How Much Cash Do You Need to Stop Work and Live Off Dividends? (2024)

Robin Brown

January 8, 2024 at 9:00 p.m.·4 min read

How Much Cash Do You Need to Stop Work and Live Off Dividends? (1)

Written by Robin Brown at The Motley Fool Canada

Quitting work to live off dividend income is no easy feat

It requires intense (and even extreme) frugality, a smart savings plan, and a very thoughtful investment strategy. Not many people are willing to give up their lifestyle in the short-term to enjoy long-term freedom for early retirement.

The cost of living in Canada has risen dramatically. As a result, the amount of cash you might need for retirement is likely significantly more than you would have needed just a few years ago. Yet, it is still possible, but it will take sacrifice.

How much cash will you need?

The cash you will need to invest to retire largely depends on three factors: 1. The cost of living in your region; 2. Your personal lifestyle and standard of living; and 3. Your level of risk tolerance when investing. All these factors are crucial to determine the amount of cash you will need to retire early.

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To live a modestly comfortable life, the average Canadian family of four likely requires between $75,000 and $90,000 of pre-tax family income. This covers standard expenses (housing, food, transportation, and childcare) and some discretionary expenses (entertainment, vacations, etc.).

Use the index to earn passive income

The S&P/TSX Composite Index has an average dividend yield of 3.15%. If we divided the level of income we would require ($75,0000 to $90,000) by the dividend rate (3.15%), one would need between $2.4 million and $2.9 million to meet their income needs.

There are other dividend-focused exchange traded funds (ETFs) that may yield more. A passive investment approach is a good option for people not interested in building and managing a stock portfolio. It can still yield good income results.

GICs are good, but not perfect

An even lower risk option would to be invest in guaranteed investment certificates (GICs). If you appropriately laddered GIC maturities, you could earn low risk return that averages a 4% interest rate today. You would only require $1.9 billion to $2.3 billion of cash to invest.

The only problem with GICs is that they often don’t pay interest until they mature (hence, the need to ladder your GICs). Once they mature, there is no guarantee you will be able to earn the same level of interest in the future. Lastly, they tend not to be liquid, so once purchased, you are locked in and cannot easily cash out.

Generate dividend income with a portfolio of stocks

The final option is to invest in a diversified portfolio of dividend-producing stocks. You can buy a mix of quality Canadian companies and realistically earn an average dividend yield closer to 5%. With that yield, you would only need between $1.5 million and $1.8 million invested to live off your dividend income.

This is the riskiest option. Stocks are volatile, and dividends are not guaranteed. However, it could also be more rewarding as there is the potential for capital upside in the future.

Stocks like TELUS Corp. (TSX:T) are interesting for dividend income. TELUS is one of Canada’s largest telecommunication players. Phones and internet are as essential as power and water. While the telecom space is competitive, it is essential.

TELUS is nearing the end of a large spending cycle. It expects to earn a lot of cash in the coming years and grow its dividend. It yields 6.3% today.

Other quality Canadian stocks for attractive dividend yields include Pembina Pipeline (5.8%), Dream Industrial REIT (5.1%), Canadian Natural Resources (4.5%), and National Bank of Canada (4.2%). Take some of these names and build a portfolio, and early retirement might come sooner than you think.

The post How Much Cash Do You Need to Stop Work and Live Off Dividends? appeared first on The Motley Fool Canada.

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Fool contributor Robin Brown has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources, Dream Industrial Real Estate Investment Trust, Pembina Pipeline, and TELUS. The Motley Fool has a disclosure policy.

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FAQs

How Much Cash Do You Need to Stop Work and Live Off Dividends? ›

Of course, this number will change depending on where you're located in the country, but on average, an annual dividend income of $50,000 should net you about $20,000 in cash that you can spend however you want.

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How much money do you need to live off of dividends? ›

If you are considering a dividend-focused strategy, you should carefully assess your income needs and risk tolerance. For example, if you require an income of 100,000 per year and were looking at a dividend yield of 10%, you would need to invest 1,000,000.

Can you live off dividends of $1 million dollars? ›

Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.

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How much money do you need to make $50,000 a year off dividends? ›

This broader mix of stocks offers higher payouts and greater diversification than what you'll get with the Invesco QQQ Trust. And if you've got a large portfolio totaling more than $1.1 million, your dividend income could come in around $50,000 per year.

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How much money do I need to invest to live off interest? ›

Many Americans need at least $1 million invested to live off interest, but it varies. Explore how to live off interest and calculate how much you need for retirement.

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How much do you need to retire and live off dividends? ›

Here's a breakdown of how much you would need to invest based on different yields: For a 2% dividend yield, an investment portfolio of approximately $2,969,200 is required to generate $59,384 in annual dividend income.

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Is it realistic to live off dividends? ›

The Bottom Line

By investing in quality dividend stocks with rising payouts, both young and old investors can benefit from the stocks' compounding, and historically inflation-beating, distribution growth. All it takes is a little planning, and then investors can live off their dividend payment streams.

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How much dividends to make $1,000 a month? ›

In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments. How Can You Make $1,000 Per Month In Dividends? Here are the steps you can take to build yourself a sufficient dividend portfolio.

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How much dividends to make $500 a month? ›

That usually comes in quarterly, semi-annual or annual payments. Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month.

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How much do I need to invest to make $300 a month in dividends? ›

However, this isn't always the case. If you're looking to generate $300 in super safe monthly dividend income (note the emphasis on "monthly" income), simply invest $43,000, split equally, into the following two ultra-high-yield stocks, which sport an average yield of 8.39%!

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How do millionaires live off interest? ›

Living off interest involves relying on what's known as passive income. This implies that your assets generate enough returns to cover your monthly income needs without the need for additional work or income sources. The ideal scenario is to use the interest and returns while preserving the core principal.

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Is saving $1500 a month good? ›

Saving $1,500 per month may be a good amount if it's feasible. In general, save as much as you can to reach your goals, whether that's $50 or $1,500. You could speak with a certified financial planner to help develop a plan for your finances if you aren't sure how much money to save regularly.

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How much money to make $500 a month in dividends? ›

Dividend-paying Stocks

Shares of public companies that split profits with shareholders by paying cash dividends yield between 2% and 6% a year. With that in mind, putting $250,000 into low-yielding dividend stocks or $83,333 into high-yielding shares will get your $500 a month.

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How much money do I need to invest to make $3000 a month in dividends? ›

If you were to invest in a company offering a 4% annual dividend yield, you would need to invest about $900,000 to generate a monthly income of $3000. While this might seem like a hefty sum, remember that this investment isn't just generating income—it's also likely to appreciate over time.

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How many dividends does 1 million dollars make? ›

Stocks in the S&P 500 index currently yield about 1.5% on aggregate. That means, if you have $1 million invested in a mutual fund or exchange-traded fund that tracks the index, you could expect annual dividend income of about $15,000.

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