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

Canadians should start making dividend income as soon as possible, as they could even live off of it in retirement!

| More on:
Man making notes on graphs and charts

Image source: Getty Images.

Dividend investing is a real strategy that works, as many retirees live off dividend income as a key source of income. Other sources of income could come from rental income or a pension. But just how much cash do you need to invest to quit work?

First, you need to make sufficient dividend income. Your dividend portfolio yield should be sufficiently high. Second, it should be obvious that the dividends in the portfolio should be safe. Third, the dividend growth of the portfolio should at least keep pace with inflation, if not beat it. Fourth, what should also be obvious is that capital preservation is critical. So, be sure to tread cautiously on every investment decision.

According to Nationwide Visas, the average annual salary for a full-time worker in Canada is $63,013. Let’s say we need to make 80% of this income (or $50,410) with dividend investing. We actually have a buffer by earning Canadian dividend income because eligible Canadian dividends are actually taxed at lower rates than your job’s income.

The Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, yields about 3.1%. As a general rule of thumb, we can target to build a dividend portfolio with a current yield of about 4.6-6.2% (i.e., 1.5 to two times the market yield). This rule allows us to earn a decently high yield while keeping safety in mind. It’s a little reminder that dividend yields of over 6.2% today could be in danger of being cut. Typically, stocks with yields near the low end of the range are safer investments.

For a portfolio yield at the midpoint of 5.4%, investors would need to invest $933,519 today to generate dividend income of $50,410.

Here are a couple of dividend stocks that offer dividend yields of 4.6-6.2%.

Brookfield Renewable

Brookfield Renewable (TSX:BEPC) is an experienced operator and developer of renewable power assets. It has a diversified portfolio of hydroelectric, wind, solar, distributed energy and sustainable solutions across five continents.

Internationally, there is a multi-decade’s long runway for growth in the sector. Management believes that combined with value investing, its repeatable strategy to grow could deliver total returns of 12-15% and annual dividend growth of 5-9%.

Due in part to higher interest rates, the dividend stock has declined about 16% since the start of 2022. The stock trades at a discount and offers a dividend yield of 4.9%. Even assuming no valuation expansion, based on a 5% growth rate, investors can still approximate long-term total returns of about 10% per year.

TD Bank

Toronto-Dominion Bank (TSX:TD) stock has paid dividends every single year since 1857. The Canadian bank stock has declined 22% since the start of 2022. This provides a good opportunity to buy the stock at a decent discount for a high dividend yield. At about $75 per share, it trades at a discount of close to 20% from its long-term normal price-to-earnings ratio and offers a dividend yield of 5.4%, which is attractive.

TD Dividend Yield Chart

TD Dividend Yield data by YCharts

The large North American bank has a track record of paying out safe dividends. For your reference, its 10-year dividend-growth rate is 9%. And its payout ratio is estimated to be about 51% of adjusted earnings this fiscal year.

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 Kay Ng has positions in Toronto-Dominion Bank. The Motley Fool recommends Brookfield Renewable. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Cogs turning against each other
Dividend Stocks

How Interest Rate Cuts Affect REITs

Now is a good time to investigate Canadian REITs and take a position in the form of stocks or exchange…

Read more »

Simple life style relaxation with Asian working business woman healthy lifestyle take it easy resting in comfort hotel or home living room having free time with peace of mind and self health balance
Dividend Stocks

3 Affordable Passive-Income Stocks That Pay Monthly

These three monthly-paying dividend stocks could boost your passive income.

Read more »

Dividend Stocks

Retirees: 2 High-Yield Dividend Stocks to Buy in July

Retirees can rely on these dividend stocks for steady passive income and high yields.

Read more »

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

CPP Benefits Not Enough? This Top Dividend Stock Can Help Fund Your Retirement

Dividend stocks like Fortis Inc (TSX:FTS) have funded many a retirement.

Read more »

A steel grain silo storage tank with solar panel in a yellow canola field in bloom in Alberta, Canada.
Dividend Stocks

The Ultimate TSX Stock to Buy With $1,000 Right Now

Once at triple-digit prices, Nutrien stock (TSX:NTR) now offers a steal of a deal for long-term growth as well as…

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

Set and Forget: 1 Dividend Stock That Could Create $1,000 in Tax-Free Passive Income in 10 Years

Enbridge operates a low-risk business that has allowed the TSX dividend giant to raise its payout by 10% annually since…

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Passive Income: How to Make $106 Per Month Tax Free

Holding quality, high-yield dividend stocks such as Freehold Royalties in a TFSA can help you earn tax-free income for life.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Earn a TFSA Paycheque Every Month and Pay No Taxes on it

Stocks like First National Financial (TSX:FN) pay you monthly. You can also earn monthly dividends through portfolio diversification.

Read more »