Whether you are just entering the investment world or are already an experienced investor, you may well be looking to get the best dividend returns for your cash. So how much in dividends could you make on your 1 million dollars?
The quick answer is that you can make around $16,000 per year in dividends, before tax, if you invest $1 million in an ETF like Vanguard’s VOO or SPDR SPY. If you wanted to generate even more in dividends, while giving up some price appreciation, the 1 million dollars invested in the SPYD would get you approximately $45,000 in dividends annually.
Of course it’s important to remember that these data point reflect a point in time and this data is accurate as of writing this piece. Your actual earned dividends will vary over time based on the dividend yield at which you bought your investments, along with market and economic conditions.
It is also important to remember that dividends are just one form of return from the stock market. Price appreciation is the other one. It is therefore important to focus on total returns, which is the sum of returns from price appreciation and dividend income.
You can use this calculator to determine how much in dividends you can generate from your portfolio in a given year. You simply need to enter the following details:
- Portfolio Value: The dollar value of your investment or portfolio
- Dividend Yield: The dividend yield, often labeled the 30-day SEC yield, for your stock, ETF, or mutual fund.
The calculator will show you how much can earn in dividends each year. This is just a simple demonstration to help you get an idea of what you can expect. As the markets and economies are always fluctuating, your actual results will vary.
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Can you live off the dividends of $1 million dollars?
The answer depends on many different factors, as we have discussed in our deep dive on asset allocation. There are important questions around what type of lifestyle you expect and its associated expenses, how long you expect to live off the dividend income, your risk tolerance, etc. You also have to consider what happens if the economy enters a recession and the companies in your portfolio announce major dividend cuts.
Unfortunately I feel that the living off just the dividends generated by the $1 million, which as we discussed could range anywhere from $16,000 to $45,000 annually, would be too difficult for most people.
The options to improve your income would be to either sell a portion of the portfolio each year to harvest your gains, or to increase your total portfolio value to an amount above $1.5 to $2 million dollars. The capital harvesting option is actually a reasonable one as it is more tax efficient that getting income through dividends. If you’re in the $5 million zone, you’re golden!
The $1 Million Dividend Portfolio
How can an one construct a $1 million portfolio to generate dividends? This discussion can go in one of many directions as there are numerous options. However if you want to keep things really simple and still attain good returns, I would suggest one of the following two options discussed below.
This fund is the Vanguard LifeStrategy Moderate Growth Fund, which has as 60% allocation to stocks and 40% to bonds. This fund is suitable for those who have a medium risk tolerance and wish to mainly preserve their portfolio value over time and attain modest growth. The 60-40 portfolio is the template of the classic balanced fund that most retirees will use as it achieves a reasonable balance. 2022 was one of the worst years on record for the balanced portfolio, as interest rates surged higher. With that big surge most likely behind us, 2023 onwards would be a reasonable starting point for the fund.
The dividend yield (30-day SEC yield) is around 2.15%, which translates to $21,500 in pre-tax dividend income per year. Over the last 10 years, this fund has generated a total return of 6.52% compounded annually. This value is inline with the typical expected return range for a balanced portfolio of around 6-8%. If this performance continues in the future, you can expect an additional 4% in price appreciation, which works out to $40,000 of capital gains. The capital gains can be harvested to generate additional income.
The Vanguard LifeStrategy Growth Fund is a slightly more aggressive version of VSMGX. This fund takes equity allocation to 80% and bonds are reduced to 20%. This fund is suitable to someone who has slightly higher risk tolerance (medium-high tolerance) and also someone who expects to live off this portfolio for a very long time. This could be someone hoping for the FIRE lifestyle, or a retiree who is simply in very good health and still expects to live for 20+ years!
The amazing thing about this portfolio’s dividend yield of 2.2% is comparable to the more conservative VMSGX and it has higher 10-year returns of 8.19% compounded annually! Where you do suffer slightly is that the portfolio has higher volatility owing to its higher allocation to shares. For comparison, VASGX delivered a -34.4% return in 2008 compared to VSMGX’s -26.5%. Both would be terrible returns, but of course VASGX performed worse. If you can stomach the higher volatility, then I would highly recommend VASGX over VSMGX.
One million dollars invested in VASGX would deliver annual pre-tax dividend of $22,000 along with additional capital gains of $60,000 (on average). These additional capital gains could be used for income.
More Options to Generate Dividends
There are an infinite variety of options to generate dividend income. Ultimately it comes down to your interest, time, ability, and patience! Here at PFF, our job is to try and give you the best information. We have published a number of articles, which I think you may find useful for your research:
- How to Make $1,000 a Month in Dividends
- Best Ways to Invest $1 million
- 11 Best Investing Books for Beginners
If you want to be conservative and put your money in a savings account, I highly recommend checking out our article on how much interest income you can generate from $1 million. Given the wonky world that we’re living in currently, you might be surprised to find out how much interest income you can actually generate! Money market funds can also be a great option to explore for those who want the liquidity of stocks, but still generate some decent returns.
How much can I make in dividends on 2 million dollars?
You can make around $32,000 per year in dividends, before tax, if you invest $2 million in an ETF like Vanguard’s VOO or SPDR SPY (dividend yield of 1.6%). If you wanted to generate higher dividends, $2 million dollars invested in the SPYD (4.5% yield) would get you approximately $90,000 in dividends annually.
How much can I make in dividends on 5 million dollars?
You can make around $80,000 per year in dividends, before tax, if you invest $5 million in an ETF like Vanguard’s VOO or SPDR SPY (dividend yield of 1.6%). If you wanted to generate higher dividends, $5 million dollars invested in the SPYD (4.5% yield) would get you approximately $225,000 in dividends annually.
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