How Much Do You Need to Invest to Give Up Work and Live Only Off Dividend Income?

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Written by Amy Legate-Wolfe at The Motley Fool Canada

What a question. How much would it take if you were looking to just live off dividend income alone? I’m going to give you a bit of a spoiler alert: a lot. However, if you do two things, it might be a lot easier than you think.

Living off dividend income right now

Let’s break this down to three ways you could live off dividend income and give up work. The first option is to create enough dividend income to allow you to quit work right now. You can walk out of your office and be done with work for the foreseeable future.

To do that, it’s going to take one huge investment. What’s more, you’re going to have to make sure that you’re investing in a company that’s going to keep paying you for life. For that I would feel safe investing in the Canadian Big Six banks, but, in particular, Canadian Imperial Bank of Commerce (TSX:CM). It has a history of having one of the highest dividends out there, so it’s certainly a great place to start.

Also, consider how much you’ll need in dividend income year after year. Let’s say you want to create $60,000 each year for the rest of your life. The good news is you’re getting a deal on CIBC stock. Yet it still won’t be cheap. Here is how that would shake out.

COMPANY

RECENT PRICE

NUMBER OF SHARES

DIVIDEND

TOTAL PAYOUT

FREQUENCY

PORTFOLIO TOTAL

CM

$52

17,242

$3.48

$60,002.16

quarterly

$896,584

There is another way!

Actually, there are two other ways to create that amount of dividend income. Right now, you would be paying almost a million dollars upfront to create dividend income each year. What’s more, that certainly isn’t going to fit in any of your tax-free accounts. So, you’re going to need to keep paying off taxes year after year, eating into your dividend income.

The first option is to work up to that amount. Again, it’s still going to take a significant investment if you want to create that much in say a decade. But not about $900,000. Even still, you’re going to need to invest hundreds of thousands of dollars to achieve that amount, even if you wait. So, there is still another option to consider

Get passive income

Investors seem to forget that dividend income is only part of passive income. The other part is returns. Returns are also passive income and why most investors get into investing in the first place. If you take that into consideration, it’s likely going to take far less time to make $60,000 per year.

So, let’s look at CIBC stock and say you want to get out of work in the next decade. CIBC stock has grown by a compound annual growth rate (CAGR) of about 5% in the last decade, with its dividend increasing by 6% during that time. In this case, if you were to invest $20,000 each year, at the end of a decade, you could look forward first to returns and dividend income over more than $60,000, but also achieve more than that amount year after year.

Year

Share Price

Shares Owned

Annual Dividend Per Share

Annual Dividend

After DRIP Value

Annual Contribution

Year End Stock Price

New Shares Purchased

Year End Shares Owned

New Balance

1

$52

385

$3.48

$1,339.80

$21,359.80

$20,000

$54.60

390.84

775.84

$42,360.86

2

$54.60

775.84

$3.69

$2,862.84

$45,223.71

$20,000

$57.33

398.79

1,174.63

$67,341.75

3

$57.33

1,174.63

$3.91

$4,592.80

$71,934.55

$20,000

$60.20

408.52

1,583.14

$95,305.53

4

$60.20

1,583.14

$4.14

$6,554.20

$101,859.23

$20,000

$63.21

420.09

2,003.23

$126,624.17

5

$63.21

2,003.23

$4.39

$8,794.18

$135,418.35

$20,000

$66.37

433.84

2,437.07

$161,748.56

6

$66.37

2,437.07

$4.66

$11,356.75

$173,105.08

$20,000

$69.68

450.01

2,887.08

$201,171.79

7

$69.68

2,887.08

$4.94

$14,262.18

$215,433.97

$20,000

$73.17

468.25

3,355.33

$245,509.82

8

$73.17

3,355.33

$5.23

$17,548.38

$263,058.20

$20,000

$76.83

488.72

3,844.05

$295,338.38

9

$76.83

3,844.05

$5.55

$21,334.48

$316,672.86

$20,000

$80.67

512.39

4,356.44

$351,433.99

10

$80.67

4,356.44

$5.88

$25,615.87

$377,049.86

$20,000

$84.70

538.55

4,894.99

$414,606.34

Now, you have a portfolio of $414,606.34 to work on. And in the last year, you would have made $25,615.87 in dividends and $63,172.35 in returns! That’s enormous income, with your dividends paying to reinvest for the rest of your life.

The post How Much Do You Need to Invest to Give Up Work and Live Only Off Dividend Income? appeared first on The Motley Fool Canada.

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Fool contributor Amy Legate-Wolfe has positions in Canadian Imperial Bank Of Commerce. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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