Living Off Dividends: How Much Do You Need to Live Off Dividends in Retirement?

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Living Off Dividends

Living off of your investments is a dream for many people. Not needing to work for income or withdrawing money from your investments would be the ultimate financial freedom.

Although it’s 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 surrounding the topic of dividend investing and ultimately getting to the point of living off dividends.

Living Off Dividends: What It Means

When a company earns 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 a dividend payment. In reality, many companies do both. They may reinvest the majority of profits back into the business while using some of the profits to give dividends to shareholders.

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

Using passive income streams is an alternative to withdrawing money from your investment balance to cover the cost of living in retirement. Since you’re not withdrawing, your retirement portfolio may continue to grow.

If you’re able to live off of dividends and the value of your investments never decreased, you’d be able to live off dividends indefinitely (of course, in reality, investments do go down sometimes). As long as your expenses remain below the amount you earn in stock dividends, you can preserve the capital of your investments.

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Of course, the cost of living increases as the years go by, which means your dividend income will need to increase as well if it’s going to cover all of your expenses.

Thankfully, many companies continually increase the dividends they pay to shareholders, and these increases often outpace the inflation rate. If you’re investing in the right companies, the dividend income growth should more than cover inflation over the long-term.

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. Even if you can never cover 100% of your expenses with dividend income, a smaller amount of passive income may still have a life-changing impact.

For example, generating $1,000 – $2,000 of cash flow per month from your investments may not cover all of your expenses, but maybe it’s enough that you can retire a few years earlier. Or maybe you combine your dividend income with money you make from a side hustle, so you can leave your full-time job.

Covering your expenses with a dividend portfolio may be one of your financial goals, but there’s still a lot to gain even if you don’t reach the ultimate goal.

What Types of Investments Pay Dividends?

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Several types of investments offer the possibility of dividend payments. What’s right for you depends on several factors, including your risk tolerance. Here are the most common choices for the typical investor.

  • Stocks – The most popular option for dividend investors is individual company stocks. These are usually large, very well-established, and recognizable companies that have long track records of paying dividends and dividend growth. See our Dividend Aristocrats list for some specific ideas.
  • Mutual Funds – Some mutual funds also offer dividends. These mutual funds invest in dividend stocks, which ultimately get passed on to the investors (minus the management fees).
  • ETFs – Similar to mutual funds, there are also ETFs (exchange-traded funds) that include dividend-paying stocks and pass those dividends on to investors. See our list of high-dividend ETFs for some possibilities.
  • REITs – REITs (real estate investment trusts) allow you to invest in real estate without the need to own or manage the property. Investing in REITs is also a great way to earn dividend payouts. Real estate crowdfunding and eREITs are also solid options. For example, Fundrise has a supplemental income portfolio for investors who want consistent annual dividend income while earning a solid rate of return.

Most of the information you’ll read online about dividend investing will be focused on individual stocks. But other types of income-producing assets may also present options.

Covered Call ETFs offer some of the highest dividends, but they may not be the right choice for many investors. Asher Rogovy, Chief Investment Officer of Magnifina, says, “Covered call funds are a very interesting financial innovation. Just like covered calls, however, they bear limited upside potential with unlimited downside risk. This dynamic is usually disclosed in a fund’s prospectus. They make the most sense as an investment during a sideways market. The underlying assets maintain their value, and the option premium sold provides steady income.”

Investment Platforms

Our highest-recommended platforms for DIY investors are Public, Webull, and Moomoo. With any of these platforms, you can easily invest in quality dividend-paying stocks and ETFs. Public even offers a helpful list of stocks and ETFs that pay high dividend yields so you can easily find ideal investments that match your goals.

You can purchase fractional shares with Public or Webull, which means you can own any dividend-paying stock or fund regardless of the stock price.

Later in the article, we’ll look at how much you need to invest to generate specific levels of passive income from your retirement portfolio. The best approach is to choose one of these platforms, get started now, and add money regularly to continue growing your portfolio.

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What Type of Dividend Yield Should You Expect?

The dividend yield produced by your investments will vary based on several factors. However, for planning, it’s good to have a realistic target. In general, a dividend yield of 2-5% is a good target. The calculations are based on a 3-4% yield, which is very realistic. Many companies aim to continually increase dividends, which can have a compounding long-term impact on your portfolio.

Dividend Reinvestment Plan

A dividend reinvestment plan (DRIP) gives you, the investor, the option to have dividends automatically reinvested. Many brokerages provide this option. With Public.com, all you need to do is go to your account settings and flip the toggle if you want dividends to be automatically reinvested.

If you’re currently growing your investments, you’ll want to enable this option. Later on, when you’re ready to use the dividend payout for living expenses, you can simply change this setting, and you’ll receive the dividends in your bank account.

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How Much Do You Need in Your Portfolio to Live Off Dividends?

Let’s look at the size retirement portfolio you’ll need to live off dividends. The table below shows how much you’ll earn (at 3% and 4% annual dividend yield) with a portfolio of $500,000, $1 million, and $2 million.

The income produced by an investment portfolio of $500,000 is not enough to completely support the lifestyle of the average person, but it can go a long way toward reducing the annual income you need from other sources.

The average person would need to build a portfolio of at least $1 million, at a minimum, to fully cover expenses with dividend income. A portfolio of $2 million would produce an amount that provides a comfortable lifestyle for most people.

DetailsExample 1Example 2Example 3Example 4Example 5Example 6
Portfolio Size$500,000$500,000$1,000,000$1,000,000$2,000,000$2,000,000
Dividend Yield3%4%3%4%3%4%
Annual Dividend Income$15,000$20,000$30,000$40,000$60,000$80,000

If the value of your portfolio increases over time (if the stock price goes up), your balance will increase, and your dividends should also go up. Also, many companies attempt to constantly increase the dividends they pay. Dividend growth could also positively impact your results.

Note: The dividend yield you’ll earn will vary depending on the stocks in your portfolio. We’re using a 3-4% dividend yield as an example, but yours may be higher or lower. Thanks to dividend growth potential, your yield may increase over time.

Keep in mind that the data in this table represents only income produced through dividends. Most retired Americans receive income from social security, a pension, or another source. In 2023, the average social security benefit is $1,827 per month, $21,924 per year. Any income you receive will reduce the amount you need from dividends.

Retirement Income Example

Now, let’s take a look at how this might play out. The average household income in the United States is estimated to be around $87,000 (source). The average retired household spends about 25% less in retirement than they did while working (source), which is typically accounted for in retirement planning.

Keeping these numbers in mind, let’s use $66,000 of annual income to guide what will be enough to cover expenses in retirement. It may be more or less for you, but this is a good starting point.

To generate $66,000 of annual dividend income, you would need a portfolio of $1.65 million with an average dividend yield of 4%.

If you’re receiving social security, that will reduce the amount needed from your dividend strategy. The average social security benefit is around $22,000 per year.

To generate the additional $44,000 from passive dividend payments ($22,000 social security + $44,000 in dividends = $66,000 for living), you would need a portfolio of $1,100,000 with an average dividend yield of 4%.

Pension income or side hustle income could also reduce the amount needed from dividends. So as you can see, it’s possible to combine dividend payouts with other supplemental income to cover the cost of living, even if you cannot live 100% off dividend income.

Again, it’s important to note that this is simply a theoretical example. Your results may vary depending on details like the dividend yield of your portfolio.

Building Dividend Income Takes Long-Term Focus

Reaching financial independence is not a short-term goal. If you want to live off dividends, you’ll need a long-term focus, and you have to stick with it. You’ll need to consistently work to build up your investment balance and give those investments the time they need to grow and compound. You’ll also want to continue to focus on investments that will help to increase your overall dividend yield.

As we saw in the example above, living off dividends is a realistic goal, but it’s not easy to achieve. You’ll need a significant investment balance before you can cover your expenses with the investment income. But if you keep working towards that goal each month for several years, it’s very achievable.

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Fundrise: An Alternative to Dividend Stocks

While stocks, mutual funds, and ETFs are the most common ways to invest for dividends, other options exist outside of the stock market. Fundrise is the most popular real estate investing platform, and it’s an excellent asset for those who want to generate cash flow from their investment portfolio.

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As a Fundrise investor, you’ll own a share of a portfolio of income-generating properties (apartment buildings, condos, office buildings, etc.). You won’t need to research properties or choose individual investments. Fundrise handles all of those details.

Fundrise pays quarterly dividends, and you can reinvest the dividends or take the cash payout. There’s a setting in your profile, and you can easily change the setting at any time.

In addition, Fundrise offers a few core strategies: supplemental income, long-term growth, and balanced. If your goal is to live off dividends, the supplemental income strategy will help to maximize the cash flow that’s generated from your investment.

Fundrise also has a very helpful goals feature. You can set a goal of a certain amount of dividend income you want to generate from your investments, and it will tell you how much you should be adding to your account regularly to reach that goal.

For those who want to add some diversification and create a balanced portfolio, Fundrise is an excellent addition to your dividend investing strategy with stocks or ETFs. The company has historically provided a solid return on investment. Fundrise average returns have been around 10% annually (including dividends and appreciation), but the results vary yearly. You can see much more detail on their client returns page.

Frequently Asked Questions

Is it possible to live off dividends?

Yes, some people are able to cover their expenses with cash flow from dividend income. It’s not easy, and it takes a long-term focus, but it’s definitely possible.

How much money do you need to live off dividends?

The answer to this question depends on how much you spend each year and what dividend yield your investments produce. For example, if you need $40,000 per year for expenses and your investments produce an average dividend yield of 4%, you’ll need to have $1 million invested to produce $40,000 in dividend payments.

Can you lose money on dividend stocks?

Yes. Dividend-paying stocks, just like other stocks and investments, can lose value.

Can you live off dividends of 1 million dollars?

If your portfolio produced an average dividend yield of 4%, a nest egg of $1 million would generate $40,000 per year in dividend payments. That might be enough for you to cover expenses in a very low cost of living area with a frugal lifestyle, but for many people, it’s not enough. In that case, you would either need a bigger higher average dividend yield or a portfolio that’s bigger than $1 million. Also, supplemental income (like social security) will help.

How many dividend stocks should I own?

There’s no exact answer to this question, as it can vary depending on your dividend investment strategy. The more stocks you own and the more sectors those stocks represent, the more diversified your portfolio will be. Most investors prefer a diversified portfolio, so owning several different stocks is preferable.

What is the fastest way to live off dividends?

The fastest way is to buy stocks or funds (mutual funds or ETFs) that have a strong history of paying dividends and invest as much money as you can. These dividend growth stocks should help you to see steady increases. You may need to increase your income by starting a side hustle to have more income that will grow your portfolio faster.

Final Thoughts on Using Stock Dividends to Create Passive Income

Living off dividends can be a realistic goal, although it won’t be easy. Keep in mind that you don’t have to completely live off dividends to have success. This approach is also very effective when it’s combined with other sources of income (like social security, a pension, or side hustle).

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