How Much Cash Do You Need to Quit Work and Live Off Dividend Income?

Dividend investing is a real strategy that works, as many retirees live off dividend income as a key source of income. Other sources of income could come from rental income or a pension. But just how much cash do you need to invest to quit work?

First, you need to make sufficient dividend income. Your dividend portfolio yield should be sufficiently high. Second, it should be obvious that the dividends in the portfolio should be safe. Third, the dividend growth of the portfolio should at least keep pace with inflation, if not beat it. Fourth, what should also be obvious is that capital preservation is critical. So, be sure to tread cautiously on every investment decision.

According to Nationwide Visas, the average annual salary for a full-time worker in Canada is $63,013. Let’s say we need to make 80% of this income (or $50,410) with dividend investing. We actually have a buffer by earning Canadian dividend income because eligible Canadian dividends are actually taxed at lower rates than your job’s income.

The Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, yields about 3.1%. As a general rule of thumb, we can target to build a dividend portfolio with a current yield of about 4.6-6.2% (i.e., 1.5 to two times the market yield). This rule allows us to earn a decently high yield while keeping safety in mind. It’s a little reminder that dividend yields of over 6.2% today could be in danger of being cut. Typically, stocks with yields near the low end of the range are safer investments.

For a portfolio yield at the midpoint of 5.4%, investors would need to invest $933,519 today to generate dividend income of $50,410.

Here are a couple of dividend stocks that offer dividend yields of 4.6-6.2%.

Brookfield Renewable

Brookfield Renewable (TSX:BEPC) is an experienced operator and developer of renewable power assets. It has a diversified portfolio of hydroelectric, wind, solar, distributed energy and sustainable solutions across five continents.

Internationally, there is a multi-decade’s long runway for growth in the sector. Management believes that combined with value investing, its repeatable strategy to grow could deliver total returns of 12-15% and annual dividend growth of 5-9%.

Due in part to higher interest rates, the dividend stock has declined about 16% since the start of 2022. The stock trades at a discount and offers a dividend yield of 4.9%. Even assuming no valuation expansion, based on a 5% growth rate, investors can still approximate long-term total returns of about 10% per year.

TD Bank

Toronto-Dominion Bank (TSX:TD) stock has paid dividends every single year since 1857. The Canadian bank stock has declined 22% since the start of 2022. This provides a good opportunity to buy the stock at a decent discount for a high dividend yield. At about $75 per share, it trades at a discount of close to 20% from its long-term normal price-to-earnings ratio and offers a dividend yield of 5.4%, which is attractive.

TD Dividend Yield data by YCharts

The large North American bank has a track record of paying out safe dividends. For your reference, its 10-year dividend-growth rate is 9%. And its payout ratio is estimated to be about 51% of adjusted earnings this fiscal year.