How Much Cash Do You Need to Stop Work and Live Off Dividends?

Want to retire early? Here’s how much cash you might need to quit work and live off your investment income.

| More on:
think thought consider

Image source: Getty Images

Many Canadians dream about quitting work and living off investment income and dividends. While this is an intriguing wish, it is not an easy feat to achieve.

Quitting work to live off dividend income is no easy feat

It requires intense (and even extreme) frugality, a smart savings plan, and a very thoughtful investment strategy. Not many people are willing to give up their lifestyle in the short-term to enjoy long-term freedom for early retirement.

The cost of living in Canada has risen dramatically. As a result, the amount of cash you might need for retirement is likely significantly more than you would have needed just a few years ago. Yet, it is still possible, but it will take sacrifice.

How much cash will you need?

The cash you will need to invest to retire largely depends on three factors: 1. The cost of living in your region; 2. Your personal lifestyle and standard of living; and 3. Your level of risk tolerance when investing. All these factors are crucial to determine the amount of cash you will need to retire early.

To live a modestly comfortable life, the average Canadian family of four likely requires between $75,000 and $90,000 of pre-tax family income. This covers standard expenses (housing, food, transportation, and childcare) and some discretionary expenses (entertainment, vacations, etc.).

Use the index to earn passive income

The S&P/TSX Composite Index has an average dividend yield of 3.15%. If we divided the level of income we would require ($75,000 to $90,000) by the dividend rate (3.15%), one would need between $2.4 million and $2.9 million to meet their income needs.

There are other dividend-focused exchange traded funds (ETFs) that may yield more. A passive investment approach is a good option for people not interested in building and managing a stock portfolio. It can still yield good income results.

GICs are good, but not perfect

An even lower risk option would to be invest in guaranteed investment certificates (GICs). If you appropriately laddered GIC maturities, you could earn low risk return that averages a 4% interest rate today. You would only require $1.9 million to $2.3 million of cash to invest.

The only problem with GICs is that they often don’t pay interest until they mature (hence, the need to ladder your GICs). Once they mature, there is no guarantee you will be able to earn the same level of interest in the future. Lastly, they tend not to be liquid, so once purchased, you are locked in and cannot easily cash out.

Generate dividend income with a portfolio of stocks

The final option is to invest in a diversified portfolio of dividend-producing stocks. You can buy a mix of quality Canadian companies and realistically earn an average dividend yield closer to 5%. With that yield, you would only need between $1.5 million and $1.8 million invested to live off your dividend income.

This is the riskiest option. Stocks are volatile, and dividends are not guaranteed. However, it could also be more rewarding as there is the potential for capital upside in the future.

Stocks like TELUS Corp. (TSX:T) are interesting for dividend income. TELUS is one of Canada’s largest telecommunication players. Phones and internet are as essential as power and water. While the telecom space is competitive, it is essential.

TELUS is nearing the end of a large spending cycle. It expects to earn a lot of cash in the coming years and grow its dividend. It yields 6.3% today.

Other quality Canadian stocks for attractive dividend yields include Pembina Pipeline (5.8%), Dream Industrial REIT (5.1%), Canadian Natural Resources (4.5%), and National Bank of Canada (4.2%). Take some of these names and build a portfolio, and early retirement might come sooner than you think.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Natural Resources, Dream Industrial Real Estate Investment Trust, Pembina Pipeline, and TELUS. The Motley Fool has a disclosure policy.

More on Dividend Stocks

dividend growth for passive income
Dividend Stocks

3 Dividend Growth Stocks to Buy With Yields of 6% or More

These three top TSX stocks offer both dividend growth and sky-high yields, making them some of the best to buy…

Read more »

A worker gives a business presentation.
Dividend Stocks

Is BCE Stock a Buy?

BCE stock continues to struggle, but with an ultra-high dividend yield, could it be a good long-term option for investors?

Read more »

Person slides down a stair handrail
Dividend Stocks

Why I’m Bullish on Cargojet Stock

Cargojet stock has a long and storied history of growth and slumps, but now might be a great time to…

Read more »

Muscles Drawn On Black board
Dividend Stocks

Canadian Dividend Stars to Add to Your 2025 Portfolio

These stocks pay good dividends that should continue to grow.

Read more »

bulb idea thinking
Dividend Stocks

The Smartest Dividend Stocks to Buy With $10,000 Right Now

In addition to consistent income, buying these two dividend stocks now could set you up for strong long-term growth potential.

Read more »

coins jump into piggy bank
Dividend Stocks

5 Secrets of TFSA Millionaires

If you're looking for the top secrets of TFSA millionaires, you've come to the right place.

Read more »

concept of real estate evaluation
Dividend Stocks

2 No-Brainer Dividend Stocks to Buy Right Now for Less than $200

These two dividend stocks have reliable operations and impressive long-term growth potential, making them two of the best to buy…

Read more »

Technology
Dividend Stocks

Building a Resilient Portfolio With Canadian Dividend Aristocrats in 2025

Are you seeking stability in 2025? Discover how Canadian Dividend Aristocrats can fortify your portfolio with battle-tested stocks that keep…

Read more »