How much would I need to invest to live off dividends?

Our writer crunches some numbers to consider what it might take for him to live off dividends — and outlines what he plans to do.

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Is it possible to live off dividends? It is — and people do. For some investors, dividends provide a key source of income in retirement. Other, younger people step out of the workforce altogether and live off dividends.

But the practicalities of doing so involve considering a few issues.

Understanding living costs

To know whether it is feasible to live off dividends, first it is important to know what individual living costs are.

That involves taking a hard-headed approach as costs tend to rise over time and, of course, life can be full of surprises.

So for those serious about financial planning, it is important to take a realistic approach to what sort of lifestyle is required and how much it will likely cost, not only now but also in the future. That needs to include costing in some expensive surprises. Life happens!

Funding living costs with dividends

According to research by the Office of National Statistics, the average annual expenditure per person in the UK was around £21,500 in 2021.

Different lifestyles come with very different costs. But using that £21,500 as an example, how much would I need to invest to cover such a cost in dividends? That depends on the average dividend yield of my portfolio.

If I achieved a 5% yield, I would need to invest £430,000. At an average yield of 6%, I could invest around £358,000. If I achieved an average yield of around 7%, I could hopefully earn £21,500 in dividends annually by investing just over £300,000.  

Building a dividend portfolio

I think such yields are achievable even when investing in blue chip shares. Legal & General, for example, yields 7.2%.

But dividends are never guaranteed. Legal & General cut its in the financial crisis, for example. Although I would diversify my portfolio across a range of shares, a cut in just one of them could still lead to my income falling. That is why I would aim to build in a large margin of safety between my monthly target income and what I aimed to earn in dividends.

Taking a long-term approach

If I wanted to try and live off dividends, I would also need to consider the long term.

Some of my costs might decline over time. But others could increase markedly, either because of inflation, or due to my changing spending patterns. For example, I expect my healthcare costs to get bigger as I get older.

Dividends are never guaranteed. But even those that keep on being paid and growing annually – a group known as Dividend Aristocrats – may grow less quickly than my expenditure. So the question for me is not just what would it take for me to live off dividends now, but also long into the future.

I may live off dividends – one day

The answer to that question is quite a bit of money! Indeed, I have no plans to try and fund my life with dividends just yet.

But I do think it could be an attractive option for the future. By investing in the right way now and in coming decades, hopefully I will be able to live off dividends when I retire. To do that, I am taking steps right now to build a long-term portfolio of brilliant income shares.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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