Example of Dividend-Paying Stocks and Income

Just last week I was talking to a friend about how awesome it would be to launch a company in your 20s and sell it for a few million dollars by the time you hit your 30s. The main reason I think this would be a great setup is not only the fact that I would have a few million dollars in the bank, but also the potential to live off of dividends and pursue whatever I want in my free time. If I did have enough dividend income to live off of I would most likely be launching companies and travelling the world versus working at a 9-5 job at a large corporation.

To illustrate an example of the power of dividends I will use Target (TGT) as an example:

In the above screenshot from Google Finance (my favorite website to research and track stocks) we can see that the last four quarters Target has paid a dividend of $0.36. If we look at it on a yearly basis Target pays $1.44 in dividends per share. Dividend Yield is therefore 1.98%. While this may seem low, remember that companies usually take a balanced approach to dividends. They arent paying out all their earnings in dividends so investors should expect the additional earnings to be reinvested and be reflected in a higher stock price over time.

Lets say you need $70,000 in income each year to live comfortably. How many shares of Target stock would you need to own to satisfy this income solely through dividends? Lets plug in the numbers:

To have $70,000 of income solely through dividends from Target stock, you would need to invest just over $3.5 million dollars. While this is a lot of money, you have to keep in mind that this is one example. Lets run the numbers for another stock, Verizon (VZ):

As you can see, the amount you need to invest will vary quite a bit depending on the dividend yield of the given company.

What I think is encouraging, though, is that if you had $1.7 million to invest you could realistically not have to work a 9-5 job and can instead live off of the dividend income alone.

If you would like to mess around with the Dividend Calculator I used above, feel free to download it here .

Pros and Cons of Dividend-Yielding Stocks for Wealth Creation

As with everything, there are pros and cons to using dividends as an income-producing asset and ultimately as a wealth creator.

Dividend yields can be relatively low, and if a dividend yield for a given stock is really high it means they are not reinvesting those earnings back into their operations. This can have a negative impact on their stock price long-term.

Another important aspect of dividend income is that it can take a large investment to get any sort of material income from dividend-paying stocks. Perhaps you do have a few million to invest; most people do not. Dividends arent the quickest way to building wealth, but if you continue to invest over time you may be able to eventually live off of dividend income. Purchasing more stocks with the dividends you receive can allow you to continue to build your stock portfolio and amount of income you receive from dividends. With that being said, if you are starting at ground zero like most in their 20s it may be a better option to build a business that you can later sell.

Nevertheless, I believe that realizing that you could potentially replace your salary through dividend income should be a great motivator for working hard to build wealth.

What do you think about dividend income? Is living off of dividend income a long-term goal of yours? Why or why not?