How much do you need to invest to get dividend income?
This is a very generic chart. It shows you essentially, what you need invested, to get a certain income, and what the driving factors are — DIVIDEND YIELD.
The calculation is simple:
What income you want / What dividend yield you are getting
How much you need invested
You want $25,000 a year.
You get 4.5% as a yield currently.
$25,000 / 4.5% = $555,555 is what you need invested to obtain that goal
(Math Note: 4.5% when inputted into a calculator is typed as: 0.045)
The higher the dividend yield, the more risky it might be
High, sexy, dividend yields above 6%, are very enticing. They’re so … HIGH. You need much less invested if you just invest in them, and get 6% right?
Well, yes and no.
Above 6%, you should be cautious for 2 reasons:
1. It may not be sustainable
A high yield means the company, every year, has to PAY IT OUT IN CASH to its investors.
If they’re promising a sexy 10% yield, this means 10% of their income, out of their free cash flow, has to be paid.
Does that sound sustainable? If the company isn’t rolling in the dough, it likely isn’t.
If it was sustainable, don’t you think they would be better off paying 5% dividends and using the other 5% to grow and invest in their own company?
Getting paid dividends is nice as an investor, but you don’t want to be locked into a company that can’t really sustain it.
You want to look for companies who have consistently paid out dividends over the years, and have consistently INCREASED those payouts as well.
It is one thing to pay dividends, it is another to consistently, over a long period, have increased that payout, and is confident they have the income and free cash to do so.
This is a lot like someone who increases their investments each time their salary takes an increase; instead of spending the money, they decide to increase their savings by 1%, then 1% again, and so on <— this is what you want to see, and generally speaking at above 6%, it is very rare if not.. impossible to do so.
Dividend yield is based off market price, so … if the stock and ergo company is not doing well, then I don’t see how they can pay out so much. It just isn’t rational.
2. The company may be doing it to lure you in
A lot of companies that offer big, sexy dividends, are doing it to get you to put money into them.
That’s it. They offer you 10%, you can’t resist the lure, and BAM!… you’re invested.
But if the company over time, loses money they’ll either cut the dividends down to something more sustainable, or they will simply go bankrupt.
Is it worth that few hundred a year in dividend income, to lose thousands? I think not.
*Caveat emptor = Buyer beware
You want a blend of stocks to reach your yield
Okay, so now you know you want to reach 4% in dividend yield.
The trick is now to find a BLEND of companies that gives you that 4%. Some might be at 3%, others at 5%, and others still at 4% or any variation in between.
To limit your risk, you need to find which companies to invest in, and then figure out the average yield you will get.
As some holdings grow bigger (YAY!), trim them to keep their capital loss at a reasonable amount, and use that money to diversify into other holdings.
My personal rules are:
- Dividend investing is only 50% of my portfolio – the other 50% is in funds.
- No more than $10,000 in any one stock across all holdings; I only put in $10K into holdings that are solid, but they are few and far between (think: mostly banks).
- Mostly, I limit my risk to $5000 in each company. If I lose $5000 it isn’t the end of the world.
- No stocks above 6% dividend yield – this isn’t sustainable. Good dividend stocks are around 3% – 4%. 6% is really pushing it, even.
- Spread the dividend-paying companies across various industries – I am very heavy in banking, so I am currently trying to diversify out into food or utilities that way I don’t get slammed if something happens to banks, and I have other streams to keep things afloat.
My goal for 2020 was to have $12,000 in projected income.
I hit that in February 2020: Investments Roundup, and have a projected income of $15,000.
I may revise that to something higher for 2020, but that depends on my contract getting extended.
How to suss out a company that pays well
You can piggyback off mutual funds that are focused on dividend paying stocks like the TSX Dividend Aristocrats Index, and just use their list as a starting point to see what you might want to invest in.
In there you will find stocks to look at, and decide if they are worth it or not (some of them on the list I am not a fan of because I think their debt load is too high and I am not a fan of debt individually or in companies when it is a ridiculous ratio).
An example of one of my favourite dividend paying stocks – Telus (T) is:
Let’s look at Telus (T):
You can see on the Globe & Mail Stock Page for Telus, that the payout is $2.33 a year, and currently based on market prices, the yield is 4.68% give or take (I calculated it in that minute as 4.61%)
This means that for every stock you earn, you will get $2.33 in dividends that year.
You can also see their individual dividend history payout on their page:
And this blurb:
In February 2020, The TELUS Board of Directors has declared a quarterly dividend of $0.5825 per share on the issued and outstanding Common Shares of the Company payable on April 1, 2020 to holders of record at the close of business on March 11, 2020. This first quarter dividend represents an increase of 6.9 per cent from the $0.545 quarterly dividend paid on April 1, 2019.
Key facts to glean:
- They are paying $0.5825 per share, quarterly, or 4X a year. $0.5825 x 4 = $2.33 <– matches above
- They used to pay $0.545 every quarter last year.
- They INCREASED the dividend by 6.9%
Hmm. Is it sustainable?
Scroll down to the bottom of that page and you will see they have been paying dividends since 1999. It is now 2020, so over a decade, and consistently increased it:
THIS IS WHAT YOU WANT TO SEE.
As a dividend investor, my heart strings go pitter-patter….
Of course, there are other ways you can invest in dividends, and they don’t have to be in individual stocks but in mutual funds or index funds.
- Dividend Growth Machine
- Step by Step Dividend Investing
- Dividend Stocks for Dummies
- Dividend Investing
- Little Book of Big Dividends
Are you into dividends?
P.S. This is why I invest in dividends and this is what you need to invest in to get dividends.
This is very helpful. Thank you.
I’m currently rebuilding my savings after a house purchase but will definitely look into dividends once we’re in a good place!
Just a little correction, 4.5%= 0.045
Your blog posts about dividend investing made me considered it. I even created a watchlist on Questrade for companies that I want to invest in but will definitely dig in for more information before making a leap. I’ll also keep index ETFs in registered accounts.