How to Live Off Dividends and How Much You Need to Retire

Living off dividends means building an investment portfolio that generates steady, passive income to cover your expenses for life. Imagine no longer needing a paycheck or worrying about market swings, as long as your dividends keep coming in.

When you invest in dividend-paying stocks and funds, you receive regular cash payments throughout the year, effortlessly deposited into your brokerage account. You can then use this income for essentials like housing, food, healthcare, travel, and more — all without selling a single share of stock.

Dividend investing provides a clear path to financial freedom, allowing you to separate your income from the hours you work. But is living off dividends in retirement really possible?

At Simply Safe Dividends, we’ve seen countless investors achieve this goal, and our conviction in this strategy has only grown since we launched our portfolio-tracking tools and Dividend Safety Scores™ in 2015.

Let’s explore what it takes to retire by living off dividends.

The Wall Street Journal offered a practical example of how dividends can support a long-lasting retirement. 

Let’s say you retire with $1 million and need $40,000 in annual income, adjusted for inflation. The example assumes 2% inflation, Treasury yields matching inflation, and stock dividends growing 3.5% per year.

In this scenario, you invest $400,000 in Treasury bonds and $600,000 in dividend-paying stocks yielding 3%, generating $18,000 in dividend income annually. To reach your $40,000 target, you sell part of your bond portfolio each year. After about 21 years, the bond portion is depleted.

However, during that time, your dividend income may have grown by a third to $24,000 per year, even after inflation. Plus, you’d still own all your stocks. If dividends increased by 33%, it’s likely the value of your stocks also grew at a similar pace, potentially reaching around $800,000.

By your 80s, you’d still have a strong financial cushion for the rest of your retirement. While your exact mix of stocks and bonds depends on personal factors, aiming for a portfolio of quality dividend stocks yielding 3% or more and growing at 3.5% per year is a realistic and sustainable goal.

However, the amount of dividend stocks you need to make ends meet depends on several factors.

As a rough rule of thumb, you can multiply the annual dividend income you wish to generate by 22 and by 28 to establish a reasonable range for how much you need to invest to live off dividends.

Multiplying by these numbers reflects a portfolio dividend yield (i.e. annual dividend income divided by the portfolio's market value) between 3.5% and 4.5%.

We believe you can build a conservative dividend portfolio within that dividend yield range without sacrificing much on business quality, income safety, or sector diversification. We would expect this portfolio to deliver mid-single-digit annual dividend growth over time, too.

Using a simple example, a study by the U.S. Bureau of Labor Statistics found that total annual expenditures in 2014 averaged $49,279 among older households. After adjusting for inflation, this works out to about $66,000 in 2024.

If dividends were this household's only income source, they would need a portfolio between approximately $1.4 million ($66,000 x 22) and $1.8 million ($66,000 x 28), assuming a starting dividend yield between 3.5% and 4.5%.

However, odds are that this couple has other income sources, which reduce the amount of dividends needed in retirement.

For example, the Social Security Administration estimates that two thirds of retirees will get the majority of their income from Social Security payments. As of 2023, retired workers and their spouses enjoyed an average monthly benefit of about $2,700 (approximately $33,000 annually).

While some of this Social Security income would likely be taxed, these benefits alone could potentially cut in half the size of the portfolio required to help this household live off dividends.

Pension income, annuities, and other income sources can further reduce the amount of supplementary dividends needed in retirement.

The amount of money you earmark for a dividend investing strategy can be put to work across individual stocks and funds.

Dividend-paying mutual funds and ETFs offer low fees, immediate diversification, and simplicity. Funds are, for the most part, set-it-and-forget-it investments.

However, fund investors lose a valuable benefit: control. 

Most funds own dozens, hundreds, or even thousands of stocks. Vanguard's High Dividend Yield ETF (VYM) owns over 400 companies, for example.

Some of these are good businesses with safe dividends, while others are lower in quality and will put their dividends on the chopping block during the next downturn. Some have high yields, and others hardly generate income at all.

Simply put, a fund is a hodgepodge of companies which may or not match your own income needs and risk tolerance very well, especially when the tide goes out.

Vanguard's High Dividend Yield ETF got into trouble during the 2007-09 financial crisis because it was not focused on dividend safety. The ETF's dividend income dropped by 25% during this period and took four years to recover to a new high.

Most funds also pay variable dividends which fluctuate unpsredictably each period, making it hard to forecast how much income you'll make any given month.

While these are not necessarily reasons to avoid funds, handpicking your own dividend stocks can make it easier to tweak the amount of risk in your portfolio and give you better visibility into your income stream.

Most companies pay fixed dividend amounts on a quarterly or monthly basis. You'll know exactly how much you're getting paid by each stock and when.

Selecting your own holdings with a focus on dividend safety can also potentially deliver higher and faster-growing income compared to most funds. You will better understand all of the investments you own as well, helping you weather the next downturn with greater confidence.

When building a portfolio, here are the general guidelines we like to follow:

You can tweak those guidelines based on your risk tolerance and goals.

For example, perhaps you are comfortable with a little more risk and willing to own more stocks with Borderline Safe Dividend Safety Scores™.

Or maybe you desire a portfolio with an overall yield near 4%, in which case you can check out our 25 favorite high dividend stocks for ideas.

That said, there are several risks to be aware of when it comes to living on dividend income in retirement.

Dividend strategies can create a temptation to own mostly high-yield stocks, which provide greater income today but tend to be concentrated in a handful of industries such as real estate investment trusts (REITs), master limited partnerships (MLPs), and utilities.

Lacking proper diversification, a portfolio betting big on these areas of the market can be more sensitive to rising interest rates, get hit harder by any industry-specific adverse developments, and generate total returns that drift far from the broader market.

And outside of industries like REITs and MLPs that are designed for higher dividends, high yields can signal that something is structurally wrong with a business or that the dividend needs to be cut to help the company survive. These situations can result in a permanent loss of capital.

Besides chasing yield, dividend investors can also fall into the trap of hindsight bias.

The desire to own consistent dividend growers has caused groups of stocks like the S&P 500 Dividend Aristocrats to become popular with investors. Dividend aristocrats are S&P 500 companies that have increased their dividend for at least 25 consecutive years.

These stocks get the attention of dividend investors because they have outperformed the market. We like to assume that they will always keep paying and growing their dividends, which is not guaranteed.

Of the 60 dividend aristocrats that existed in 2007, 16 of the them cut or suspended their dividends during the financial crisis. While bank stocks accounted for the majority of those cuts, it's never easy to predict which sector will experience the next shock.

The pandemic was the latest reminder that dividend income is not risk-free. With the U.S. economy experiencing its sharpest contraction in history, 25% of companies covered by our Dividend Safety Scores™ (333 out of 1,313) cut their dividends in 2020.

This doesn't invalidate a dividend investing strategy but rather highlights the importance of owning companies with strong balance sheets and time-tested operations. These are the businesses that are more likely to sustain their payouts in good times and bad.

The bottom line is that dividends have risk. Investors pursuing this strategy in retirement should monitor the dividend safety of their portfolios, make adjustments as necessary, and diversify their holdings.

A final trap dividend investors can fall into is focusing on income return at the expense of total return (income and price return).

Just because a stable company pays a dividend doesn’t mean it is a superior investment or resistant to price drops in the broader stock market. In theory, whether your retirement cash flow comes from dividend income, bonds, or sales of your portfolio’s holdings shouldn’t matter.

But from a behavioral perspective, leaving principal untouched and living off the dividends it generates each month can help investors tune out the noise from fluctuating stock prices.

And if the stock market experiences a major correction in the early years of retirement, dividend investors have less exposure to sequence of returns risk as they do not need to sell more shares in response to lower stock prices.

Managing your finances for retirement can feel overwhelming, with important decisions shaped by your savings, goals, risk comfort, and lifestyle needs. 

Always review the fees, flexibility, and details of any investment strategy, and remember there are many ways to generate income, including dividends, bond interest, annuities, or asset sales.

Quality dividend stocks can be a reliable foundation for retirement income. They offer consistent payouts, income growth, and long-term capital appreciation to help your portfolio last a lifetime.

We built Simply Safe Dividends to help investors generate safe income from dividend-paying stocks. If you are interested in this strategy, you might like to try our online product, which lets you track your portfolio's income, dividend safety, and more so you can rest easy during your retirement.

You can learn more about our suite of portfolio tools and research for dividend investors by clicking here.