Trading hours for income is how most of humanity lives. This is inherently limited, because there are a finite number of hours one can work in a day or a week or a month.
Collecting dividends increases one’s income without increasing the number of hours worked. In fact, over time, increasing one’s dividend income allows one to decrease one’s hours worked and at the same time increase one’s income.
The Truth
Now, it must be said that in the situation where one trades hours for income, one must accumulate enough funds to buy dividend paying stocks. As a result, one sets aside some money to buy stock instead of using that money for other uses. So initially at least, we could say that one does trade hours for future dividend income. That much is clear. However, once that initial trade is made, the future benefits far out-weigh any initial cost.
Is It Possible?
Is it possible for one to get enough income not to need to work at a job? Yes, it is possible. It takes time. And it requires persistence and determination. It is a possible goal, it is something that one should actually reach for?
Tradeoffs
Let’s look at what it would take.
The yield from dividends of all the stocks in the S&P 500 bounces from 1.3% to about 2.0%
The yield from dividends of all the stocks in the Dow Jone Industrial Average is often between 1.8% to 3.0%
Of course, one need not one all the stock in a group. Some companies yield more than 3.0%, some less.
So for arguments sake, lets say you can achieve a 3% yield on your investments. If your annual expense are, for argument’s sake, $75,000, then you would need a portfolio of stock worth about $2,500,000. (3% of $2,500,000 is $75,000) That is a tall order if you have little to begin with.
If $2,500,00 sounds impossible, do not give up! For most of the world, $2,500,000 is impossible. It certainly was for me. But that is simply a number to deal with in the future, not now. NOW you just deal with getting started, getting off the ground, getting the ground-work set. NOW is the time to begin. And remeber, the sooner you start, the better off you will be.
Remember
Things to remember before giving up in despair:
[1] One does not need to start with $2,500,000. One can, and should, start small and start slowly, and get there over time. In fact, aside from winning to lottery or inheriting a boatload, most people start small, and grow their portfolios over time. I started small, and am still growing my portfolio.
[2] If you reinvest your dividends, then you do not need to come up with $2,500,000. Over time, your dividends will be purchasing additional shares, so the your actual amount of stock you need to buy to reach your goal is much less.
[3] Other events can accelerate the growth in your portfolio. For example, over time, some companies will spin off new companies, and you will get shares in companies you did not initially purchase, and many of those new companies will pay a dividend.
[4] Dividend increases will occur frequently and often automatically, which further reduces the amount of shares you need to initially purchase.
[5] Replacing all one’s income is not the only possible outcome. Replacing even a part of one’s income with dividends is incredibly liberating in its own right. (I can personally attest to that.) Or plan to keep the job, and bask in the increase of income that did not need additional labor.
[6] Don’t forget to factor in taxes. But, for better or worse, U.S. tax law taxes dividends at lower rate than income from labor. Go figure. But of course you also need to pay taxes on labor income.
Your “crossover point” is the point where your income from dividends covers your expenses, and your need for labor income declines. It is a fascinating goal.
How close you are to your “crossover point” ? You can let me know here.
The Erdapfel (German: lit. earth apple) is a terrestrial globe produced by Martin Behaim from 1490–1492. The Erdapfel is the oldest surviving terrestrial globe. It is constructed of a laminated linen ball in two halves, reinforced with wood and overlaid with a map painted by Georg Glockendon. The map was drawn on paper, which was pasted on a layer of parchment around the globe.
The Americas are not included, as Columbus returned to Spain no sooner than March 1493. (Creative Commons Attribution-Share Alike 2.0 Germany license.)
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