How much cash do you need to live off of dividend income?
It’s a question that many Canadians are asking these days. The Canada Pension Plan (CPP) doesn’t pay enough to live off of, and apart from the Government, employers don’t usually pay defined benefit (DB) pensions anymore. So, you need a certain amount of dividend and/or interest income to make ends meet in retirement. Either that or have a very, very large stack of cash that you draw down progressively, hoping it doesn’t run out. The latter option seems like a scary prospect, so I’ll just go out on a limb and say that you need investment income to make ends meet in retirement.
Taking that as a given, how much investment income do you need to make ends meet in retirement? That’s an important question to ask, because the answer to it partially determines when you can retire. Investments, CPP, and OAS are the three lifelines that most Canadians have to rely on in retirement. With that in mind, let’s try to figure out how much you need.
My previous answer
The last time I wrote about the amount of dividend income Canadians need to retire, I concluded it was about $841,000. With that amount of money invested in high yield dividend stocks, you can get about $55,500 in annual dividend income. That’s enough money to live off in smaller Canadian cities – especially when you consider the fact that dividends are taxed much less than employment income.
When I decided to tackle this question again, I took a different approach: what about how much money you need to retire and live off dividend income factoring in CPP and OAS payments?
My previous answer was probably a good one for those hoping to go into early retirement. However, many Canadians do receive CPP and OAS. So it’s worth estimating how much money they need to live off of, too.
About $723,300
It takes about $723,300 to live off of dividend income assuming that you receive the average amount of CPP and OAS. That is $821 per month in CPP and $718 per month in OAS. The two combined works out to $18,468 per year. If you’re 65 years of age or older, you can receive both. According to Rentals, average rent in Canada is $2,201 per month. According to the National Bank, the average cost of living for a Single person excluding rent is $1,146 per month. That’s $40,164 in total costs per year. Subtract $18,468 from that, and we’re left with $21,696 that we need to cover with dividends.
How much to get to $21,696 per year in dividends?
At the TSX’s average yield (3%), it takes $723,200 to get $21,696 per year in dividend income. It’s possible to get that much income with less savings if you invest in higher yield stocks (though this strategy comes with more risk).
Consider First National Financial (TSX:FN), for example. It’s a Canadian lending company with a 6.6% dividend yield. With that kind of yield, you only need to invest $327,727 to get to $21,696 per year in dividend income.
It might seem incredible that you can get $21,696 per year in dividends with just $327,727 invested in a stock, but it’s true. As you can see in the table below, FN’s dividends do produce that much – assuming that they don’t get cut at some point.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY |
| First National | $36.39 | 9,034 | $0.204167 per month ($2.46 per year). | $1,844 per month ($22,133 per year). | Annual |
Now, of course, you shouldn’t go investing all of your money in FN stock. A portfolio needs some diversification to reduce its risk. In the case of FN, the risks include a potential slowdown in the housing market and Canadians not being able to pay their mortgages. In today’s high interest rate environment, both of these risks are real. Nevertheless, the example above does illustrate what’s possible with dividend stocks.
