How long does it take to get to $50000 per year in dividends?

When I defined what Financial Independence means to me (here), $50000 dividend dollars per year seemed good to me….how I came up with that number is listed in that link. I did not have any notion of how to get there apart from creating passive income streams (cash from bank interest + dividends from stocks). How I designed the passive income streams is explained here and here.

The next question for me now is: how do I get to $50000 per year OR roughly $4000 per month. This post will talk about the next steps for me.

Assumptions

  • Dividend Distribution Frequency
    • Dividends can be distributed with different frequencies i.e. monthly, quarterly, half-yearly, yearly. I have mutual funds with all the above frequencies.
    • So, for the entire portfolio, what distribution frequency should I assume?
      • Monthly is the most aggressive (most amount of money compounding) and Yearly is the most conservative (least amount of money compounding).
      • Most of my funds are either quarterly or less, one of them is half yearly and one is yearly.
    • So, I have decided to go conservative and assume a yearly dividend distribution.
  • Dividend Reinvestment Plan (DRIP)
    • If the dividends are re-invested into the same assets that produced the dividends in the first place, we call this the Dividend Reinvestment Plan.
    • The assumption is that I am going to use DRIP as I do not need to use the dividend money right away.
  • Dividend Tax Rate
    • Dividends are taxed at a different rate depending on the tax bracket.
    • I will assume that my dividend tax rate is 15%.
  • Average Annual Dividend Yield
    • I have assumed 3%….a reasonable, middle of the road dividend yield assuming a 2% to 5% spread.
  • Yearly Investment
    • I will assume a yearly investment of $12000 i.e. $1000 per month.
    • I will assume that I will not increase this investment money each year.
  • Investment Time Period
    • I will assume 10 years since my wish is to achieve financial independence in 10 years.
  • Tool used
    • I am going to use a wonderful dividend calculator from Dividend Ladder.
    • If I had known about this tool, I would have used this when I defined my goals…I just came to know about this recently.

Case 1: Base Case

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 3%
  • Yearly Investment = $12000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $12725
  • New Principal = $424176

This is a far cry from the $50000 per year dividends I need to reach. So, which of the above parameters do I need to change to get the dividends closer to $50000 per year?

Case 2:  Add 5yrs to the 10yr FI plan

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 15 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results, which is much closer to $50000 dividend dollars per year:

  • New Annual Dividend Income = $45483
  • New Principal = $909663

So, to get close to the $50000 per year, I need to do the following:

Contribute $24000 annually instead of $12000 as per Case 1.

  • If I buy a house, then this increase in money is impossible. If not, then this should be doable.
  • Bottom line is that for the next 15 years, $24000 per year => $360000 investment into passive income streams.
  • How this money is spread across 15 years I am not sure yet, but it is a target for me.

Work for 15 more years instead of the 10 years I had initially planned

  • This is not acceptable, but it seems like I have no choice.

Assume a dividend yield of 5% instead of 3%.

  • This is acceptable because….
  • Some of the funds I own distribute capital gains as well. This is also re-invested.
  • Some of the funds I own and federally tax exempt and one of the them is state tax exempt also. So, dividend gain of 3% and add no taxes to it, makes it equivalent to a higher yield.

Case 3:  Stick to the 10yr plan

Lets say I do not want to work an additional 5 years i.e. stick to the 10yr FI plan. If so, what numbers do I see?

  • Starting Principal = $225000
  • Dividend Distribution Frequency = Yearly/Annually
  • DRIP = yes
  • Dividend Tax Rate = 15% tax rate
  • Investment Time Period = 10 years
  • Average annual div = 5%
  • Yearly Investment = $24000
  • No increase in yearly investment every year.

When I put the above numbers into the Dividend calculator, I got the following results:

  • New Annual Dividend Income = $31632
  • New Principal = $632657

So, if I can adjust my need for money from $50000 per year to $31000 per year, then I can stick to the 10yr plan.

 Conclusion

It is very hard to see 10-15 years ahead in life. Who knows what can happen in future? But, assuming that things go well (touch wood), I will continue to aim for $50000 dividend dollars per year and contribute money trying to reach it. If I reach somewhere in between $31000 to $50000 dividend dollars per year, I would be happy. If it is tending towards $31000, then I may think of increasing the yearly investment or reducing dollar requirements in future.

So, the plan is to do the following:

  • Invest $24000 per year
  • Work for the next 15 years (5 more years than my plan for FI)
    • i.e. $360000 over the next 15 years
  • Assume a 5% dividend yield instead of 3% (the safe number)

Wish me luck to finish in 10 years instead of 15!

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28 thoughts on “How long does it take to get to $50000 per year in dividends?

    • Thank you for the kind words! I only wish I had come across all this knowledge at least a decade earlier. But, better late than never hey 🙂 Best of luck on your FI journey as well!

      Like

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  3. It is always hard to stand on your tip toes and peer into the future to imagine what could be. On one hand, it’s always good to try, so that you can plan. On the other hand, it sometimes creates the illusion that you have control over what happens. I like how you laid out the three different paths. Hopefully you can work something out in 10 years rather than 15!!

    Like

    • Thanks for dropping by Dylan! And thanks for the best wishes!

      Regarding planning, my philosophy is the following (courtesy my dad):
      + When I plan for the future, I am sure that some of the assumptions I made may not be valid at a future time. But, with planning, I hope to cover 70% of the scenarios in future and for the remaining 30% of scenarios which are unexpected, I can plan for it as I go along. Rather than no planning where I need to plan for 100% of scenarios.
      + When my assumed scenarios change, sometimes suddenly and drastically, it puts my mind under stress and, to be frank, I may not be operating at full efficiency. I.e. the chances of a mistake is high. In this mode, I would rather have a plan that covers 70% of the cases and I need to cover for the 30% new ones, rather than plan for the entire 100%.

      The above philosophy has served me well over time 🙂

      Liked by 1 person

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