- So in this video today, we're going to be
answering the question of how much money do you
need to have invested in order to live off of the dividends? Now, most people invest
in the stock market as a means for retirement income. So when they reach a certain age and they don't wanna work anymore, they're able to draw a
percentage from that account. And when you combine
that with Social Security and maybe some other type
of retirement pension from their job, that should in theory
be enough to sustain you for the rest of your life. But there's a whole
movement of people out there that are taking a more radical
approach to this equation. And in particular, this is
called the F.I.R.E community or Financially Independent, Retire Early. And these are people who
are looking to retire at a much earlier age and live off of dividend income. So that's what we're gonna talk about in this video today guys, is how much money you
need to have invested to be one of these people. And obviously guys this
goes without saying, I am not a financial advisor. This is not financial advice. And this is just for
entertainment purposes only. But that being said, if you're excited about dividends and potentially living off of this income, do me one quick favor and
drop a like on this video, just to show your support. That being said, let's get into the video. All right, see what I did there? I'm in a different chair
now, where's my like? But first of all, for
those who are not familiar, let's talk about what
a dividend actually is. So a dividend is a way
that a large company can share a portion of
those company earnings with the shareholders. So let's take Coca-Cola for example. They've been paying quarterly
dividends since the year 1920. So if you own shares of Coca-Cola stock, for every one share that you own, you earn 40 cents of
dividend income per quarter, and that is them sharing a
portion of Coca-Cola's earnings with the shareholders. Now what's more impressive
is that these companies try to grow these dividends over time, and this is called the company's
dividend-growth streak. Coca-Cola having a very impressive 55-year dividend-growth streak. So every single year
for the last 55 years, Coca-Cola has grown
and paid that dividend. Now, most companies out there
and most investment funds are going to pay dividends
on a quarterly basis. However, there are some oddballs out there like Walt Disney stock that
pays an annual dividend, or you have Realty Income
that pays a monthly dividend. But for the most part, you should anticipate a quarterly dividend from an investment that pays a dividend. Now, some people take that
dividend and reinvest it, which is the smart thing to do if you're looking to grow your money, as that allows you to
earn compound interest. If you wanna learn more
on that topic guys, check out that video in the corner. Other people, for
example, who are retired, may take that dividend income and use that money to live off of, which is exactly what we're talking about in this video here. All right, so now what I wanna talk about is how people actually earn dividends. And it's typically one of
two different approaches. The first approach is the more
passive investing approach. And that is where you're
investing in what is called an index fund, or some people will accomplish
this through a mutual fund. But essentially what that is, is a collection of, in some cases, hundreds of different companies. So rather than investing in
one particular dividend stock, you invest in hundreds of
dividend stocks through this fund, and then that fund as a whole
pays out a quarterly dividend. So one popular example out
there of one of these funds is the Vanguard High Dividend Yield ETF, which pays around a 3% dividend yield. And this fund holds over
400 different companies that pay high dividends. Now, the advantage to this approach is that you're well diversified across 400 different companies. So if one company in
particular or a couple of them cut their dividend or eliminate it, well, you're not going
to be in as much trouble as you would be if you
own that stock directly. And the other advantage to that is you don't have to spend
time researching investments, listening to earnings reports, you can literally just toss
your money into this fund, dollar-cost average, and just do nothing after that. And then collectively earn your dividends from these hundreds of
different dividend companies. Now, the second method for doing this is where you invest in individual
dividend paying stocks. So rather than investing in a fund of hundreds of different companies, you pick a handful of companies that you personally want to invest in, and then you take those dividends
and either reinvest them, or eventually you may live off of that as your source of income. So for example, a couple of popular
dividend stocks right now are AT&T, which pays
around a 5% dividend yield, Southern Company, which
pays around a 3.75% yield, Exxon Mobil, which pays
around a 5% dividend yield. And so what you may find is that it's possible to build
a dividend stock portfolio with a collective dividend
yield of four to 5%. Now, most people would not recommend that because you wanna have a mix
of both growth-dividend stocks and more well established
dividend companies, because there's always that
risk of companies cutting or eliminating that dividend. (coughs) General Electric. (coughs) Sorry about that, I had something
caught in my throat there. Anyways, that fund we
talked about earlier, that Vanguard fund pays
around a 3.2% dividend yield. So some people looking for a higher yield from their dividend stocks will instead build a
dividend stock portfolio and maybe find that they
can build a portfolio with a four to 5% yield. However, this is higher risk because you're not diversified
across many different stocks. You just have a handful
of them in your portfolio. Now, what I wanna talk about is, what is the average income that we're looking to
replace with dividends? And obviously guys, this
should go without saying, but I'm gonna say it anyway, it would be a lot easier to
replace your monthly income with dividend income, if you needed let's say
$2,000 of monthly income versus $20,000. And most people who follow
this F.I.R.E movement live on a very small amount of money. In some cases, something like
1,500 to $2,000 per month. So the less money that you spend, the easier it is to replace
that money with dividend income. But what we're going to do for this video is use the average salary out
there for a single person, because let's be honest guys, if you're trying to replace
your income with a family, good luck with that, okay? So let's assume that you're single and you're looking to replace your income with dividend income instead. Well in 2017, the average
salary was $61,372, so we're going to go with that figure. And it's actually a
pretty simple calculation to figure out how much money you need in dividend stocks roughly
to replace that income. Now, this is assuming that that dividend yield does not change. And as we're going to discuss later on, that dividend yield can in fact change. But assuming it does not change, the way you would figure this out, is you would take the income
you're looking to replace and divide it by your dividend yield that you anticipate earning. So for example, that
Vanguard ETF we talked about pays a dividend yield of 3.19%. So we would take $61,372 divided by 0.0319. And that tells us we
would need $1,923,887.15 invested in that ETF, earning a 3.19% dividend yield to earn just about $62,000
per year in dividend income. Now let's assume you
follow the second approach, and instead of investing in a fund, you build a dividend stock portfolio with a higher yield of 4.5%. Well again, you take that salary number or the number you're looking to replace, divide that by your anticipated yield. So if we divide that out, we end up with a number
here of $1,363,822.22 to earn again roughly $62,000
per year of dividend income. So short answer here, you need like one to $2 million invested to earn a basic salary
from dividend income. All right, so now let's
answer the question of how much of your dividend income do you have to give
over to the government? Yes, let's talk about taxes, all right? So here's the thing, there're two different types
of dividends out there, and this brings you down
a complicated rabbit hole of jargon that really your tax advisor and your financial advisor are the only people who
really understand that. But we have both a qualified dividend and an ordinary dividend. So ordinary dividends are pretty simple because this is just money
that is being paid out from the earnings of a company, and it's called an ordinary dividend because it gets taxed as ordinary income. So essentially, the same rate that you pay for taxes at your job. On the other hand, you have something called
a qualified dividend, which is earnings paid out from a company that meets the following requirements. First of all, the dividend
must be paid by a US company or a qualifying foreign entity. Second of all, the dividends
are not listed with the IRS as those that do not qualify. Now, a couple of examples
of popular dividend stocks that don't qualify by
IRS standards are MLPs or a master limited partnership or a REIT which is a real
estate investment trust. Now, what we're getting at here is that these qualified dividends are taxed at a lower tax rate. So it is an advantage
where you can basically have more income from
these dividend stocks than you would from the
income from your job, because you're taxed at a lower tax rate. All right, and the third
and final requirement here for a qualified dividend is
that the holding period is met. Now that holding period explanation is extremely complicated, but in most cases, it is a
60 to 90-day holding period. So most long-term dividend investors, unless you're investing
in a MLP or a REIT, or a non-qualifying company, then you are in fact
earning qualified dividends, which are taxed at a lower tax rate. And that tax rate is
either 20%, 15% or 0%, depending on how much money you make. So if you're in the higher tax brackets or the very bottom ones, it can save you a significant
amount of money on taxes by having qualified dividends
instead of ordinary dividends. And because of this lower tax bracket, you may not need as much
money as you thought you would in order to live off of dividends. But wait a second guys, I do
have to burst your bubble here, there're a couple of problems with trying to live
off of dividend income, and I wanna get into those right now. First of all, we have
something called inflation, which is the general increase
in prices of things over time. Now, as we said earlier, companies try to increase
their dividends over time, but there's no guarantee of this. And there's also no guarantee that the dividend increase
will outpace inflation. So that being said, the buying power of your
money could deteriorate. And $60,000 today will not
buy the same amount of goods or products or services
as $60,000 in 30 years. Another big problem is
that dividends themselves are not guaranteed. So companies tend to pay
dividends consistently and grow them consistently as that keeps shareholders around, but during bad economic conditions or a company falling
under financial hardship, they can cut or eliminate
that dividend at any time. For example, I know I
mentioned it earlier, General Electric used to be a
high-yielding dividend stock. And then there was a change in the CEO, the company was doing
terribly financially, and the new CEO slashed their dividend down to just one penny per share. So they went from a
high-yielding dividends stock of above 5%, to a company that barely
pays a dividend at all. So if you followed this strategy and invested a boatload of money in GE, and then all of a sudden your
dividend income disappeared, well, then you would be in some trouble. And there's another issue here, as much as people
complain about their jobs, they do supply you with
some pretty useful stuff. One of these things
being health insurance. Because if you were living
off of your dividend income, you would essentially be unemployed and you wouldn't have health
insurance through your job, so you would have to
pay for your own policy, which could cost you for a single person, 500 to a thousand dollars per month. And there's also a lot of other reasons why this is not an exact science or necessarily the best
strategy to follow. But the last one I wanna cover here is that a job will also provide you with a consistent payment of weekly or biweekly payments in most cases. Dividend stocks on the other hand, pay dividends on a quarterly basis. So if you, for example,
invested in a dividend fund, you would earn four paychecks per year and you would have to
manage that money well, and spread it out over
those 13-week periods. Now for some people, that
wouldn't be an issue, but for a lot of people, if you handed them a check for $15,000, they may spend that on things that they wouldn't ordinarily spend it on just because they see
how much money they have, even though that would have
to last them for many weeks. So living off of dividends
isn't all it's cracked up to be as you guys can see. So what I wanna share with you right now is what I believe to be a better strategy. Rather than living off of dividends, it's this idea of eventually
supplementing your income with dividends. Because this idea of having
enough dividend income to retire in your thirties, while it is possible,
it's kind of a long shot. But the idea of building $500 a month of passive dividend
income in your thirties, now that's a much more attainable goal and something that is going to
be much easier to accomplish. Because as you understand now, living off of dividend income
is not an exact science, and there're many factors that can affect your level of income when you
are living off of dividends. And the other thing we have
to mention here is that doing nothing all day would
honestly be extremely boring. I can tell you guys this
from firsthand experience, I've taken time off where
I'll go on a vacation and I'll do nothing. And by the third day, I am
literally bored out of my mind. So the idea of living
off of dividend income, never working again, and sitting on the beach and
drinking Malibu Bay Breeze, that sounds like a great idea
until you actually try it and you realize that it sucks and nobody would actually wanna do that. So instead of having that goal in mind, I think a better goal is
to reinvest your dividends in your twenties and thirties, and then supplement your
income later in life maybe with that dividend income. Because for most people, $500 per month in dividend income, that's a substantial amount of money and that could be huge for whatever your goals are long-term. So anyways guys, that is my video here. I hope you enjoyed it. If you're new to the channel
make sure you subscribe. And if you wanna learn more
about dividend investing, like I said, I have a
portfolio through M1 Finance, where I'm building up a $100,000
dividend stock portfolio, and I'm reinvesting those dividends to earn that compound interest. If you wanna check out that video, I'll pop a card up in the corner, or there's a link down
in the description below. I personally invest through M1 Finance. It's a commission-free brokerage that has portfolio level
dividend reinvestment, automated portfolio rebalancing, and a lot of awesome features. I'll drop a link to them down in the description below as well, if you wanna check them out. For transparency, I am
affiliated with M1 Finance, so I do earn a small
commission if you use my link. But thanks so much for watching. I hope to see you in the next video. See you then.
