How Much $ You Need To Live Off Dividends (FOREVER)

What's up? Grandma's guys here, so let's talk about how much you really need invested to live entirely off the dividends.

I've tried just about every passive income idea that you could think of—from side hustles, real estate, intentions, marketing programs—and I have to say, from my experience, dividends are by far the easiest way to begin replacing your income with a lot less money than you think. But that comes with a bit of a warning that we'll discuss shortly. That's why we should really talk about my own thoughts as to whether or not dividend investing is even worth it, how much you'll realistically need if you want to replace your income, and at the end, I'll share my own dividend portfolio that currently makes almost ten thousand dollars a month.

Although before we start, I'm sure you're aware one of the benefits with dividends is that it's completely passive. And that's extremely similar to subscribing. If you haven't done that already, because with just one click you'll get access to three new videos every single week. And as a thank you for doing that, I will do my best to reply to as many comments as possible. So thank you guys so much! And also, big thank you to popular.com for sponsoring this video, but more on that later.

All right, so first we gotta talk about the basics. For those unaware, anytime you buy a stock, that entitles you to a portion of that company's profits. And sometimes those profits are distributed on a regular basis in the form of a dividend. This is taken as a fixed amount that each share pays out on a quarterly basis, and its percentage is based on the price the stock is currently trading at.

So if a share pays five dollars a year and it's trading for a hundred dollars, that's a five percent yield. And because of that, the dividend return could go higher or lower depending on the price the stock is trading for. Now, of course, not every company pays a dividend, and it's generally thought the companies only pay dividends when they can't get a better return reinvesting their capital back into their operation, which can't be true. But for the most part, when you do get a dividend, they'll generally range anywhere between one percent to ten percent depending on the company. This will probably be some of the easiest passive income you will ever make in your entire life.

The benefit from an investment standpoint is that this gives you predictable cash flow on a regular basis without needing to sell any shares. And that gives you more money left over to buy even more investments, like this really cool 1934 $500 bill. However, when it comes to doing this, there are some pros and cons that need to be considered.

As far as my own strategies when it comes to replacing your income, here's what I think. To start, dividends are fun because it kind of feels like you're getting this magical internet money. Kind of like this. All right, I'll leave the magic to the experts. In the big picture though, on a positive side, I like dividends because they're somewhat insulated from the market. Like we've all seen throughout the last year, the market could be a mess, but dividends are a lot more predictable.

For the most part, you know you're going to get the exact same dividend payment and the exact same amount, whether the stock price trades for twenty dollars or forty dollars. And for someone expecting consistent cash flow, that helps smooth out the fluctuations in the market. Second, dividend payments are also a lot less volatile than stock prices. For example, the SimpliSafe dividends blog pointed out that from 1900 through 2018, dividend payments remained fairly constant, with an average variance of plus or minus 10.

During market downturns, when you compare that to something like the S&P 500, you'll quickly see that there's a lot more volatility. And for someone expecting consistent cash flow, that goes a long way. It also helps that dividend companies tend to be a lot larger, more mature, and prioritize stability, so you'd be holding on to companies who've been around a lot longer than Peloton.

Third, throughout recessions, dividend payments could sometimes increase. As a Simply Safe dividends blog pointed out, in three of the above recessions, dividends paid to investors actually increased, including a 46% jump during the first recession following World War II. You know, even though such an increase doesn't happen every time, the average dividend cut is just a mere 0.5% compared to the stock market's average decline of 32%.

Fourth, dividend stocks have also been shown to provide a comparable return to that of the overall market. In fact, Fidelity found that dividends accounted for 54% of market returns during times when inflation was above 5%. This means even though they're not the stocks that go up the most during a bull market, they also don't decline the most during a crash.

Fifth, depending on your tax bracket, dividends could be taxed at a much lower rate. For instance, if you receive what's called a qualified dividend, you'll have to pay no tax on that profit whatsoever if you're single making under forty-one thousand dollars a year or married making less than eighty-three thousand dollars a year. Even above that amount, certain dividends will be taxed as a long-term capital gain which is significantly less than what you'd have to pay as ordinary income.

But there's also a few significant downsides that come with the territory, like number one: dividends are not guaranteed. Even though companies generally try to avoid cutting or reducing dividends, it does happen. And because dividends are generally a reflection of the company's profits, in the event of a downturn, they may choose to turn the money printer off until conditions improve.

Second, dividend payments mean nothing when the company itself declines in value. In this case, earning a five percent dividend could actually lose you money when the stock price declines something like 30%. And this is an example that happens all the time. Just take a look at 3M, who currently pays a 5.6% dividend, but they've lost more than 55% in value throughout the last five years from an ongoing lawsuit.

This year, of course, there's a chance the stock price recovers while you sit back and collect all the extra cash flow, but there's also a chance that doesn't happen, and that needs to be considered. The third, even though there can be some tax advantages, there could also be some tax disadvantages. See, I'm like buying a stock and only being taxed when you sell. Dividends are taxed the moment you receive them, and depending on your tax bracket that could be a price of 20% or more. Not to mention, in a way, dividends are even taxed twice: once at the corporate level as profit, and then once again when you receive them. So they're not exactly the most tax efficient.

And fourth, dividends could flat out be irrelevant. In this case, two well-known economists argued that if an investor needs the money, all they really need to do is sell the stock and that dividends don't actually create any more value for the company itself. It would be kind of like saying instead of getting paid a two percent dividend, the stock price would just go up by an extra two percent, whereas in both scenarios, your value stays the exact same.

Although in the big picture, I do think that there are some major advantages for anyone looking to replace their income with this strategy. So as far as how to do this as well as my own portfolio, here's what you need to know. Although before we go into that, when it comes to investing, it's important to have as much information at your disposal as possible. Even for myself, I'll spend hours combing through the most obscure reports just to find a few new details to take into consideration.

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Feel free to check out all of the details down below, and now with that said, let's get back to the video. All right, now in terms of my own dividend portion of my own portfolio, I currently receive almost ten thousand dollars a month through five main sources. The first and largest is from a broad U.S. market ETF, SCHB, with the dividend yield of 1.56%. This encompasses 2,500 of the largest publicly traded U.S. companies with slightly more exposure to smaller stocks than the S&P 500, although not by much since both are weighted by market cap.

This means that the largest companies still make up the bulk of this investment. But when you have over 3.8 million dollars invested here, that's a dividend yield of about five thousand dollars a month. Second, in addition to that, I also have an international equity ETF, SCHF, with a dividend yield of 2.65%. For those aware, this fund includes large and mid-cap stocks from developed countries outside of the United States, including Nestlé, Samsung, Shell, and Toyota, along with about a hundred others.

I personally use this as a way to get diversification outside of the United States, and since I have almost a million dollars invested here, that brings in an additional two thousand dollars a month. Third, in addition to that, I also have a variety of individual stocks that I hold on the side to satisfy my need to feel like I could somehow beat the market. That brings my total to about nine thousand four hundred dollars in dividends every single month, or about a hundred and twelve thousand dollars a year, regardless of what happens to the stock market.

But as far as how much you need to live entirely off the dividends, here's the entire calculation. To begin, it all comes down to how much do you need. After all, the person living in a luxury high-rise penthouse in New York City is going to live a much different lifestyle than someone who prefers to live off the grid in a tiny home in Montana. So it would depend on what your expenses are. But since the average retiree spends fifty thousand dollars a year, we'll go with that as our baseline.

The second, when it comes to dividends, you don't necessarily want to go for the stock that just pays the highest yield. After all, you want consistency, and that's what brings us to the Holy Grail of passive income: dividend Aristocrats. This is a group of 65 S&P 500 companies with more than 25 years of consecutive dividend increases and selected based on their size, growth, and ability to continue increasing their payments. In fact, throughout the last 20 years, there have only ever been two years of negative growth—once in 2008 and another in 2018.

Beyond that, dividend Aristocrats have continued growing above and beyond the average because of their consistency. On top of that, a good portion of these companies actually outperformed the market throughout recessions. And even though they can certainly decline alongside everything else, they tend to decline a lot less. That's generally because it's theorized that dividend-paying companies focus more on cash flow, they're more selective with their spending, and they're willing to reward their shareholders in the process.

So as you can see, these dividend Aristocrats tend to pay anywhere between 0.3% the lowest to 5.3% the highest, with most somewhere between two and three percent. That means if you took a basket of these stocks with an average yield of three percent, you would need one million six hundred seventy thousand dollars invested to replace the average fifty thousand dollar a year income. If we break that down even further, you could potentially achieve that by investing five thousand dollars a year over forty years while reinvesting the dividends, and voila! There you go, you've done exactly that.

But I will say that if you're impatient like I am, there are a few other alternatives that could get you there a lot faster. One method I've seen floating around a lot lately is what's called a covered call ETF like JEPI, which generates income through a combination of selling options and investing in U.S. large-cap stocks. How much income can you make through this? Well, try ten point seven percent. Essentially, this fund would generate a yield regardless of how the market performs, since it pays you based on the premiums of the call options it sells on its holdings.

But you'll also see limited upside in the event the market does well, and if the market goes down, then so does the price of the funds. So there's no such thing as a free lunch. However, that does mean that hypothetically, you would be able to replace a fifty thousand dollar a year income by investing five hundred thousand dollars, which is a lot more achievable for the average American person.

Overall though, just keep in mind that it's probably not a good idea at all to go all in on something like a covered call ETF since their objective is purely to generate income as soon as possible, and long-term you're likely to severely underperform the overall market or end up losing some of your initial capital. So realistically, it'll likely be a lot smarter to take a much more diversified approach if you're going to do this, which is going to cost you three times more.

From my perspective though, at the end of the day, you just have to realize that money isn't free. And even though you're getting paid a dividend, that really is coming out of the company's cash flow that isn't being reinvested to grow the business. That's why I think the real benefit to dividends isn't so much that they're a superior investment or that they're better than another stock that doesn't pay a dividend, but instead they give you the psychological benefit of receiving steady income without having to physically go and sell shares.

Even for me, I'll admit the dividend I receive really makes no difference because I just automatically reinvest the proceeds anyway, and some could say that's a very inefficient way to invest since I'm forced to pay a tax up front. But it does give me some additional peace of mind knowing that if I needed to spend the money, I could. And it's more like icing on the cake as a reward for long-term investing.

That's why I believe that dividends could be a great part of a well-diversified portfolio, but if you're young and you don't need the money, then they shouldn't be your main focus. Instead, I choose to prioritize the overall market, and if it happens to pay a dividend in the process, then all the better.

So with that said, you guys, thank you so much for watching. As always, feel free to add me on Instagram, and don't forget that you could get a free stock worth all the way up to a thousand dollars with our sponsor republic.com down below in the description when you make a deposit with the code Graham. Enjoy it! Let me know which one you get because if you do pay a dividend, so that'll get you a head start. Thank you so much for watching, and until next time!