How Much Cash Do You Need to Stop Working and Live Off Dividends?

Are you interested in retiring and living off dividends? Here’s how much cash you’ll need!

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Many investors dream of the day they can quit their job and live off dividends. However, it’s unclear at which point you can actually do that. That’s because the answer will vary from person to person. For example, if you can live off of $40,000, then you would need much less invested compared to someone who would want a more lavish lifestyle of $80,000 per year.

Figure out how much money you’ll need

Depending on what kind of retirement you want, your portfolio will need to match that. Say you want a retirement income of $50,000. It’s estimated that the average Canadian will need just more than $29,000 to pay for all necessities in a given year. That includes groceries, car payments, rent, and more.

Of course, this number will change depending on where you’re located in the country, but on average, an annual dividend income of $50,000 should net you about $20,000 in cash that you can spend however you want. That gives you enough flexibility to attend events or go on trips a few times a year — not bad, if you ask me.

How much does your portfolio yield?

Next, you’ll have to figure out how much your portfolio yields in a given year. In other words, how much cash will you receive from the investments you hold? Using our target income of $50,000 per year, you would need to maintain a yield of 5% if you had a $1 million portfolio. That sounds like a lot, but if you can invest consistently for a long time, that’s a number that you could hit eventually.

If you’re hoping to reach that $50,000 annual dividend mark sooner, it’s certainly possible with less money, but you’d have to find companies that yield much more than 5%. For example, if you found dividend stocks that averaged out to a yield of 10%, you could theoretically receive that same income on an investment portfolio of $500,000.

While that may sound great, I certainly wouldn’t recommend it. In my opinion, the best yields to look for are somewhere around the 4-7% range. In Canada, there are outstanding stocks out there that offer Canadians this kind of yield. Investors could turn towards the utilities or financial sectors to find strong, reliable dividend stocks.

A stock you should consider buying for its dividend

If you’re looking for a stock that could help you get started on this journey, then consider Manulife Financial (TSX:MFC). This is the largest insurance company in Canada and one of the largest fund managers in the world.

What investors should find great about insurance companies is that they tend to be pretty stable businesses. For example, these companies receive consistent and predictable payments from customers each month and really only have to pay customers out when they make claims. If you’ve ever had to talk to your insurance company, you’ll know that they even try to make it difficult for any payments to be distributed. In terms of cash, you’ll never have to worry about whether Manulife will have any.

This stock currently offers investors a forward dividend yield of 5.01%. Manulife stock has a dividend payout rate of 56%. That suggests to me that the company could continue to comfortably raise its dividend over the coming years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Jed Lloren has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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