How Much Cash Do You Need to Quit Work and Live Off Dividend Income

Do you want to quit work and live off of dividend income? It’ll take some patience, but it can be done. According to various sources (named below), the average Canadian has $35,148 in annual living expenses. In this article, I will explore how much money you’d need to save to earn that much in dividends alone.

About $841,000

It takes about $841,000 to quit work and live off of dividend income in Canada. I arrived at this figure using two empirical facts and one estimate about the obtainable yield on a well-diversified portfolio:

1. $2,193 per month: the average rent in Canada, according to MoneySense.
2. $736 per month: the average living expenses for a single person, according to Spring Financial.
3. 4.18% per year: my estimate of the obtainable yield on a well-diversified portfolio.

The first two numbers above simply come from survey results; accordingly, I’ll treat them as empirical facts. The third is my own estimate of the kind of yield an investor can obtain without pursuing outrageously high-risk strategies in pursuit of yield. This estimate comes from the following observations:

• The S&P/TSX dividend index yields 3.36%.
• Treasuries yield just under 5%.
• Therefore, a diversified 50/50 combination of dividend stocks and treasuries yields 4.18%.

Putting all of this information together, you get $2,929 in combined monthly living expenses ($35,148 per year), which has to be paid for by a 4.18% yield. It takes $840,861 invested at a 4.18% yield to get to $35,148 per year. So, that’s how much you need to invest to quit your job and live off of dividend income.

Could it be done with less?

If you’re a Canadian with savings the median nationwide amount, you might find my roughly $841,000 estimate of savings required to quit work and live off of dividend income disappointing. After all, most Canadians don’t have even have half that amount saved.

Is it possible to get to $35,148 per year in dividend income with less invested?

If you were willing to assume more risk, it could potentially be done.

There are stocks out there that have much higher yields than average. If you look at Toronto-Dominion Bank (TSX:TD), for example, it has a full 5.52% yield. At that yield, you only need to invest $636,700 to get to $35,148 per year in dividend income.

However, stocks with very high yields usually acquire such yields by virtue of being cheaper than average. Cheapness is associated with high risk. To continue the example of TD Bank, the bank is currently perceived as risky because it is being investigated for money laundering in the United States.

TD Bank employees in New Jersey were caught laundering money for Fentanyl cartels. The U.S. Department of Justice investigated, eventually finding further wrongdoing in New York and Florida. Analysts expect TD to ultimately pay $2 billion in fines related to the investigation.

TD stock is a good value and will continue being able to pay its dividend if the fines end there. However, if a “worst-case scenario” plays out here, with tens of billions in fines over the decades, then TD stock could be down for a good, long while. So, holding TD in a well-diversified portfolio is preferable to putting all of your money into it, hoping to collect 5.52%. For this reason, I think the $841,000 estimate for a diversified portfolio is better than the single-stock $636,000 estimate for a TD-only “portfolio.”