Dividend investing sounds perfect, right? You invest in a few stocks, then the company regularly pays you money as a reward for your investments. You might receive returns from your dividends annually, quarterly or even monthly.
Money will roll directly into your pockets or will be reinvested. It's the definition of passive income. However, can you actually collect enough dividend returns to live off of dividend investments?
Let's take a look at dividend stocks for income, go over dividend basics and find out w live off your dividends.
Can You Live Off Dividends?
Yes, you can live off of dividends but it's important to understand that you'll need to have a lot of money invested in a portfolio in order to generate enough income to live off of. Over the last 25 years, the S&P 500’s average dividend yield was around 2%. You'll have to have a large portfolio if you want to live off the dividends.
In other words, yes — it's possible to live completely off of dividends, but you have to make the right decisions about your dividend investments and make sure they offer the right option for your needs on a month-by-month basis.
Dividend Basics
What exactly is a dividend? A dividend is a distribution of shares of stock or cash to an investor. Shareholders receive dividends just because they invest in a company and companies want to do their best to reward them or keep them interested in continuing to invest.
However, you must buy your stocks by a certain date in order to receive a dividend, based on the declaration date, record date, ex-dividend date and payment date as noted below:
- Declaration date (also called the announcement date): The date that a company you’ve invested in announces its dividend plans.
- Record date: As long as you are an investor on record with the company on this date, you'll receive a dividend payment from the company.
- Ex-dividend date: You must have already purchased shares by the ex-dividend date or you won't receive the next dividend payment.
- Payment date: On this date, you’ll receive your dividend payment from the company from which you've purchased shares.
The ex-dividend date is the most important date if you're trying to time your status — it's the definite cutoff date as to whether an investor successfully "makes it." If you happen to buy and sell stock on its ex-dividend date, you will not receive the most current dividend payout.
How to Live Off Your Dividends
Does creating a portfolio for dividend-income living mean you should buy as many shares of stocks in firms as possible? Not necessarily! You want to do the right things in the right order that make the most sense for your portfolio. Let's take a quick look at a few steps you can use to make sure you invest the right amount and in the right way to live off your dividends.
Step 1: Take stock of your financial goals.
The first thing you may want to do is to walk through your financial goals, which you might want to consider having a financial advisor help you figure out your goals and timeline. For example, if you plan to retire in 20 years it'll require a much different approach than if you're retired now.
You may want to consider having a financial advisor help guide you through the process of identifying your financial goals. A professional can help you determine your risk tolerance, appropriate investment timeline and more. In short, they can help you decide when you need the money and how you should get it.
Step 2: Research and invest.
In order to make sure you make the right decisions, you'll want to know various factors about dividend stocks, including the company's dividend history, expense ratios, total holdings and more. It's a good idea to consider whether you're diversified over many sectors. If one company in a sector goes down, everything in the sector might also do the same.
Check out the dividend yield, which equals the annual dividend per share divided by the stock's price per share. If a company's annual dividend is $1 and the stock trades at $25, the dividend yield is 4%: ($1/$25).
You can add up the dividend yield for a wide variety of company stock you plan to invest in so you know how much you might earn in a given year from your investments.
For example, let's say that you own 1,000 shares of stock in a company that paid $0.75 per share in dividends last year. In this case, $0.75 multiplied by 1,000 shares of stock is $750.
You can also reinvest your dividends back into the stock so that you increase your total returns. Buying even more dividend stocks along with a dividend yield increase means that you can earn even more in subsequent years.
Once you've landed on the portfolio that's right for you, you can choose the following purchase option from your brokerage:
- Market order: Market orders mean you purchase the stock right now at the best available price.
- Limit order: Limit orders mean that you dictage a specified price (or lower) for a particular stock.
- Stop order: A stop order means that you buy after a specified price (the stop price) has been reached.
- Stop-limit order: Once the stop price has been reached, the trade turns into a limit order and becomes filled to the point that specified price limits can be met.
Step 3: Determine whether you're pulling in enough dividends.
As you receive dividends, determine whether you're making the most of them. Have you purchased enough dividends to live off of or not? If so, continue the same process of investment year after year. If not, you may need to consider another approach to your investment goals.
What if you discover you'd like a higher yield? You may want to look into master-limited partnerships, REITs and preferred shares, which can increase your current portfolio yield. You may also want to consider dividend-paying ETFs as part of your investment plan so you make sure you have a diversified portfolio. However, your best bet is to know the dividend yield of everything before you invest so you know what to expect from year to year (with the assumption that the dividend yield might increase, of course).
Consider reinvesting dividends through a dividend reinvestment plan (DRIP) if you don't need to live off the money right now. Reinvesting in dividends can allow compound interest to build and also completely build the number of shares you own.
Top Dividend Stocks for Income
How do you decide on the right stocks? You can start with the list of Dividend Aristocrats from MarketBeat, or companies that have increased their dividend yield for 25 consecutive years. Take a look at a few that offer a wide variety of dividends and their yields:
Note: You may also want to check out a list of Dividend Kings as well.
Consider Other Investments
Calculating dividend stocks for income might cause you to realize that you need a few other investments to live off of as well, possibly including an individual retirement account (IRA), Social Security income and other types of investments. It might not be possible to live fully off dividend stocks, but it can give you a solid income stream in combination with other types of investments.
Consider a wide variety of factors and talk with a professional so you know you have the best portfolio possible to sustain your income.
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About Melissa Brock
Experience
Melissa Brock worked as an associate editor & contributing writer for DividendStocks.com from 2021 to 2024.
She currently works as a full-time freelance writer and financial editor covering higher education, investing, personal finance, mortgages, college savings, insurance, and more.
Areas of Expertise
Dividend Stocks, Retirement
Education
Bachelor of Arts in Communication Studies, Central College, Pella, Iowa
Past Experience
Melissa graduated summa cum laude with a bachelor of arts in communication studies with minors in psychology and Spanish from Central College. She's a longtime member of the National Association of College Admission Counseling (NACAC). While working in college admission, Melissa Brock pursued a freelance writing and editing career.