4 Steps to Start Living Off Income From Dividend Stocks

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Do you want to live off of dividend income?

It’s a worthy goal, but it takes some time to achieve it.

It’s not enough to simply invest in dividend stocks. Unless you have a large amount of savings, you’ll need to invest progressively over time until you finally have a dividend stock portfolio that you can live off of.

In this article, I will share a four-step process that can ramp up your dividend income to the point that you can live off dividends.

Step #1: Save money

The first step in dividend investing — or any kind of investing — is to save money. How much money you’ll need to live off of dividend income depends on your expenses. If you have, say, $35,000 in annual living costs, you’ll need to get at least that much in dividends (less any CPP or other pension income) per year to live off passive income.

If you invest your money into a TSX index fund, you’ll need to invest over $1 million to get to $35,000 per year in dividend income. That might sound like a lot, but as I’ll show in an upcoming section, you can get to $35,000 per year in dividend income with a lot less than a million invested by investing in high-yield stocks.

Step #2: Open a brokerage account

Once you’ve got some money saved up, your next step on your journey to passive dividend income is to open a brokerage account. Head down to your bank or use an online service like WealthSimple and request a brokerage account. If you go with your bank, they’ll have you sign some forms. If you use an online service, you do not even need to book an appointment; you just visit the service’s website, sign up there, and then download the app.

Step #3: Invest in high-quality dividend stocks

Once you’ve got some money saved, it’s time to start investing. Here, you have many opportunities available to you. There are Guaranteed Investment Certificates (GICs), which, these days, yield as much as 5.5%. There are index funds, which provide diversification that reduces your risk. Finally, there are individual stocks, which sometimes offer very high yields.

Consider Toronto-Dominion Bank (TSX:TD), for example. It’s a $78.71 stock with a $0.96 quarterly payout. That’s $3.84 in dividends per year, which, when divided by the $78.71 stock price, gives us a 4.8% dividend yield. At a 4.8% yield, you only need to invest $718,000 to get to $35,000 in annual passive income rather than a million.

TD Bank stock has a high yield, but amazingly, its dividend is fairly safe. TD Bank has a 48% payout ratio, meaning that its profit could fall by 50%, and it would still be able to keep paying its dividend. Fortunately, investors probably don’t need to worry about TD’s profit falling 50%. U.S. banks recently released their third-quarter earnings and delivered high, positive growth. TD’s earnings will likely be similar to those of U.S. banks, as it earns 40% of its profit in the United States.

Step #4: Repeat steps 1-3

Once you’ve begun buying dividend stocks, the only step left is to repeat steps one to three until you’re left with a dividend portfolio that can pay all your expenses. It may take a few decades to get there, but get there, you will!

The post 4 Steps to Start Living Off Income From Dividend Stocks appeared first on The Motley Fool Canada.

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Fool contributor Andrew Button has positions in Toronto-Dominion Bank. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.