How much should I invest to give up work and live only off dividend income?
In a world of high interest rates and generous dividend yields, the possibility of generating sizeable passive income from my cash holdings is real. By being smart with the choices of where to invest and what time frames are involved, I feel there’s a potential for me (and other investors) to live solely off dividend income.
Understanding how it works
Before getting to exact figures, let’s run through how it’s possible to live off dividend income. The core idea revolves around the strategy of having a portfolio of stocks that cumulatively pay out enough cash to support my household bills and other expenses.
This portfolio isn’t something that can be achieved in a matter of weeks, unless I have a very large amount of free cash sitting in a bank account. Rather, this is something that needs to be built up over time.
Aside from the process of building the portfolio, to live off the income I need to sort other logistics. For example, I want to own enough stocks to receive some form of payment each month. Given that an average dividend stock might pay out a couple of times a year, this requires careful planning.
Another key point is that in the early days, it helps if I reinvest the dividends received. This will help to compound my gains and grow my pot at a faster pace. So I need to ensure that when I reach a point of taking money out of the portfolio, I’m aware that future growth will be slower.
A big pot needed, but not impossible
The figure that everyone needs to live off is different from person to person. I live in London, so mine will be higher than those living in rural areas. A fair estimate for me would be £35,000 a year.
I feel I can achieve an average dividend yield of 6.5% on a robust dividend portfolio. So my investment pot needs to be £538k to hit my financial target. On the face of it, this seems a very large figure.
Yet I never thought this was going to take a year or two. After all, living solely off dividend income is an incredible feat. But it doesn’t mean it’s impossible. For example, if I invested £500 a month, it would take me just under 30 years. That’s assuming my portfolio doesn’t encounter setbacks, which is always a risk, of course.
Granted, this might be too long for some investors, especially depending on their starting age. Things can be sped up if I already have a large investment pot, or a chunk of cash to put to work straight away. If I already had a £100k portfolio or cash deposit, it would only take me 19 years to reach my goal.
There are many different ways of looking at this strategy, but the reality is that there are people out there living solely off dividend income!
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2023