How to Retire at 55 and Live Off Your Dividends

What If You Are Already Retired?

Compounding of dividend income is very advantageous if you have a long time horizon, but what about if you are near retirement? For these investors, dividend growth plus a little higher yield could do the trick.

First, retired investors looking to live off their dividends may want to ratchet up their yield. High-yielding stocks and securities, such as master limited partnerships, REITs, and preferred shares, generally do not generate much in the way of distributions growth. On the other hand, investing in them increases your current portfolio yield. That’ll go a long way toward helping to pay today’s bills without selling off securities.

Dividends paid in a Roth IRA are not subject to income tax.

Nonetheless, retired investors shouldn’t shy away from classic dividend growth stocks like Procter & Gamble (PG). These stocks will increase dividend income at or above the inflation rate and help power income into the future. By adding these types of firms to a portfolio, investors sacrifice some current yield for a larger payout down the line.

While an investor with a small portfolio may have trouble living off dividends completely, the rising and steady payments still help reduce principal withdrawals.


Dividend Terminology

Below is a detailed list of important dividend terms and dates to familiarize yourself with if you intend to invest in dividend paying stocks.

Dividend Dates

Declaration Date: This is the date a company says it will be paying its dividend. A declaration statement will include details of the following: amount paid in dividends, the record date and the date of payment.

Ex-Dividend Date: You must own the dividend paying stock before this date in order to receive the next scheduled dividend payment.

If you were to purchase the stock on or after the ex-dividend date the dividend payment still goes to the previous owner of the stock.

Payment Date: This is the predetermined date that the company will make dividend payments to shareholders on record.

Source: Royal Bank
Source: Royal Bank

Dividend Stock Glossary

Adjustable Rate: The rate in which an annual dividend can vary depending on certain factors.

Average Daily Volume: The average number of shares traded per day of a security in a given time frame.

Backwardation: When a commodity’s spot price is higher than the future price.

Balance Sheet: A financial statement of a company and it’s assets. Including both what it owns (assets) and what it owes (liabilities) as of a specific date. Usually reviewed on the last day of a company’s fiscal quarter.

The difference between the company’s assets and liabilities determines the net worth.

Basis Point: An interest rate measurement equal to one-hundredth of one percent. For instance, 50 basis points equals 0.5 percent and 100 basis points equal one percent. 

CAGR: CAGR stands for compound annual growth rate and is the growth rate of an investment year over year.

Callable: The opportunity the issuer has to redeem a security prior to its maturity.

Call Date: The earliest date a preferred stock can be called.

Call Price: The price the issuer must pay to redeem a stock when called.

Capitalization Rate: Capitalization rate, otherwise known as cap rate is the property’s net operating income divided by it’s purchase price.

A higher cap rate generally means a higher return on investment.

Cumulative: A company issuing “cumulative” preferred shares must pay any skipped dividends on those shares before common stock dividends are paid and before the preferreds are redeemed.

Declaration Date: Date that dividend is announced.

Dividend Capture: This strategy involves buying a dividend paying stock at a precise time in order to capture the dividend payment, followed by the selling eh stock shortly after.

High Risk and Low Risk Dividends

Dividend yields (how much you get paid per share) varies widely between different publicly traded stocks. Typically anywhere from 2% to upwards of 6.5%. And though the higher yielding dividends may seem appealing to someone looking to replace their income, they do come with their own risks.

One of the biggest risks of living off dividends, especially in retirement is the overall volatility. As you can imaging, it’s hard to budget when your income changes month to month. However, dividend paying stocks in the S&P 500 Index in comparison to non-dividend paying stocks has historically lower volatility over the last 47 years.

This becomes apparent when you look at the high st

This becomes apparent when you look at the high standard deviations of Dividend Non-Payers and Cutters.

Dividend Tax Considerations

Don’t forget to factor taxes into your dividend calculations. If you’re receiving your dividends from equities in a traditional 401(k), IRA, or taxable brokerage account, they will be taxable income.

However, they’ll be subject to different tax rates. With a traditional retirement account, you won’t pay taxes on dividends while you reinvest them. Once you start taking them as distributions, though, they’ll be taxable at ordinary income rates.

If you take your dividends from a taxable brokerage account, they will receive one of two tax treatments, depending on whether they are:

  • Qualified: These are taxable at the discounted long-term capital gain rates of 0%, 15%, or 20%.
  • Ordinary: These are taxable at ordinary income rates, which range from 10% to 37%.

If your dividends come from after-tax accounts like Roth 401(k)s or IRAs, you can avoid the issue altogether. You won’t pay taxes on reinvested dividends or those you take as distributions.

Make sure you know the significance of these two types of taxation, as they can skew your numbers significantly.

👉 For example, $30,000 in qualified dividends taxable at 15% is $25,500. The same amount in ordinary dividends taxable at 24% is $22,800. That’s $2,700 less each year and $225 less per month.

It’s always a good idea to get personalized tax advice regarding the implications of any investment strategy. Consider discussing your approach with a tax expert like a Certified Public Accountant or Enrolled Agent, or read what the IRS has to say about dividends.

📘Learn More: If you need to brush up on the different types of personal income taxes, take a look at our overview of the subject: Taxation 101: How Do Taxes Work For Individuals?

What is a Good Dividend Yield?

Whether a dividend yield is “good” or not is really in the eye of the beholder. For instance, whether a yield is good enough is based upon many factors, including how focused an investor is on capital gain potential, dividend growth potential, dividend safety, and more.

To help us understand this, let’s look at a few examples. For our first example, let’s assume a 25-year-old investor that has 40 years until they retire. This investor would do well to focus on dividend growth potential and companies that can stand the test of time in terms of dividend longevity.

These companies, however, tend to have lower current yields because investors bid up the stock’s valuation in anticipation of future growth. Thus, a yield of 1.5% or 2.0% may be deemed to be sufficient for this investor.

On the other end of the spectrum, let’s say we have an investor that is 65 years old and has just retired. This person is almost certainly not particularly interested in dividend growth potential and is likely much more focused on dividend safety and current yield.

Thus, this investor may have a “good enough” hurdle rate of 4%, or even 5% or 6% depending upon their needs.

Therefore, there is no “right” answer in terms of what dividend yield is good enough because the answer is different for every investor. One must take into consideration their portfolio size, their investment time horizon, their goals, their risk tolerance, and numerous other factors.

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How much initial capital is required?

You can invest either small or large sums of money in dividends. You can also select an investment strategy based on your financial situation. By selling a business, excess real estate or other assets, you can create a portfolio of stocks to earn a dividend income. For example, an investment of $10,000 will bring in $300 annually with a dividend yield of 3%.

You can start building a portfolio with smaller amounts, such as by buying $100 worth of dividend shares every month (or week). In this case, it will take you more time to generate good interest income.

How much money should one invest in stocks?

If the investor plans to continue working but prepares a cash cushion for the future, they can start with any amount. By purchasing dividend shares for several years and reinvesting the interest received, they will reach a decent passive income after 20-30 years of owning a portfolio.

Let us take an example. Buying $100 worth of stock every month ($1,200 a year) for 30 years will result in an income of $21,000 per year and an accumulation of more than $55,000 in a securities portfolio. Part of the shares for the specified period may considerably increase the yield and the real profit of the investor will be even higher.

Those who want to live on dividends right now need to invest an amount that will ensure the influx of the necessary income. To calculate how much you should invest, take the amount you need to live comfortably (rent cost, food cost, etc.) and multiply it by 12 months. For example, a family spends $1,000 a month or $1,200 a year. The average US stock yield is about 5%. So the initial capital required will be $24,000.

To calculate how much money you need to invest initially, a simple formula can be used:

Investment = Annual Income / Dividend yield x 100 %

In our example described above, it will work out as:

Investment = $1,200 / 5% x 100% = $24,000

Please note that the tax rate and the broker’s commission should be taken into account when calculating the required initial investment or the monthly investment.

Clipping the coupon: adding bonds to an income stream

Bonds are called fixed income because they offer regular (usually fixed) interest (coupon) payments. As such, bonds can provide a steady cash flow for investors. The income component is a key reason investors own bonds in their portfolio.

A bond’s coupon is a fixed interest rate and represents a percentage of the par value that the buyer will receive in ongoing interest payments. For example, a bond with a $1,000 par value and a 5% coupon will make annual interest payments of $50 until the bond matures and the par value is fully repaid. Coupon payments may occur more frequently depending on the bond.

While bonds can add stability and income to a portfolio, as interest rates have declined over the last few decades, yields have followed suit. The relationship between interest rates and bond yields is an important one.

When rates decline and yields drop, it supports equities, as investors seek out riskier assets for higher expected total returns since stocks provide the opportunity for price appreciation and comparable or even more favorable income.

Searching for yield: comparing income in stocks vs bonds over time¹

As with equities, the prices of underlying assets, correlations, and fluctuations in the market can impact your ability to live off portfolio income.

How Much Money Do You Need to Retire At 60?

Buying individual bonds vs bond funds

Are there benefits to investing in single bonds vs shares of a bond fund? There are several important differences between owning individual bonds and investing in bond funds. For individual investors, investing in bond mutual funds or ETFs is often the best way to gain exposure.

As with stock funds vs individual stocks, owning a bond fund provides greater diversification and liquidity. Building a diversified bond portfolio on your own can be difficult due to minimum purchase sizes. Some corporate bonds may require a minimum purchase of $250,000 or more. Small buyers won’t be given as favorable pricing offers from dealers who favor large institutional purchasers.

But when you own bonds outright, you have the most control over how long you hold that particular security. Holding an individual bond to maturity gives investors a reliable payment of par.

As you look to bonds for income, consider the pros and cons of sector diversification, duration, and credit quality. For example, high yield bonds can offer additional income and risk (of default). High yield (or junk) bonds are also strongly correlated with stocks, which limits their diversification power. Also, corporate and long-term bonds tend to be the most sensitive to changes in interest rates. There’s a lot to consider.

Balancing Risk and Reward

When considering investments and savings, and the interest you may need to live comfortably in retirement, think through the risk spectrum. Think of investments falling on a straight line, with one end being low- to no-risk investments and the other end being high-risk investments.

High-interest savings accounts, certificates of deposit, and some bonds fall on the lower end of the spectrum, while stocks, real estate, and alternative investments fall on the high-risk end. With more risk, you have the potential to earn more of a reward in terms of interest, dividends, or growth.

However, taking on more risk means you could potentially lose your investment. Lower-risk investments provide stable, safe returns, but at a much lower rate than higher-risk options.

If you are planning on living off interest earnings, it is important to manage these risks in-line with your income needs and overall tolerance for account fluctuations.

Part-II: How to Get 10% (or more) Investment Returns Consistently

We know that it may be too risky to put all your money in the S&P 500 or any other set of index funds, mainly because in the investment world, ten years is not a very long time frame, and our portfolio will be subject to the risk of the sequence of returns.

Note: Sequence risk, or sequence of returns risk, is defined as the risk that the stock market crashes early in your retirement or just prior to retirement.

So, what’s the alternative? We will suggest a portfolio with two buckets (preferably three) that will greatly reduce the risk of the sequential return.

  • DGI Bucket: 40% to 50%.
  • Rotational Risk-Adjusted Portfolio: 40% to 50%.
  • Optional/Flexible Bucket: 15% allocation. (This is a flexible bucket that could be a growth bucket prior to retirement and replaced with a CEF-based income bucket after retirement. Highly conservative investors could keep this in CASH-like securities).

The DGI portfolio will provide a safe and consistent 4% (and increasing) level of income from dividends. It also will protect and preserve the capital better than the broader market during a correction, if not entirely. At the same time, the second bucket consisting of a Rotational portfolio will provide the necessary hedge and protect the overall capital.

I’m determining how much I want this to make up my retirement plan

While living off of dividend checks is something I hope to do when I retire, I don’t want to make it my entire plan. For the past four years, I’ve stuck to a regular and robust SEP IRA contribution plan and want to use that retirement fund to support the majority of my lifestyle when I stop working. While I do have some dividend-generating stocks in my SEP IRA portfolio, it’s a very small amount.

In addition to what’s inside my SEP IRA, I want to continue to work toward a strategy that has my retirement plan shaping up to include 20% future income from dividend stocks, 30% passive income from real estate and small business investments, 30% income from my SEP IRA (including some dividend stocks), and 20% from side hustles that I’d like to do when I officially retire. 

Dividend Investing for passive income

As with many things in life, there is certainly more than one way to generate passive income in retirement.

Examples include bonds that pay fixed amounts to holders, preferred stocks, which is perpetual equity that behaves like a bond, real estate investments, and of course, dividend stocks. We favor the latter because of the various options for passive income, it is the most likely to provide a strong mix of capital appreciation, growing amounts of income over time, and high yields.

In addition, investing in dividend stocks provides exceptional liquidity compared to the other options for passive income, so it truly is a great choice for generating income from a portfolio.

Jonathan Bednar, a Certified Financial Planner at shares his enthusiasm of passive income from dividends.   He offers,

“What if you could passively increase your passive income? One of my favorite ways to focus on dividend investing is to dig a little deeper and look for those companies that concentrate on dividend growth. These companies not only pay but raise their dividends year after year. Dividend growth is a great way to passively increase your income and also combat inflation, which at currently around 8.5% is on everyone’s mind.”

The goal is to generate enough income that one can live off the proceeds, at least in part. The options are numerous within the realm of dividend stocks, including finding those with the best dividend growth prospects, those with the safest payouts, the longest dividend increase streaks, or the highest current dividend yields.

Each of those strategies has their own merit, and depending upon each individual’s goals, the size of the portfolio, and risk tolerance, one of these strategies, or a combination, may best suit. Now, we’ll take a look at some examples of high-quality dividend stocks we think are great additions to passive income portfolios.

When it’s Time to Retire

You can see that living off interest in retirement depends on several factors, including how much you have saved and invested, and the amount you need to cover basic and extra expenses throughout your lifetime.

Create a realistic picture of your retirement lifestyle and determine the most appropriate time to retire. Also, remember that there could be more expenses later in life due to medical issues, or a need for long-term care services. Include these unknowns when figuring out when you can retire comfortably.

Is Living Off Dividends a Good Idea?

While there’s something instinctively satisfying about living solely off dividends, it’s usually not necessary to distinguish between living off dividends versus a portfolio of equities in general.

How Much Do You Need to Invest to Live Off Dividends? 💸 Click To Tweet

In truth, there’s no practical difference between distributing money from your portfolio through dividends or through selling assets.

🤔 Think of it this way: Your dividend yield is just a portion of the total return on your portfolio. If you have a 10% return, it doesn’t matter whether it breaks down to 5% value growth and 5% dividend yield or 9% value growth and 1% dividend yield. In other words, if an asset pays you a dividend of $500 and you reinvest it, that’s the same as if the shares increased such that your position’s value went up by $500. The difference, of course, is that a dividend is relatively predictable, while appreciation is not.

The only difference to an investor would come from a variance in tax rates when taking distributions from a taxable brokerage account. In most cases, though, that will work out in favor of selling assets over taking dividends anyway.

If you manually sell portions of your retirement portfolio, you can use the first-in, first-out basis, which means the first asset you sell is the first one you acquired. These should always be subject to long-term capital gains taxes if you’ve been investing for years. 

Meanwhile, ordinary dividends are subject to the less favorable ordinary income tax rates.

You’ll also have more control over the timing of your earnings if you sell portions of your portfolio manually. Shareholders don’t get to decide when they receive their dividends or how much they’ll be.

So while you can live off the dividends from your investments, it might not be the optimal retirement strategy. You’re generally better off optimizing your portfolio’s total return than you are chasing a high dividend yield just for the sake of dividends.

📘 If you prefer a buy and hold strategy but you still want market-beating growth, there’s a variant of dividend investing that you should consider – Dividend growth investing


Holding dividend shares allows you to live on the profit from them alone if you start investing 15-20 years before giving up other sources of income, such as wages, profits from your own business and rental income.

To ensure a comfortable standard of living, the minimum investment will be $400,000 – $500,000. You can reach this amount without initial capital in 15-20 years if you form a portfolio of dividend shares from all of your sources of income and reinvest the profits earned.

To minimize the risk of losing your investments or reducing profitability, you need to know how to build a good portfolio. You should evaluate the financial stability of companies, analyze their payment data in previous years and choose shares with a yield close to the market average. Experienced investors give a positive answer to the question, “Is it possible to live well on dividends?” But to do this, you need to either invest a lot of money at the start or form a long-term strategy if you have no initial capital.


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