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Living off of Dividends? Not as hard as you’d think.

stock quotes on a phone - living off of dividends

Living off of Dividends? Not as hard as you’d think.

Living off of Dividends. Sounds like a dream, doesn’t it? Your money smartly invested in the market, generating you income so you don’t need to worry so much about your cost of living. It’s covered. All you need to worry about is how you’re going to spend it as it rolls in, month by month.

This sounds like something that is reserved for well-off retirees, trust fund children of the super-rich elite, or the Scrooge McDucks of the world who happen to be sitting on a pile of gold.

But what if I told you that you, or anyone really, could begin to live off of dividends by supplementing their monthly income? Even with a small amount of money invested into well-chosen stocks, you can earn passive income off of your capital.

What are Stock Dividends and How do they work?

A dividend is a portion of a company’s profits paid out regularly to shareholders. Usually they’re paid out annually, quarterly, or monthly. Most stock dividends are expressed as a yield (a percentage of the ratio of share cost to payout), which can give you an idea of how efficient your invested money is working. Usually you can get the dollars and cents of how much the dividend is and how often it is paid out from the company’s website.

Often, smaller or newer “growth” companies will not offer a dividend. Thats because many of these companies may not actually generate any profits at all, or they are still so small that they need to reinvest their earnings back into the enterprise. Dividends aren’t exclusively for the blue chip, old-guard stocks though. In fact, of the S&P 500 companies, more than 400 pay dividends to their shareholders.

When a Company’s Dividend is considered “Safe”

Nothing is ever “safe” or risk-free in the investing world (especially when it comes to stocks). As a common stock holder, you are often the last person to be paid (if at all) when a company goes bankrupt. Usually when times get tough, if a company can’t keep its cashflow positive and its operations afloat, they will need to reduce, cut or outright stop paying a dividend. Sometimes this will be temporary (as in the case of the COVID-19 pandemic), but could stretch to a longer amount of time if business doesn’t improve.

A rule of thumb I’ve seen in most of the investing books I’ve read, is that a dividend could be considered “safe” if the firm in question has a great rack record of paying it. This means the company has paid a dividend consistently for at least 10 years straight, and, the dividend has been increasing year-over-year. As a company grows, so should its earnings, profits, and dividends paid to shareholders.

Beware of Unsustainable Dividend Stock Yields

This is something to keep in mind when picking stocks with the intention of living off of dividends. A high dividend yield is very attractive to someone looking to retire – after all, the higher the yield, the more efficiently your money is reaping you earnings. But beware – a high dividend yield may not be sustainable.

Do your due diligence to determine how the company is funding the dividend, and diversify your portfolio so you don’t have all of your dividends cut at the same time. This can happen when an industry or sector takes a major hit without warning (ie. Feb 2019 Oil Collapse coupled with the Global Pandemic).

Often when a company slashes or outright stops their dividend, their share price will tank. This can leave you holding the bag, with your principal greatly reduced and earning you no dividends. That’s the opposite of your goal –  so be selective in the companies you choose, and diversify.

Living off of your Dividends – bit by bit

Ok, so you aren’t Scrooge McDuck. Neither am I. How can you put your money to work in the market to help you earn a living?

Invest consistently! Bit by bit, you can add to your income-generating holdings. A lot of people say they don’t have “enough money to invest”, or that their invested money just doesn’t generate much revenue. While obviously a bigger pile of capital can generate more returns, even a single share of a stock can earn you a dividend payout.

Take a company like Enbridge. While pipelines often get a lot of bad press, they can be very stable income-generators due to the nature of their business. I’ve even heard of a pipeline having a 115 year contract for space from a shipper…

Enbridge has paid a dividend for 66 years. They note: “Over the past 26 years, the dividend has grown at an average compound annual growth rate of 10%.” For 2021, their annual dividend total payout will be $3.34 CAD per share. At their current share price of $47.74 CAD, a small ~$500 investment could currently earn you $33.40/year in dividends. Thats enough to cover more than a few coffees.

With that in mind, $5,000 could pay for ten times as many coffees… or maybe a monthly bill. Just imagine what $500,000 could do!

If you’re not ready to retire just yet, reinvest your dividends to compound your growth. Many companies allow you to reinvest dividends for more shares through a DRIP.

What dividend stocks can you live off of?

Only buy businesses you understand and that meet your risk needs! Beware unsustainable dividends. Don’t invest in a company whose business model makes no sense to you.

A good start would be to look into dividend or “high-dividend” ETF index funds. These track the market and are consistently managed by professionals. Consider adding bonds (if you have the capital) to your portfolio for less risky, consistent income.

Learning to evaluate businesses for yourself to determine if they are solid is a key skill for investing. Whatever you do, avoid getting your investment education on social-media websites and through dated online articles. Please – do not pick specific stocks from these sources either! You’ll likely regret it.

Living off dividends is a great goal for any investor, regardless of your age or income. The sooner you start, the sooner you’ll get there though – so invest often and consistently for the best rewards. Cheers!

Note: this article is meant to be general in nature and doesn’t imply financial advice or endorse a specific stock or fund. I currently own shares in Enbridge, but haven’t received anything for using them as an example.

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