How to Live on a Dividend Income

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One of the most effective ways to increase your net worth is by making investments that provide passive income. For those who invest in the stock market, that means finding an equity that pays out a dividend. Investing in dividend stocks is one of the key strategies used by arguably the most successful investor of all time, Warren Buffet, who has built a net worth of more than $50 billion dollars.

What Are Dividend Stocks?

Dividend stocks are those that pay out a regular income each quarter based on how many shares you own in a company. Investing in enough of these stocks over a long period of time can provide a significant dividend yield and enough income for you to live off of during your retirement.

However, planning to live off dividend income isn’t without risk. Unlike interest payments, dividends are not guaranteed, but there are some big upsides. Some companies, like Coke, have a strong track record of not only paying regular dividends but also increasing them annually. Besides, your retirement should include additional income sources, not just the dividend yields.

How much you invest in dividend stocks depends on your goal for how much you’d like them to pay out to you. For example, with an average dividend yield of about three percent in your portfolio, you’d need approximately a $3.33 million portfolio to earn $100,000 per year in dividend income.

How to Invest

When building your portfolio, many financial professionals will recommend investing in a diversified group of companies across many sectors with a history of at least 10 years of paying out dividends. Don’t simply chase those with high-paying yields which oftentimes can turn into a bad investment.

Diversity will also offer protection in case one industry is hit hard and leads to a lower dividend payout for one of your stocks. The others can absorb the blow. However, even with this strategy, volatility is to be expected.

Among the highest paying dividend stocks Buffett invested in are JPMorgan Chase, Phillips 66, General Motors and SunCor energy.

Living off of dividends is a marathon. Not a sprint. Plant the seeds of your dividend stock investments early. Warren Buffett has been investing for his entire life, but he earned 98 percent of his money after the age of 52. Passive income dividend investing takes a lot of upfront work, but the benefits you enjoy later in life can be huge.