Living Off Dividends

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Being able to live off of our investments is a dream for many of us. No need to rely on working for income, and not even needing to withdraw money from your investments would be the ultimate in terms of financial freedom.

Although it is a dream, it’s also a realistic possibility with the right combination of time and discipline.

In this article, we’ll look at all of the details that surround the topic of investing for dividends and ultimately getting to the point of living off dividends.

What Are Dividends?

When a company has a profit, it can reinvest that money into the business (with the hope of growth), or it can distribute the profit to shareholders in the form of dividends. In reality, many companies will do both. They may reinvest the majority of profits back into the business while using some of the profits to pay dividends to the shareholders.

Shareholders can either take the dividends as cash, or they can be reinvested to buy more shares of the company. Of course, if you are living off of dividends, you would be taking this money as cashing and using it for your living expenses instead of income from a job.

Living off dividends and passive income is an alternative to withdrawing money from your investments in order to cover living expenses in retirement. If you’re able to live off of dividends and the value of your investments never decreased, you’d be able to live off of dividends indefinitely, as long as your living expenses remain below the amount you earn in dividends.

While it would be great to be able to live off dividends, don’t overlook the fact that living off dividends is only one option. Keep in mind that dividends are not magical money that appears from out of nowhere. Money that companies use to pay dividends to shareholders is money that those companies are not reinvesting into the business. This means that those companies may grow slower than they would if they were reinvesting more money into the business.

Most smaller companies that are 100% focused on growing will not pay dividends because they reinvest as much as possible to try and grow faster. If they are successful, the result is a higher share price. The higher share price can lead to a bigger portfolio for your investments, even if no dividends are paid.

Withdrawing from your investments isn’t necessarily a bad thing. It’s possible that your investments could be growing even more than you are withdrawing.

How Much Money Do I Need?

Dividend Yield3%4%3%4%
Annual Dividend Income$30,000$40,000$60,000$80,000

What Types of Investments Pay Dividends

Let’s take a look at some of the most popular types of investments that can pay dividends:

  • Stocks – The most popular type of investment for dividends are individual stocks. These are usually large, very well established and recognizable companies (check out this article to get free stocks).
  • Mutual Funds – Some mutual funds will also pay dividends. These mutual funds invest in stocks that pay dividends, which ultimately gets passed on to the investors (minus the management fees). You can see a list of some of the top dividend-paying mutual funds here.
  • ETFs – Similar to mutual funds, there are also ETFs (exchange-traded funds) that include dividend stocks and pass those dividends on to investors. You can see a list here.
  • REITs – REITs (real estate investment trust) allow you to invest in real estate without the need to own or manage property. Investing in REITs is also a great way to earn dividends, and there are a number of REITs that pay out significant dividends. Real estate crowdfunding and eREITs are also popular investments that pay dividends. For example, Fundrise has a supplemental income portfolio for investors that want dividends.

Most of the information that you’ll read online about dividend investing will be focused on stocks. Even some of the other options, like mutual funds and ETFs, ultimately invest in dividend-paying stocks. But other types of income-producing assets can also be options.

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Active Income vs. Passive Income

Dividends are attractive because they are passive income. You don’t have to do any work for the money that you earn as dividends, it’s simply a result of your investments.

Active income is money that you make as a direct result of your work (like a typical job or a service that you provide if you’re self-employed). Passive income doesn’t require your time or effort.

Most types of passive income require either, 1) money to invest, or 2) time and effort up front in order to set up the passive income stream. Dividends fall into the investment category.

If you want to be able