It’s the dream of many people to earn enough passive income to live comfortably without having to work, and one way to do so could be through investments that pay dividends.
Finance influencer Graham Stephan took a deep dive into dividend investing in a recent video on his YouTube channel. His intention was to show whether dividend payments from publicly listed stocks are overrated or , as he puts it, “the easiest way to replace your income.”
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The video is another contribution to the lively discussion among those seeking to replace wages and salary with passive investment income and thereby achieve financial independence and even early retirement. This is sometimes known as the FIRE (financial independence, retire early) movement.
Stephan built his reputation as a savvy investor on YouTube by focusing on cash flow instead of capital appreciation. He often discusses the benefits of buying real estate or stocks that appear to be below fair value and holding on to them for long-term cash flow.
The pros and cons of dividend investing
Stephan believes dividends are much more stable than stock prices and just as lucrative. This is true if you consider that the Dividend Aristocrats — a widely circulated list of 67 S&P 500 stocks that have consistently raised dividends for over 25 years — tend to pay, Stephan says, between 0.3% and 5.3% on investments, with most between 2% to 3%.
Stephan calls Dividend Aristocrats the “holy grail of passive income.”
Crucially, companies do not have any obligation to pay dividends and could cut payouts without notice when times get tough. For instance, V.F. Corp. cut its dividend payout and was officially knocked off the Dividend Aristocrats list in March.
But, according to Stephan’s analysis, investors can still rely on dividend stocks to fund their lifestyle in retirement.
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Stephan’s $10K-per-month dividend portfolio
Stephan claims his dividend portfolio generates $9,400 a month in passive income. The portfolio includes five major holdings:
Schwab US Broad Market ETF ($5,000 a month)
Schwab International Equity ETF ($2,000 a month)
Individual dividend stocks ($2,400 to $3,000 a month)
Altogether, Stephan claims his portfolio generates roughly $112,000 a year in passive income. Drawing on historical data that tracks the underlying companies’ record of dividend increases and decreases, Stephan says the income from his portfolio is more or less stable “regardless of what happens to the stock market.”
How much do you need?
Stephan believes the first step to figuring out how much money you need to be financially free is to calculate how much your lifestyle costs.
“The person living in a high-rise in New York City is living a much different lifestyle than someone living off the grid in rural Montana,” as he puts it in the video.
He runs a quick calculation and finds that a portfolio of Dividend Aristocrats with an average yield of 3% could deliver roughly $50,000 a year from a $1,670,000 upfront investment.
Simply put, you need about $1.7 million invested to potentially earn $50,000 in passive income via dividends, which for many Americans would be enough to retire early and live out the rest of their days.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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