For many Americans investing in stocks and shares, dividends are highly lucrative. In fact, investing wisely and regularly managing your portfolio may result in healthy passive income for time to pass. If you’d like to learn how to live off dividends, however, there are few things to keep in mind.
Let’s dive into how dividends could make you money in the US, and how you may be able to live off that passive income for months or years to come.
Dividends: a quick summary
If you invest in a company’s shares, you stand to receive cash payments based on their profits and how many shares you own. You’ll also find that directors decide how many dividends people receive over time based on their own terms, too.
You’ll typically receive dividend payouts anywhere from once a year to even monthly. It’s down to the discretion of your holding company.
How much money can I make from dividends in the US?
The amount of money that you can make from dividends depends on a couple of factors. The two primary factors include your portfolio size and the dividend yield. Let’s consider examples from two different perspectives:
- Income: In order to earn $1,000 a month strictly from dividends ($12k annually), your portfolio size would need to be anywhere from $150,000 to $1.2 million in size.
- Portfolio size: A $1 million portfolio can potentially generate dividends in the range of $16,000 to $45,000 a year. This works out to $1.3k to $3.75k per month.
These figures are of course hypothetical and before tax. The reality will be dependent, of course, on the shares or funds you choose to invest in. If you know the size of your portfolio and dividend yield, you can use our dividend calculator to figure out your annual, quarterly, or monthly income.
While it’s entirely possible to live off this sum of money from dividends alone, there’s a few hurdles you’ll need to navigate.
For example, your dividend return will depend entirely on how much money you invest, how many times a year your invested company pays out, and how your assets are allocated. Additionally, financial market and broader economic conditions will dictate whether companies choose to pay a dividend or not, and whether they increase the dividend each year.
For more on how to choose the right stocks and shares to reap dividend income from, take a look at our guide on making
Living off dividend income – points you must consider
While it’s certainly possible to earn a living from dividends, I personally feel there are too many factors that make it highly risky to depend on. Most of the time you’ll be okay, but you could potentially go through periods of market stress that could really cause problems to your incoming cashflows. Periods of 2007-09, 2018, 2020, and 2022-23 come to mind.
From my experience, I would advise ensuring you have other streams of investing income available, rather than risking it all on one potential money-maker. The reason for this is that dividend yields can – and will – change. What’s more, there’s never any guarantee as to how much you’ll receive in dividend pay.
Many companies in these periods of stress either cut or eliminate their dividends and this could really crimp your living style if you don’t have alternate sources of income, or other parts of your portfolio that you can fall back on – such as cash or bonds.
Let’s look through a few of the changing factors that you’ll need to consider if you want to live off dividends.
Taxes will apply
It’s easy to assume that the advertised dividend income you’re likely to receive will be exactly what you get. However, depending on how you’re paid, and the amount you receive, the IRS will request some of that money back from you.
You’ll need to pay “qualified” dividend tax if you’ve owned a specific stock for over 60 days inside a holding period set for 121 days. However, this will also only apply if the dividends you receive are paid through a US corporation with a US state rooting (or in a US territory).
Alternatively, it’ll also apply if you invest in shares from a company based abroad, but listed on a stock exchange in the US.
But – that’s not all. You’ll need to pay income tax on “ordinary” dividends. However, you typically won’t have to pay any tax if you’re in one of the lowest federal brackets (the three lowest available), or if you hold them in retirement accounts (such as your 401k).
Capital return, too, isn’t taxable – but you may feel the pinch later on.
Ultimately, it’s wise to check these points with a tax advisor and/or a financial planner before risking disappointment.
Dividends change during economic shift
If the economy hits a downturn and prices for the companies you invest in start to tumble, your dividend payouts may potentially fall, too. The worst part is that economics forecasts are worse than weather forecasts, meaning that nobody really knows what’s going to happen 6 months to 12 months down the line. That means even if you calculated a firm rate of return in Q1, it could fall significantly by Q4.
Do also keep in mind that dividends will change if there are significant industry shifts. Ultimately, anything likely to affect the market pricing will change how much you seek to receive in dividends.
The moral of this particular story is, of course, to keep an open mind. Personally, I don’t feel you can (or necessarily should) rely on dividend yield as a sole source of income.
You won’t always get paid in cash, and payment dates vary
As mentioned briefly above, companies that pay dividends may not always do so in cash. Instead, they may choose to grant more shares to investors depending on performance and how many shares they already hold in said firm. You could of course sell those shares immediately, but it’s just something you’ll have to keep in mind.
Therefore, it’s wise to read dividend policies carefully before investing money outright. Again, companies vary on when they pay dividends out, too. Some may do so monthly, while others may only pay back out once a year. Do check these details before you make any kind of financial offering.
If you’re generating dividends from an index fund or ETF, your dividends will very likely come in the form of cash.
Strategies for living on dividend income
While I advise against living purely on dividend income, there are still a few strategies here and there that I feel may be worth thinking about if you have your heart set on making as much money through this investing setup as possible.
Grow, don’t cash out
Research shows that time after time, stock dividends have a habit of growing, even in times of high inflation. Therefore, a good way to effectively live off dividends may be to keep reinvesting your income in additional stock in other firms.
This effectively means that you can keep reinvesting dividends in other companies and keep receiving more dividends and income over time. Provided you can wait for the results and don’t need this income immediately, it’s a mathematically proven way to grow your portfolio even in times of financial uncertainty.
However, as always, it’s no guarantee – but in my view, it may be a more worthwhile strategy than purely waiting around on dividend money to arise.
Total Returns
We’ve talked a lot about the importance of focusing on total returns in our other articles. It is an important enough topic that it’s worth summarizing here again briefly.
Total returns measures the returns generated from both both capital appreciation (increase in the investment’s value) and income generated (like dividends or interest). Some companies do not have a dividend, but their share price grows at a high rate. Other companies like utilities have high dividends, but their share prices don’t go up much.
Focusing solely on dividends when assessing an investment’s performance can lead to a narrow and incomplete view of its overall health and profitability. While dividends do represent a portion of the returns, they are just one piece of the puzzle. Total return, on the other hand, provides a more holistic measure of investment performance, capturing . Total return paints a more accurate picture, accounting for all sources of growth.
If your dividends are qualified dividends, then your income tax rate on capital gains and dividends is equal. If your dividends are not qualified dividends, then your tax rate on dividends will be higher.
What this means is that, from a tax perspective, a long-term investor should be indifferent to the source of the income – whether it be shares increasing in price or from dividends. By focusing on total returns, you generate the best possible returns from your portfolio and then fill in any holes in your income by selling down your gains.
Start investing early
If you’re set on living on dividend money, it pays to start investing in high-yield stocks as soon as possible. While rates are never guaranteed and there are multiple factors that will change how much you receive over time, the sooner you start, the sooner you can start to build a stock of money to cover your eventual expenses.
Think of early investing-to-save as much like investing via a FIRE system. You’re putting extensive money away now to effectively live financially free later in life. If you need the money now, however, relying on dividends alone probably isn’t the safest of options.
Try combining the “start early” approach with the aforementioned dividend reinvestment plan. In my opinion, it’s one of the safest ways to approach growth and effectively live off dividends – though you should always have a backup plan.
Are dividend payments ever guaranteed?
This is the clincher – no. You’ll never get any kind of guaranteed payment plan through relying on dividends alone, which is why many investors choose to supplement this income with portfolio diversification, a focus on growth and physical asset acquisition.
There’s no reason you won’t be able to make considerable money through dividend building, but it’s simply unwise to choose it as your sole route of income.
Consider exploring dividend options as a passive line of income alongside your regular job or other investment choices first, and then start growing your stock options by transferring dividend income from one company to the next.
