To stop working and live off of dividends.
It’s a dream that many Canadians share.
If you had enough money to live off of dividends alone, you could say “goodbye!” to your boss, your commute, and so many more hassles.
But there’s just one problem with retiring early on dividend income:
It takes a lot of money!
Realistically, you’ll need hundreds of thousands invested before you can live off of dividends alone. More if you wish to do it with a minimal amount of risk. High yield stocks are often riskier than the market, and investors are advised to manage risk wisely. In this article, I will explore how much money you’ll need to invest to stop working and live off dividends – without taking on too much risk.
About $2 million at the current market yield
To answer the question of how much money you’ll need to live off dividends, we need to determine how much money you need to live off of, period.
According to Spring, the average living cost in Canada is about $3,443 per month if you include rent. That’s $41,316 per year. Most Canadians pay about 30% in taxes. So, let’s say you need $60,000 per year pre-tax to live off of dividends. In that case, you’ll need $2 million invested to achieve your objective. The TSX Index as a whole currently yields about 3%. At a 3% yield, $2 million produces $60,000 in annual income.
Could you do it with less money invested in high yield stocks?
If the thought of saving $2 million just to live off dividends sounds like a drag to you, a question arises:
“Could you do it with less money invested in high yield stocks?”
And the answer is, “yes, if you choose them carefully enough, after thorough research.”
Consider Enbridge Inc (TSX:ENB), for example. It’s a pipeline and natural gas utility company whose shares currently yield 7.44%. At a 7.44% dividend yield, you can get to $60,000 in annual tax-free passive income with $809,000 invested.
Should you actually invest in Enbridge stock?
That’s a more complicated question.
ENB stock currently has a high payout ratio, above 100%. That means it’s paying out more in dividends than it actually earns in profit. That would tend to indicate that the company’s dividend is unsustainable. On the other hand, the company uses an alternative metric, “distributable cash flow,” to calculate its own payout ratio. That version of the payout ratio is 72%, which isn’t especially high.
One thing to keep in mind about pipelines is that they are very capital intensive businesses. Enbridge, for example, recently spent many billions upgrading its Line 3 pipeline. These kinds of expenses are just part of doing business for pipelines. Enbridge has even more such expenses coming up in the future. For example, a U.S. judge recently ordered the company to re-route one of its pipelines. That will cost it a lot of money. For these reasons, I tend to shy away from pipelines like Enbridge, but as pure income plays, they can work.
