Last week, I discussed how to build a retirement portfolio with dividend stocks. Since bonds and certificates of deposit offer historically low rates, chances are that retirees and future retirees will invest more money into “safe” dividend stocks. Following this post, a reader asked me how to build a 6 figure income dividend portfolio. First of all, this is not an easy task; making 100K per year from your investments requires 3 things:
A lot of time
A lot of capital
A bit of luck 😉
But since I like the idea of building a kick-ass dividend portfolio earning 6 figures annually, I thought of running a few scenarios to understand what was required to achieve the ultimate 6 figure income dividend portfolio!
Let’s start with some numbers
The first thought I had was to begin with the end results in order to start my calculations. So how much investment do I need to generate 100K per year? We’ll start our first assumption with a dividend yield of 3.5% as I don’t want to take much risk while picking my dividend stocks. So at first, if you divide 100k by 3.5%, you get the incredible amount of $2,857,142. This would be the capital required to create a 6 figure income dividend portfolio. Discouraged? I’m with you… this is quite discouraging. But now, let see if we can crunch the numbers a bit.
In order to give us a chance to amass such an amount of capital (without a winning PowerBall ticket), I’ll assume that we will be saving for the next 35 years. After all, with our life expectancy playing with the century mark, it wouldn’t hurt if you start saving at the age of 30 and stop at the age of 65. You’ll probably have another 30 years in front of you to enjoy your dividends ;-). If you use excel and make a quick calculation, you would need to save $2,000 per month at 6% during 35 years to reach 2,8M$ in capital. Once again, this is quite discouraging!
What about dividend growth?
For those who think that I should use a higher dividend yield upon retirement based on dividend growth, I’d say that I have already factored in the growth with my 6% investing yield. If you insist, I can play around with the numbers and calculate using a 4% dividend yield portfolio and a 7% yield. This would require a capital of 2,5M$ instead of 2.8M$ and you would need to save almost $1,400 per month. Here again, it is still pretty high. However, if you are willing to save during 40 years, you drop the bar to $1,000 in savings (about $950 per month). Still too high? Yeah, I agree with you. However, I know how to build a 6 figure dividend portfolio ;-)…
How To Build a 6 Figure Income Dividend Portfolio
As you can see, retirement calculations will definitely depend on the 3 points I mentioned at the beginning of this article:
Time (the amount of time you are saving before retiring)
Capital (how much are you able to save per month?)
Luck (this is with regards to your investment yield 😉 ).
I think it’s pretty obvious that if you want to build a 6 figure income dividend portfolio and live only on the dividend payout, you’ll need a darn good job in order to be able to save this much. However, if you plan on withdrawing $100,000 per year, this is another story. You will need a lot less capital, time or yield to achieve it.
I ran some quick calculations to see how much you would need to save per month in order to be able to withdraw 100K per year from your portfolio until you are 85 or so. The best scenario I found was the following:
Investment return: 7%
Time: 37 years
And if you are willing to save during 40 years instead of 37, you need a monthly investment of $600. This becomes more attainable, right? However, I must warn you of something very important: taxes and inflation were not considered in these calculations. And, personally, I found that 7% is very optimistic. I usually don’t push past 6% when I run investment calculations. These examples were not made to build your retirement plan, they are just presented to give you a quick view of how much you should be saving per month in order to have a comfortable retirement.
How to start your 6 figure dividend portfolio
If you expect to achieve a 7% investment return, you need a solid investing plan. After several years of research and investing experience, I came up with a solid and proven investing plan. My investing philosophy is based on 7 investing principles. Each of them are proven by extensive research produced by mathematicians, statisticians and investing firms. The purpose of the seven investing principles is to establish simple but effective rules to buy, manage and ultimately sell the right dividend stock at the right time. You can learn more about my investing strategy by reading The 7 Investing Principles I follow to Succeed. You will find in this article the result of years of research along with a clear path to dividend growth investing.
Have you run other type of calculations? Have ever considered how much you need at retirement? I’m curious to know what your plan is?
My Own Advisor
My goal is a little more modest, ;), but I think my goal is realistic. I hope to have passive dividend income of about $30,000 in < 25 years, before age 60. As of today, I'm 1/6th of the way there. I figure I'll need a dividend portfolio of about $600,000 to reach my goal. My plan is to own at least 20 Canadian dividend-paying stocks. I'm more than 1/2-way there with that goal.
Back to your post, inflation, definitely, should have been included in your calculations. I would factor in at least 3% over time. Personally, I think a return of 7% is very optimistic. I would be more inclined (and very happy for the next 25 years) to get a 5% yield on my stocks, without including capital appreciation.
I'm getting about 4.3% now.
One more factor to consider is the need to get a 6 figure income just from dividend income . What about other sources of income during retirement like 401k, IRA in the US. a combined 6 figure income between the three (or more) of these type of investments could make sense.
Another consideration is a good company match. I see a number of people who are in fine shape for retirement because they did in fact work for a “fine company”, maxed out on their 401(k) contributions, and got a good match.
Part of my plan is to downsize which releases a few hundred thousand that is tax free. Also, if interest rates rise a bit I plan to buy a single premium immediate pay annuity.
Max out your tax deferred sources and save to consistently fund your investments!
I find defensive stocks more attractive than the high flyers.
For the past 20 years, inflation has been at 2%. When we do financial plans, we are recommended to use 2.25%. I think 3 is a bit too much.
Kuddos on your portfolio! that’s a great start!
You are right, by combining different sources of income (investment, retirement plan account, pension plan, side income) it becomes much easier to build a 100K salary.
There are still great companies with great pension plan or retirement plan. It is a good point to consider when you hesitate between 2 jobs! Employers can make a real difference!
It’s funny you say that! I’m 29, and I am now gradually leaving growth stocks to buy more stable large cap such as JNJ and CVX (or Canadian Banks). I think it is also easier to trade as it requires less time to follow!
Iain from Smart Dividend Growth
Great article. This really shows the beauty and importance of starting early. I am a little surprised that you’re only expecting a 6% annually over the long run.
gotta be careful with annual yield 😉
Wow…sure would be nice receiving a 6-figure income while sipping Mai Tai’s on the beach.
To be more realistic, I’m hoping to be financially independent by 40 through passive income. I’m contributing a lot more than $600/mo, and am closer to $1500-$2000 per month, depending on commissions. I won’t need anywhere near $100,000/year in passive income to be independent, however.
I agree with most of the comments here. I guess it’s important to note that there are no shortcuts to building a dividend income stream. You need heaps of time and money (and a bit of luck as you mentioned); the less you have of one the more you need of another.
My financial goals are actually more aggressive than that.
But I think most people, with a decent 401(k), Roth IRA (or international equivalents; I’m American), and their own taxable dividend stock and bond portfolio should be able to achieve a comfortable retirement. Historically, a pot of good dividend stocks and bonds, consistently rebalanced, has performed fairly well even over this lost decade of investing.
Using a 6% rate of return for your calculations is reasonable, imo. Personally, I go with 3% inflation and 10% rate of return for calculations, which ends up at about 7%- I keep my inflation number fairly conservative (on the higher side than I’d expect it to be), and my rate of return a bit ambitious (I’ll take what I can get!)
No one EVER figures in the taxes or inflation. WHat is the point of the exercise with these calculations? Taxes and inflation, even at modest rates, kill the whole scenario.
We don;t need daydreams, we need factual, practical, information.
I didn’t consider taxes in my example as I am expecting people to save in their retirement plan (which is tax free). On top of that, if you live in Canada, I don’t factor your tax return either (contribution to a RRSP is tax deductible).
As for inflation, I didn’t factor the rate in the contribution either. Therefore, in 10,20,30 years from now, saving $600/month will be much easier than today. On top of that, if I try to factor the inflation, I would use 2.25% (which is recommended by Watson&Wyatt) but most people will argue with me and ask for 2.50%-3.50% inflation rate. I didn’t want to enter into this debate ;-).
I’m a little short of having $600 a month and I don’t have 40 years to wait but then again I don’t need 100,000 a year to retire. Every little bit helps and if you really need $100,000 you can save more than $7200/year. I’m only at $4000 but my income is at $31,250. If they wanted $100,000 I assume they are living on $100,000 so they could be saving $10,000-$20,000/year.
what if i’d be satisfied with 50,000 a year ? or even 40,000 ? we live rather simply yet we are late to the ball game when it comes to investing.
what would the calculations be to live on 30,000 year ?
We should also consider the purchasing power of $100k, 35 to 40 years from now. Minimum wage could be over $50k/year by then.
It looks like I have to earn a big $ right now to make my retirement comfortable
I am not from US, so the numbers are way lower in my place, but still this is only a goal than just a real thing in today’s situation
I am 28yo. I max out my Roth IRA every year and put 15% (+3.5% company match) into my 401k. What items should I have in my portfolio in order to reach that 6 figure dividend goal? How much should I invest into any particular stock before moving on to the next one?
I don’t believe you would have to invest as much as you calculated if you consider dividend reinvestment. With dividend reinvestment, 7% or more is quite achievable when buying large caps that pay high dividends, have low debt, and stable earnings with some growth. If purchased under 15 P/E of course, closer to 10 optimally.
Dividends benefit from huge tax benefits and never selling gives the advantage of never paying taxes on capital gains. So tax considerations are not as important as with other investments methods.
I currently make around 60k from a mix portfolio of roughly 1.1M. With 1.6M in rental units with .7M in mortgages. And 200k in dividends companies with 40k USD on margin. Most months I try to invest an extra 5k a month on top of paying my mortgages which is a form of reinvestment. Except three months dedicated to municipal and federal taxes.
If you invest just one dollar a week in a compound interest scheme from the very first day you start work, you will be able to retire early a millionaire without taking any risks. Try the math.
Einstein called it the 8th wonder of the world.
The above comment is absolutely NOT true!
The math—-$1 a week times 52 weeks=$52
$52 divided 12 months=$4.33 per month
$4.33 per month compounded annually at 10% from the age of 1 to the age of 65=$281,178.00
From the average starting working age of 19 to the age of 65=$46,756
Early and often is what I always say! If we can just convince people to put a little away early on in life it can grow into a large sum. Save, save, save!!
I am one of those guys who has actually built a $100k/yr dividend portfolio. Currently is 31 holdings, $2,647,511 value, yield of 4.25% and annual dividends currently at $112,494. I earn an additional $40-50k in option income, mostly covered calls and some uncovered puts. Some key points from what I have learned thus far…
1. It is better to go for lower yield and large annual dividend increases than the larger yield even if it will take some years to catch up.
2. Selling Covered Calls and then reinvesting in more stock has accelerated my savings and income.
3. Investing across 8-10 industry types at all times has balanced out the portfolio.
4. 21 of the 31 are Dividend Aristocrats, Champs, Contenders or Challengers.
5. As dividends and option income has rolled in I have had more success buying the most currently unliked and undervalued names in my portfolio rather than drip.
6. 28 of the 31 stocks pay me a minimum of $2,000/year which is the minimum I now look at with a new purchase or expect to arrive at within a year. My largest pays me $12,000/yr, second largest $10,800/yr.
7. As much as my wife likes to spend I do my best to hold onto some income to buy more stock every month!
Thank you for insights. It looks I’m on the right track (but I will look into selling covered calls!).
Count me in for this strategy. I have $2.3M put into an after tax account that will generate at least $86K of income this year. I’ve been at this for 4 years and my rate of payout compounding has been around 15%. I hope to keep this up another decade as I’m just under 45.
Dividend growth investing is a smooth ride. Focus on quality companies that are regular dividend growers at a fair to attractive valuation, reinvest all dividends into new compelling positions and supplement it with fresh cash regularly.
Watch the annual payouts grow and snowball and be mesmerized. Watching money create money is really fun. And the dividend growth is the special sauce, it’s like you put in capital but it happened automatically. Magic at work that only gets larger and more grander with time.
I’m inspired by the poster who is up to $112k last year. My goal is to get to $100K by 2030 but I may be able to achieve this next year with luck and some more pushing.
Sorry I meant to write $100k by 2020.