Many Canadians dream about quitting work and living off investment income and dividends. While this is an intriguing wish, it is not an easy feat to achieve.
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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.
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 ($75,000 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 million to $2.3 million 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.
