Living off dividends - the dream of passive income

Is living off dividends just a dream? Absolutely not!

Imagine you owned every single stock in every listed company in the world.

What would your income have been in 2015?

The answer is $1.15 trillion!*

This is the amount of cash that is being paid to investors all over the world every single year and it has risen from just over $700 billion in 2009.


Of course, you're not going to own every stock in the world but the point is that this cash is out there and it is being paid to someone somewhere, year after year.

Why shouldn't that person be YOU?

As you can imagine, it would only take ownership of a tiny, tiny fraction of all the equities (stocks) in the world to have an extraordinarily high income.

Your goal, over time, should be to consistently increase your ownership stakes so more and more of that huge pile of cash being is coming into your pockets.

Living off dividends can sound like a completely unrealisic dream.  It is, however, possible but requires patience, self discipline and (large windfalls aside) a significant period of time.

Your first step to living off dividends - become a compulsive saver!

There are a few things to consider when thinking about living off dividends and how to get to that goal. One of the most important habits you must develop is the ability to save.

A good way to think about this is to think of the extremes.

If you save 100% of your income then you could retire tomorrow!

Why? Well, this means you are spending NOTHING, so you don't need an income to live so you can simply retire now.

At the other extreme, if you spend 100% of your income then you'll never be able to retire (or you'll rely on the kindness of government or family to fund your retirement). This is because you will not be building the capital which is can be used to build a passive income.

Therefore, the more of your income you save the quicker you'll be able to retire.

We cannot over emphasize the importance of saving as, no matter what your income is, if you aren't saving you won't be able to attain financial independence.

Next you need to think about income. To state the obvious, it's far easier to build up a substantial level of capital with a higher income.

This means, if you are employed then you should really invest in yourself to increase your earning power. This may mean pushing for higher pay via promotions, making more sales or making yourself indispensable to your employer.

You can also look to build up other forms of income such as starting a side business, building an online business, or taking a second job. As your income grows, try to save as much of this extra income as possible so you can build that pot of capital to invest.

Let's be realistic, living off dividends requires a large amount of capital.

If you need $50k a year to live and if you're earning a 4% dividend yield off your portfolio, you will need a portfolio of at least $1.25 million.

At first, this sounds like a mountain to climb which in itself could put off many potential investors. However compound interest will help along the way, by increasing the earning power of your stocks even if you don't add another dime

Therefore we strongly recommend that you take it step by step and set yourself small goals and harness this compounding to help you move towards the ultimate goal of living off dividends.

At first you should aim to simply supplement your income. It's up to you to set your individual goals but let's say you manage to save $15,000. Well using our 4% yield example, that would provide $600 a year. Maybe that's enough to cover the cost of your cell phone.

Let's say you then manage to build on those savings, plus the companies in your portfolio start raising their dividends so within a couple of years you may well have doubled that passive income to $1,200 a year.

Well now your electricity bill might be covered!

Aim next to cover the cost of your car, your rent/mortgage, and ultimately have enough passive income to cover your costs. Undoubtedly it does take time, patience and a consistent savings habit but it can be done. Financial independence is a goal worth striving for!

* Henderson Global Dividend Study.  

For examples of how building a passive income is possible, read our article on compound interest.


Mike - six-figure dividend earner

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