A common goal for dividend investors is to target to live off their dividend income one day. How much do you need to invest to give up work and live only off dividend income?
The quick answer is that you can stop working essentially when the dividend income you make replaces your work’s income. Based on the Labour Force Survey, the average annual salary in Canada in 2022 was $59,300, accordingly to Dundas Life. Let’s assume that rises by 3.4% — the recent inflation rate — to $61,316 for 2023.
How much do you need to invest to live only off dividend income?
Thanks to higher interest rates, fixed-income investments like bonds and guaranteed investment certificates (GICs) have become better competitors for investment capital, driving valuations lower for dividend stocks. Some businesses are also expected to experience lower growth due to a higher cost of capital from higher interest rates. So, it’s possible to earn safe dividend yields of even 7% if you’re willing to take greater risk (venture into stocks versus safer investments like bonds and GICs) or reduce your growth expectations.
On a 7% portfolio yield, you would need $875,942.86 invested today to earn $61,316 in dividend income per year. (The calculation is $61,316 divided by 0.07. You can replace $61,316 with your target dividend income per year and replace 7% with your portfolio dividend yield.) Let’s be much more conservative and assume you target a portfolio yield of 5% today; in that case, you would need $1,226,320 invested.
Here are some examples of dividend stocks with these kinds of yields.
Enbridge stock
Enbridge (TSX:ENB) stock is a large-cap, blue-chip dividend stock that pays a massive dividend yield of close to 7.3% at $48.86 per share at writing. The analyst consensus 12-month price target of $58.74 on Yahoo Finance suggests the energy stock trades at a discount of roughly 17% or has near-term upside potential of 20%, which is not bad at all for a big-dividend stock.
Enbridge maintains an investment-grade S&P credit rating of BBB+. Through 2025, its distributable cash flow growth can support dividend growth of about 3% per year, while the growth could bump up to about 5% post-2025.
Emera stock
Emera (TSX:EMA) is a regulated utility that generates annual revenues of about $7.6 billion and fairly predictable returns on its investments. Through 2025, it has a capital plan of $8 to $9 billion with a 75% focus in Florida. It projects these investments can help support a rate base growth of 7-8%. Because its payout ratio is at the high end — estimated to be 87% this year — management targets dividend growth of 4-5% through 2025.
At $54.72 per share, the stock provides a dividend yield of just north of 5%. The analyst consensus 12-month price target of $60.07 on Yahoo Finance suggests the utility stock trades at a discount of roughly 9% or has near-term upside potential of 10%. In other words, the stock is about fairly valued.
The sooner you start saving and investing, the greater your dividend income can become. You’ll also be able to build a diversified portfolio, given the market opportunities that pop up at different times.
Don’t forget other income you might earn in retirement
Here comes the good news. Other income, like pension income, can come into play, too. For example, the standard age to start receiving Canada Pension Plan (CPP) payments is 65. The Government of Canada website indicates that the average CPP payment amount for a new retirement pension at age 65 in April 2023 was $760.07. Other income will simply reduce the amount of dividend income you need to live off. So, the more streams of income, the merrier.
