I’m not going to bury the answer here. If you’re hoping to invest enough to retire and live off dividend income alone in retirement, it’s certainly possible! You can absolutely do it…if you have a ton of cash to invest.
How much would it take?
If you’re hoping to retire and live off your dividend income alone, it’s likely you already have enough cash to retire in general. To retire on dividend income alone, you’re going to need to create about as much as your annual salary. Since the average Canadian makes around $60,000 per year, according to Statistics Canada, that means creating a whopping $60,000 per year in dividend income.
That’s no easy accomplishment and, of course, it is going to take a major investment. What’s more, even if you’ve created a diversified set of investments, there are no guarantees about your dividend income sticking around for life, or returns for that matter. For instance, you could see your passive income come in from a high yielding dividend stock, but returns could be in the toilet. That could lead to your dividend being cut.
But for giggles, let’s look at how much it would take to create $60,000 in annual dividend income alone by investing in a reasonably safe stock such as Royal Bank of Canada (TSX:RY).
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | PORTFOLIO TOTAL |
| RY | $117 | 11,111 | $5.40 | $60,000 | quarterly | $1,299,987 |
Got $1.3 million?
So, if you already have $1.3 million at your disposal, yes, sure, you absolutely can retire! But you could do that anyway even if you don’t invest for dividend income alone. Odds are you’re at Motley Fool because you do not have $1.3 million at your disposal, and are likely wanting to create that amount instead.
That’s why it’s important to look beyond dividend income alone. While that’s certainly a benefit, investors need to consider returns as well. After all, returns certainly count when looking at passive income! What’s more, a combination of returns and dividend income over time can help you make a more informed choice.
Finally, if you follow this method of focusing on both types of passive income, you’re likely able to also use an investment account like the Tax-Free Savings Account (TFSA). There certainly is not enough room for $1.3 million today. However, the TFSA does have current contribution room of $88,000 if you were born in 2009 and haven’t invested. So using this could certainly bring you closer to retiring with major passive income.
An example
Let’s say you were to invest in Royal Bank stock, and were looking to create $60,000 in passive income through both returns and dividends in the next five years. To do that, you would need to come up with an amount that could be placed in your TFSA again and again, reinvesting as you sought to create $60,000 in passive income. Here is what that might look like if you were to do this with a goal of retiring in the next five years. Take into consideration Royal Bank stock’s compound annual growth rate (CAGR) of 5%, and dividend CAGR of 7% as of writing.
| Year | Share Price | Shares Owned | Share Value | Annual Dividend Per Share | Annual Dividend | After DRIP Value | Annual Contribution | Year End Stock Price | New Shares Purchased | Year End Shares Owned | New Balance |
| 1 | $117.00 | 171.00 | $20,007.00 | $5.40 | $923.40 | $20,930.40 | $20,000.00 | $122.85 | 170.00 | 341.00 | $41,891.85 |
| 2 | $122.85 | 341.00 | $41,891.85 | $5.78 | $1,970.98 | $43,862.83 | $20,000.00 | $128.99 | 170.00 | 511.00 | $65,913.89 |
| 3 | $128.99 | 511.00 | $65,915.17 | $6.18 | $3,157.98 | $69,073.15 | $20,000.00 | $135.44 | 171.00 | 682.00 | $92,370.08 |
| 4 | $135.44 | 682.00 | $129,008.60 | $6.62 | $4,514.84 | $133,523.44 | $20,000.00 | $142.21 | 172.00 | 854.00 | $121,447.34 |
| 5 | $142.21 | 854.00 | $150,313.38 | $7.08 | $6,046.32 | $156,359.70 | $20,000.00 | $149.32 | 174.00 | 1,028.00 | $153,500.96 |
Already, from investing $120,000 over the next five years, you would create passive income of $39,547.28. That comes from including your total portfolio balance and dividends, for a total of $159,547.28. That’s far less of an investment and will create just as much passive income over time.
