Hey everybody welcome back to whiteboard Finance my name is Marco and I'm here to Help you master your money and build Your wealth today's video is sponsored By policy genius but more on that later In today's video we're going to address The topic of how much money you need to Live off of dividends in my opinion Getting paid dividends from stock that You own is one of the purest forms of Passive income out there I know that Phrase gets thrown around way too much On YouTube and social media usually from Gurus trying to sell you something but Dividends truly are passive income so in This video I'm going to teach you how Much money you need to live off of Dividends how to calculate that number And show you some common real life Examples of how this can work exactly For you stay tuned okay number one is How much money do you need to live off Of dividends so the calculation for this Number is very simple you take the Income required so dollars required and You divide it by the dividend yield okay This gives you the amount you need to be Invested or have invested to live off of Dividends so according to census.gov of Real median household income in 2021 was Seventy thousand seven hundred and Eighty four dollars so for this example For easy numbers let's just use seventy Thousand
Okay so first let's take that seventy Thousand dollars and divide it by a Realistic dividend yield of three point Five percent So if you take seventy thousand divided By 0.35 uh the dividend yield is Basically a financial ratio that tells You the percentage of the company's Share price that it pays out in Dividends each year so when it comes to Dividend investing in today's current Environment any yield above five percent Is getting into yield trap territory uh We'll talk about this later meaning that You're chasing yield over gaining solid Growth Investments and returns again We'll come back to this later so if we Take this seventy thousand dollar Seventy thousand dollars divided by Three point five percent this would give Us an investment number of exactly Two million dollars so this sounds like A scary number and it may sound Unobtainable to some of you watching This video today however everyone's Income needs are different so you need To apply the situation to you personally So for example some people need seventy Thousand dollars a year to live off of Some people need forty thousand some People need three hundred fifty thousand Uh my only advice here would be to track Your expenses realistically for one year And see where you can improve so I'm not
A fan of keeping budgets for every Single little thing you do however I am A fan of understanding your general Income versus General expenses and Understanding how much money you have to Play with at the end of each month so if You see there are areas in which you can Cut spending incorporate those into your Calculation also if you're seriously Considering living off dividends you Need to cut expenses such as commuting To work because you'll no longer be Doing that you also need to look on the Other side and look into other options Such as health care and other costs that May not be covered because you are no Longer working but I don't to get the Cart before the horse here so my Favorite take on financial Independence Retire early aka fire which I'll be Talking about in this video is actually Financial Independence recreational Employment so instead of I'll just write it here You have fire financial Independence Retire early there's a big subset a big Community of these people here I like The acronym Financial Independence Recreational employment this is a phrase That I heard from the channel Gen X Dividend investor so shout out to him And go check him out if you haven't Already okay step number two to Understanding how much it takes to live
Off of dividends per year it is critical That we understand dividend yield and What it is so I mentioned that we're Going to talk about it let's get into it The dividend yield is a Stock's annual Dividend rate per share divided by the Stocks price at that point in time so Let's take a look at an example if a Company pays one dollar per share I'll Just put it right next to here so you Can easily see it This is what it pays annually per share To its investors every year in dividends And the current stock price is let's say For example Thirty dollars this company has a Dividend yield of one divided by 30. That gives you 3.33 percent as the Dividend yield you can easily find this Information online you can use like a Seeking Alpha or Yahoo finance or Whatever but again this is whiteboard Finance we're trying to understand the Concepts and understand the numbers that We're looking at not just click the easy Button and see the answer so the reason Dividend yield is so important is Because if you're truly going to pursue The path of being a dividend investor or Living off dividends you need to Understand your if your yield is Competitive versus other Financial Products such as a savings account T Bills or other options with yields
Themselves so the other thing you have To realize is that chasing a higher Yield can ultimately hurt you in the Long run I'll show you an example of This later so for example if you have a Stock with a yield of let's say nine Percent this may initially look Attractive to you but what if the Company's share price declines by more Than that year after year you are Ultimately net negative for this Investment and it defeats the whole Purpose of investing in that thing so Some people may say but hey Marco I'm Just interested in living off the Dividends so I don't care what happens To my overall Capital as long as I'm Paid consistently by the stocks that I Hold so for some people maybe close to Retirement or even close to death this May be true but for others who are Thinking about Capital preservation and Better yet Capital Growth while still Receiving that dividend these yield Traps are ultimately going to hurt you In the long run it's important for Investors to keep in mind that higher Dividend yields do not always indicate Attractive investment opportunities Because the dividend yield of a stock May be elevated artificially as a result Of a declining stock price okay so let's Take a look at how an increased dividend Yield actually decreases the amount of
Capital you need to reach your income Goal okay so let's take our example I'm Going to erase this uh pause the screen You know memorize it do what you got to Do I'm going to erase this right now Let's take our example of seventy Thousand dollars needed to live In the previous step okay And instead of dividing it by 3.5 Percent this time our previous dividend Yield let's increase that dividend uh to Five percent so we're going to divide This by point zero five that's five Percent and uh what do we get so instead Of two million dollars we now only need 1.4 million okay can you see now how Enticing it is to chase yield so we now Need six hundred thousand dollars less Two million versus 1.4 to achieve our Same income goal of seventy thousand Dollars so chasing yield is is enticing But I promise you it will most likely Hurt you in the long run so speaking of Getting hurt in the long run let's Prevent that with today's uh sponsor Worst worst segue ever uh let's prevent That with today's sponsor with insurance From policy genius if you have anyone Relying on your income you need life Insurance it's really that simple policy Genius is your One-Stop shop to find and Buy the insurance you need at the right Price it's essential to have life Insurance because mortgage payments
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The description to get your free life Insurance quotes and see how much you Can save okay so as promised let's jump Into three real life examples based on Age we're going to do someone in their 20s a couple in their 30s and 40s and a Couple in their mid 60s let's take a Young 20-something person who wants to Achieve fire financial Independence Retire early or again Financial Independence recreational employment so This young person they can live off just Twenty five thousand dollars per year Okay Sorry did you guys hear my dog barking Because they have a roommate uh they Have a roommate they're Frugal and they Don't have any dependents so this person Isn't afraid to invest in higher Dividend yield stocks and they're even Looking into some real estate investment Trusts AKA REITs which are giving them a Blended yield of 4.5 percent Okay 0.045 is 4.5 percent now at this point You should be able to figure out the Amount of investment income needed for This person to live off their dividends I want you to pause the video and tell Me the answer down in the comments below Okay their expenses are twenty five Thousand dollars a year their dividend Yield is a blended 4.5 percent please Pause the video leave the answer down in
The comments below okay for those of you That answered Five hundred and fifty five thousand Five hundred and fifty five dollars you Are correct okay you are absolutely Correct that this young 20-something Person can live off their portfolio for That amount I know this sounds like a Large number but there are now remote Positions that pay very well where a few Laser focused years you could sock away This much money and live off your Dividends okay example number two let's Take a couple in their thirties give me One second I haven't done one of these Live drawings uh in a minute on this Channel thank you for your patience okay So these people are in their 30s this is Example number two okay Uh they're in their 30s they want to Start living off dividends because they Just had a daughter and they want to be Able to fight uh Fire by the time she Starts high school they want to be able To travel as much as possible while They're still physically able to do so And able to enjoy it they determine that They will need 125 000 a year to support uh this Lifestyle without having to decrease Their quality of life and also adjust it For other costs mentioned earlier such As health insurance so this couple was Able to take advantage of their
Incredible uh growth of their tech Stocks which paid little to no dividends But they decided to sell all those Growth stocks and reinvest that Capital Into the ETF known as schd which is Currently yielding 3.22 at the time of this recording okay So let's do the math let's take 125 000 Divided by three point two two percent Which gives us the amount of Three million 726 000 okay again this sounds like a Boatload of money and it is but between Two high income earners who live Frugally coupled with dividend growth And dividends being reinvested which I'll talk about at the end of this video Uh this can be achieved by the time Their daughter goes to high school in 14 Years or so so the other option for a Scenario like this one is one of the Parents obtaining fire while the other Still works full or part-time you would Then be able to essentially cut this 3.7 Million dollar number in half because Only one of the parents would need the Income from the portfolio Okay and then Finally let's go to example number three Where we have someone who's trying to Basically retire in their uh 60s or a More uh traditional retirement age okay So let's take a look at a couple that Want to retire in their mid 60s
Typically by this age your house will be Paid off you will receive assistance From Medicare for health care costs and Usually when you get older you typically Don't spend as much money as you do in Your 20s 30s and 40s uh their entire Goal of building this portfolio is Basically to retire and enjoy their time Together the nice thing about building a Portfolio for this age is that you will Also have supplemental income with Social Security payments uh at least at The time of this recording who knows What it's going to be like for my Generation but this couple will only Need a few thousand dollars a month to Live comfortably let's call it Forty five thousand dollars a year okay So this couple has no children no heirs Basically no dependents no one that they Want to leave the money to so they're Happy to pursue a much higher yield Risking overall Capital preservation and Capital Growth their portfolio has an Average dividend yield of six percent Okay so this is easy math you should Know this by now so if we follow the Math from this video we're just going to Take forty five thousand dollars divided By six percent giving us an investment Amount of seven hundred and fifty Thousand dollars Okay between the two of them considering Their time frame this number can easily
Be achieved with just median wage Earnings by the time they reach their 60s okay so as always I end the video on My thoughts uh some things that I didn't Talk about in order just to simplify uh This video and kind of just get the Conversation out there obviously we Didn't touch on taxes so with dividends You have qualified versus unqualified Then my dog seriously just come in the Studio you got to be kidding me Leila What are you doing all right we're gonna Do this last segment with Layla Layla You're barking in the video you're doing Everything okay so this is what we're Doing so we have taxes we have qualified Versus unqualified so basically ordinary Versus qualified so what are ordinary Taxes so unqualified is basically taxed At your income tax rate so if you make 50 Grand a year at your W-2 job that's What these Dividends are going to be Basically added to your taxable income Okay that's bad because if you make a Lot of money then you're paying the Highest tax bracket possible on these Dividends if they're qualified okay Um basically You have three different tax brackets Depending on your income you have zero Percent on capital gains or on the Dividends you have fifteen percent and You have twenty percent okay so if You're really really rich that's good
Because you'll be paying 20 if you don't Make that much money you're probably Going to fall in between 0 or 15 if that Makes sense uh number two we have Number two we have drip you know how Hard this is to do with a dog okay okay Number two is drip it which is basically Reinvesting your dividends okay so if You own these dividends you can either Choose not to reinvest them in which They will show up as cash in your Account or you can choose to reinvest Them either buying more shares of the Same stock or you can kind of just take The cash and buy whatever you want to Buy but when you turn on the dividend Reinvestment plan uh this is basically Just going to buy you more and more Shares of the stock if you don't touch This this can snowball into a pretty Um material amount of money over time Okay so um at some point you may reach 15 20 grand of dividends a year well There you go you're investing basically Almost two grand a month let's just say It's twenty four thousand a year you Have two grand a month going into Dividends without even adding any of Your own money anymore Um but that leads me to point number Three uh growth and no Cuts you want to Make sure that the companies that you're Investing in are growing their dividend And you want to make sure that they're
Not cutting cutting them you want to Have a consistent track record of growth And also payouts you don't want to Invest in something in these yield traps That are you know yielding nine ten Percent next you know they cut the Dividend by a ton or they don't even pay Out a dividend and they stop the Consecutive you know quarters years you Know whatever you want to call it months Of paying out this dividend itself you Want to look into dividend Aristocrats Dividend Kings dividend Champions these Are companies that you should look for If you're investing in the long term This is not Financial advice this is Coming from Layla Layla say hello to Everyone oh Okay all right thank you All right that's it you guys I hope you Enjoyed the video Um uh World Cup is starting I'm gonna try and knock out as many Videos as possible I'm still working on Whiteboard Finance I apologize uh I just Been super busy with family friends Traveling you know a bunch of stuff uh Things around the house I know you know How it gets if you have kids but uh Anyway please like the video please Subscribe please share this with Everyone you know uh the algorithm is What it is thank you so much everybody Have a prosperous day
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