How much do you need to invest to give up work and live only off dividend income? It’s a good start to target replacing your salary with dividend income. Here’s the good news, though – you don’t actually need to completely replace your job’s income.
First, in the non-registered account, Canadian dividend income is typically taxed at lower rates than your job’s income. Second, you could also be earning dividend income in tax-advantaged accounts like your Tax-Free Savings Account (TFSA), which results in no income tax on the Canadian dividend income that you generate.
For example, according to LinkedIn, the median income in Canada this year is $55,000 to $60,000. If you lived in Ontario and earned $60,000 from your job this year, your combined federal and provincial income tax would be roughly $12,836.78 for an income tax rate of roughly 21.39%. So, the after-tax income would be $47,163.22.
You need to determine how much you’re spending each year. Obviously, there is necessity spending and discretionary spending. Some Canadians choose to retire earlier by reducing their discretionary spending on items like vacations and gadgets. Anytime your after-tax dividend income could consistently cover your total spending, you could give up work and live only off dividend income.
Actually, if eligible Canadian dividends are your only source of income, there’s essentially no tax on the first $53,359 earned in 2023. So, if you could comfortably live on about $47,163 this year, you would only need this much annual dividend income. In a higher interest rate environment, Canadian investors can find higher dividend yields in the 7% range that are still safe.
Let’s be super conservative and assume a dividend portfolio yield of 5%. To earn $47,163 in dividends this year, your portfolio size should be $943,260. This seems like a lot, especially if you’re new at investing. However, remember that your dividend portfolio can help contribute as well, by providing dividends for reinvestment while you’re still working.
In real life, your income situation will be more complex. Other than dividend income, you might also receive pension income, insurance income, and other investment income, such as interest income.
No matter what, it’s the right thing to do to start building a dividend income stream as soon as possible because this type of income is taxed at lower rates than your job’s income.
Where to look for safe dividend income?
The big Canadian banks are some of the oldest dividend payers available. In particular, Toronto-Dominion (TSX:TD) stock started paying dividends as early as 166 years ago. Since peaking in 2022, the bank stock has come down.
At $81.78 per share at writing, it’s reasonably valued at a price-to-earnings ratio of about 10.2. This is a discount of about 12% from its long-term normal valuation. Analysts believe the stock is about fairly valued. It also offers a safe dividend yield of close to 5%.
In the long run, investors can count on the large North American retail banking focused bank to increase its dividends. For your reference, its 10-year dividend growth rate of 9.4% is above average versus the Canadian banking sector.
If you buy about $10,000 of TD stock at the recent quotation on a commission-free trading platform like Wealthsimple, you’d earn almost $499 a year in dividend income. The sooner you start, the earlier you can put your dividends to work to earn you more dividends by reinvesting the dividends into dividend stocks.
Don’t put all your eggs in one basket. Portfolio diversification can provide more reassurance and reduce the risk of your dividend portfolio.
