How Many Stocks Do You Need to Live Off Dividends?

Investing is not a process for its own sake; it should have a clear objective. Many investors aim to accumulate enough capital to live comfortably on the passive income generated, often considering dividend income for this purpose. However, to achieve this goal, you need to calculate how many stocks you need to live off dividends.

How Many Stocks to Buy to Live on Dividends

The question of purchasing the optimal number of dividend stocks can be divided into two parts:

1. What is the optimal number of types of securities or issuers?
2. How much money is needed to form a dividend portfolio?

The answers to these questions depend on many factors, such as:

• Dividend yield of the stocks.
• The individual’s needs that must be met to consider living on stock dividends.
• Current prices of goods and services.
• The time needed to accumulate the required capital, etc.

Nevertheless, we will attempt to answer both questions without delving into overly complex mathematical calculations and investment theory details.

Optimal Number of Dividend Stocks

Of course, it would be ideal to buy shares of a single company (such as Apple) and regularly receive a stable dividend income. However, such a simple dividend living strategy is unlikely to yield the desired results. Statistics show that in the US stock market over the past 10 years, at least 5% of dividend-paying companies have missed payments at least once. Moreover, even “dividend aristocrats,” as indicated by the relevant S&P index, have shown reductions in their dividends. For instance, in 2020, the S&P 500 Dividend Aristocrats index dropped from 1350 in February to less than 1000 in April, an unprecedented decline since 2014. Such a drop in dividend yield is striking. Imagine living off stock dividends during that period.

Therefore, to ensure dividend payouts regardless of the economic situation, you need to create a portfolio of dividend stocks. This portfolio should include more than just 4-5 securities. Assuming that the dividend yields of the issuers’ securities are equal to a certain average, missing payments by one company would significantly (by 20-25%) reduce the amount received by the investor. The same applies to reductions in the portion of profits paid to shareholders.

However, including all possible dividend stocks in the portfolio is also not the solution. This is due to the investor’s limited capabilities. It has long been proven that a portfolio of 20-30 stocks can be managed most comfortably. In this case, the holder can:

• Effectively monitor company events, stock price fluctuations, and dividend policy news.
• Analyze portfolio returns and forecast them with a high degree of probability.
• Timely adjust the portfolio structure to achieve the desired result.

Important! The minimum stocks for dividend income should not be less than 10 securities. In this case, even if one company completely misses payments, the yield for the quarter will decrease by no more than 10-15%. Such losses are likely manageable for the investor.

Of course, creating your own diversified portfolio that provides the desired yield is not that simple. The selection of stocks can be simplified by using indices such as:

• S&P 500 Dividend Aristocrats (mentioned earlier). It includes companies that have not missed payments for at least 25 years.
• S&P High Yield Dividend Aristocrats. A broader index within the S&P Composite 1500. Companies in this index have paid dividends for at least 20 consecutive years.
• S&P High Dividend, which includes 80 companies with the most generous dividend payouts. Achieving stability from them is difficult, but to increase the overall yield of the portfolio, it is quite possible to include several companies from this index, keeping in mind rebalancing and restructuring.

Choosing 20-30 companies from various sectors and industries based on the structure of these indices is not difficult. For those who do not possess portfolio construction techniques or do not want to deal with it, there is another method. You can buy a couple of ETFs (on the first and third or second and third indices), correctly selecting their ratios based on the desired yield and acceptable risk.

Portfolio Size for Dividend Income

Answering the second question is somewhat more difficult. The main task is to understand what amount can be considered sufficient for achieving income through dividends. Let’s start by taking the median single-person salary in the US, calculated by the Bureau of Labor Statistics for the fourth quarter of 2023, as a benchmark. It amounted to $59,384.

It is easy to calculate that with different levels of dividend yield in the portfolio, the required capital will be:

However, such a level of income is unlikely to provide a comfortable life. Indeed, this amount is only sufficient for basic needs — rent and utilities, budget groceries and clothing, and healthcare. The recipient of such an amount is unlikely to afford more.

This is confirmed by social studies, which indicate much higher figures for a comfortable living in the US. The survey considered that a sufficient level of comfort is ensured by budgeting in the proportion of 50/30/20, where:

• 50% — essential expenses such as rent and food.
• 30% — non-essential expenses, like purchasing a new car.
• 20% — discretionary spending.

The results significantly differ from those calculated by the Bureau of Labor Statistics. Surveys across various states, involving people from different social groups and professions, showed annual income requirements ranging from $80,704 to $116,022.

Consequently, the capital required to ensure a comfortable lifestyle also increases.

As we can see, the amounts are quite substantial. And these figures are calculated without accounting for taxes and other mandatory fees and charges. When these are considered, it turns out that obtaining such capital in one go is impossible for more than 98% of the population.

However, nothing prevents investing much smaller amounts and achieving the necessary capital over several years. In doing so, when forming a portfolio, it is essential to consider several additional factors:

• Missed payments and dividend reductions. Determining the maximum drop in payments is relatively simple. After creating a portfolio, one needs to plot a dividend payment chart, for example, for the past 5 or 10 years, and find its average deviation. This amount should be added to the final sum to ensure that even in a crisis, the payments do not fall below an acceptable level.
• Liquidity of securities can vary significantly. If achieving income through dividends becomes impossible, the portfolio structure will need to change. Low-liquidity stocks can become “dead weight,” which are difficult to sell. Therefore, at the initial formation of the portfolio, preference should be given to highly liquid stocks, such as those with an average daily turnover on the exchange exceeding 100 million or a billion dollars. This approach ensures that portfolio restructuring will proceed without excessive problems.
• Even when choosing high-dividend-yield stocks, it is essential to understand how this yield is achieved. It is clear that high dividends are an attempt to attract investors at any cost, hide existing problems, and obtain additional funds to solve them. However, business problems can vary — one company might be on the brink of bankruptcy, while another might need funds to complete the construction of a new innovative production line. Thus, thoughtful analysis of issuers is mandatory even in dividend investing strategies.

Overall, achieving income through dividends is simple and straightforward. There are only two requirements: stability (no missed payments) and constant growth (dividend aristocrats almost always meet this requirement). In this case, with regular contributions to the initial amount and reinvestment of received interest, it is possible to accumulate the necessary capital within 5-10 years for anyone with a steady income. However, even if the goal seems easily achievable, it is essential to approach the issue as seriously as possible. Even for this simple case, it is necessary to implement all stages — from creating an investment plan to calculating risks and determining the size of possible regular contributions.