds and more…This is an advantage to you, you can pick any type of bond and start earning dividend income.
The only negative thing about bonds is bonds with maturities of longer than 5 to 8 years it will best for you to not deal with them your goal is to keep rising your income not to risk it.
Real estate and funds may be much the same, the only difference is that REITs as opposed to traditional stocks and bonds when it comes to purchasing income-generating.
What investors love about REITs is, their tax rules and they also reported that they feel safer for the protections real estate offers.
What’s next for you to live off dividend income
What’s left for you now is to earn passive income and maintain earnings sustainability.
You made it…
Now just follow the following tips and you are a one-way step to live a lifestyle you want free from financial stresses and never have to work again.
The wall street boys named it the 4% rule, and the concept of the idea is to put in of 150$ to $200 to your dividend growth portfolio, it’s that simple, or you can play as they do and set up automatic contribution of 4% of your annual income into the same dividend growth portfolio.
You can put in more, the more you contribute the sooner you will retire, however, focus on the monthly contributions and be consistent as possible.
Increase the 4%
First, do the first step for at least 5 to 10 years, then you can start to increase your contribution by 20 %to 30%, it looks a lot for you but it can be achievable.
Remember your goal is to live off dividend income, so as long you increase you will be in a good spot, even though it can be much more difficult, but certainly, it’s achievable.
Investors call reinvesting the key to quick dividend growth, and truly it is, so in this step, you can use DRIP it will automatically reinvest any dividend income you receive into your dividend growth portfolio.
But, as you’ve seen before DRIP won’t allow you to reinvest or control where to invest, in this can if you want quick safe growth you can do the reinvestment by yourself, reinvesting will speed up your dividend growth as long as you do it.
Add to your investments
Once you get used to the processes, nothing will be complex as it was, therefore..Continue adding to your investment to your long term goal. at this point, it shouldn’t be hard.
invest in good quality stocks that offer of 6% growth rate, it will upsides and downsides, just try to have a winning score over 60% into your dividend growth portfolio.
Living off dividend income is all about dividend growth, it won’t be easy but it can be approachable the key to success lies within the quality of stock you invest in.
Diversify your stocks and learn the calculations, stocks are risky business but with the right planning strategy you will live off dividend revenue sooner than you think.
Search, be smart, and invest in safe stocks.