When do we get to live off dividends?


Disclosure: This article is not intended to be financial advice and information should be taken as educational only. Read the disclaimer.

Passive Income! It's all about passive income!

Saying this term is like pulling out the bat signal. Suddenly people's ears prick up looking around for news on how they can get a step closer to it. 

So for those new, what is passive income?

A passive income is an income you recieve from your investments, which has you putting in little to no effort. Think of dividends or the rent you receive from an investment property.

When I talk with new investors it is something that is the front of their mind. Invest, build an income from it, then live happily ever after.

Don't get me wrong it's good to have an ambition to live off passive income but it does take work. To get to this passive state you need to be active for a long time in the lead up. Shares is not the only way but it is a very simple process to follow if that's what you want to do.

It's important to understand the reality of what you need to live off say $50,000 a year in this passive income. That is, you own enough in investments (shares) that the dividends are paid buy them becomes this passive income.

How the math stacks up

A good dividend stock pays around 5% of its worth in dividends on a regular year (called a yield). 

So if the stock price of an investment is $100, then a 5% return would be $5 per share, per year.

If you wanted that $50k passive income from dividends you would need $1 million dollars worth of a share paying 5% (this is irrespective of what the share price is).

You'll need a million dollars to make $50k a year.

Think about the work involved to get there so that you can put together an asset big enough to provide that.

This math applies to property as well. A $1 million dollar house might return 5% to you a year income (rented out for $900+ a week). 

So there you go, to make $50k a year in passive income you'll need a $1 million in shares or $1 million property that's rented out.

Of course, if you have a million in the bank you can always drawdown from that to pay you an income. You can take out $50k from your million dollars for 20 years before it runs out.

If passive income from shares is your dream, you need to sacrifice

So you like the idea of making $50k a year without having to lift a finder. Well, you need to use those hands to make a million dollars first. 

What are you going to sacrifice to do this?

For me, I'm not interested in retiring early or setting specific goals around how much income I want.

My focus at the moment is to earn more, continue with my investing system, and put processes in place to enjoy life each day.

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Tim Ellis, creator of DadInvestor.com.au, helps people confidently invest and manage their money. Inspired by his own experiences, Tim is passionate about creating a financially secure future for his family and sharing his personal finance knowledge with others.