How Long Will It Take to Get to $30,000 of Dividend Income?

Summary

  • How much do North Americans save every year? How much do you save and invest every year?
  • How many years will it take for you to get to $30,000 of dividend income?
  • The size of your current portfolio is, how much you contribute monthly, how much dividends you reinvest, and how much your income tax rate is will affect how long it takes.

How Much Does North Americans Save?

The latest data we found (from Jan. 2018) indicates the average Canadian earns CAD$55,806 in annual income, but the household savings rate was measly 1.1% in Q1 2019. That equates to tiny monthly savings of CAD$51.

Q4 2018 data indicates that the median annual income for an American was ~US$46,800, while the U.S. savings rate was recently 6-8% (US$234-312 per month), which is much better than in Canada.

Saving is a habit. The more you save now and invest it properly, the less you have to save for the future. 

It’s not uncommon to save from 10% to 50% of one’s income. If the average Canadian or American can save just 15% of their income, that’d imply an amount of CAD$8,370 or US$7,020 that can be invested every year (or about CAD$700 or US$600 a month, respectively).

a creative photo of finance with a focus on funding, saving, and benefit
Image by rawpixel from Pixabay

Since you have money to invest in stocks, obviously, you’re in much better financial shape than the average North American. 

In the scenarios below, we assume you need $30,000 of dividend income (complemented by other income such as job’s income, rental income, or pension income) to live comfortably. Regardless of how much dividend income you need, the principles discussed will still be relevant.

Our other assumptions include a safe and conservative portfolio yield of 3% and a very achievable 10% rate of return on investments.

Scenario 1a: Starting with a $120,000 Portfolio

Assumptions:

  • You currently have a portfolio value of $120,000
  • Annual growth of the portfolio is 10%, compounded annually
  • Monthly contribution: $0
  • Portfolio yields: 3%
  • Tax rate on dividends: 5.5%

Source: Author

Based on the assumptions above, it’ll take 23 years to earn $30,000 of annual dividend income. Notably, if we reinvested all the dividends received (after taxes), we would cut down 7 years and only take 16 years to earn $30,000 of dividend income. 

Everyone’s tax rate is different. In our case, the Canadian province we reside in implies the highest tax bracket of 5.5% in 2019 if our only income were eligible Canadian dividends.

Obviously, if the tax rate were much higher, the dividends (after taxes) we get to invest will be so much lower, and it’ll take longer to achieve our dividend income goal. We just used the 5.5% as a conservative estimate, as the effective tax rate should be lower because the taxes for lower brackets are lower. 

Annual Dividend based on 10% portfolio growth rate that assumes corresponding dividend growth:

Source: Author

Portfolio value with no dividend reinvested vs. Portfolio value with dividends reinvested

Source: Author

Scenario 1b: Starting with a $220,000 Portfolio

Assumptions:

  • You currently have a portfolio value of $220,000
  • Annual growth of the portfolio is 10%, compounded annually
  • Monthly contribution: $0
  • Portfolio yields: 3%
  • Tax rate on dividends: 5.5%

Source: Author

Scenario 1b is used to show that the greater your current portfolio value is, the sooner you can achieve your dividend income goal. In this case, if your portfolio value were $220,000 today, based on the same inputs as Scenario 1a, it’d only take 16 years to achieve $30,000 of dividend income per year; 12 years if dividends (after taxes) were reinvested. 

Scenario 2a: $500 of contributions a month

Assumptions:

  • You currently have a portfolio value of $120,000
  • Annual growth of the portfolio is 10%, compounded annually
  • Monthly contribution:$500
  • Portfolio yields: 3%
  • Tax rate on dividends: 5.5%

Source: Author

If you contribute $500 per month to your portfolio, you’ll cut down 4 years and reach $30,000 of annual dividend income in 19 years. With dividends reinvested (after taxes), you’ll reach your dividend income goal in 14 years.

Scenario 2b: $1,000 of contributions a month

Assumptions:

  • You currently have a portfolio value of $120,000
  • Annual growth of the portfolio is 10%, compounded annually
  • Monthly contribution: $1,000
  • Portfolio yields: 3%
  • Tax rate on dividends: 5.5%

Source: Author

Obviously, the more you save early on, the sooner your money starts working for you

If you double your monthly contributions from $500 to $1,000, you’ll get to a $1,000,000 portfolio and get $30,000 of annual dividend income in 16 years. You can shorten the timeframe to 12 years if you reinvest your dividends. 

The Limitations of the above Projections

The scenarios count on the organic growth rate of 10% to come true and that contributions & dividends reinvested occur within the year. So, you’re pretty much staying the course and fully-invested at all times.

Some investors may be thinking that, in August 2019, late in the bull market, that if you’re patient, you will be able to scoop up quality stocks at cheaper prices and at much lower risk when a correction occurs.

The scenarios are smooth sailing returns (see charts in Scenario 1a) but in reality, returns are lumpy.

What’s Your Income Tax Rate?

Everyone’s tax situation is different. Your tax rate is going to change depending on many factors, including:

  • your income composition (what types of income you earn)
  • how much you’re earning

And in general, your tax rate will go up as you earn more unless you contribute to retirement accounts or earn money in American’s Roth IRAs that are similar to Canadian’s Tax-Free Savings Account (“TFSA”).

The goal is to limit your income taxes for life, which requires tax planning. So, please consult your accountant or a tax professional for your own unique situations!

The less money that goes to the taxman, the more money you have for you, your family, and your investing!

We’re more familiar with the income tax rules in Canada. So, we’ll briefly comment on that.

In Canada, both the federal and provincial government collect income taxes. In the province we reside in, eligible Canadian dividends are taxed at the lowest rate, followed by capital gains, then non-eligible Canadian dividends, and other income.

A job’s income and foreign dividends, including U.S. dividends, are considered other income and have the highest tax rate. Some Canadians invest high-yield U.S. dividend stocks in their retirement accounts (“RRSPs”) to avoid the 15% foreign withholding tax and also defer taxation. 

Moreover, there are tax brackets that are different depending on which province you reside in. Essentially, there are different tax levels. 

For example, for 2019, if you reside in Ontario and earn the average annual income of CAD$55,806, the first three brackets will apply to you. If the first CAD$43,906 you earn is your job’s income, you’ll be taxed 20.05% (i.e., CAD$8803.15 for that amount). The rest of your income will be taxed in the subsequent two brackets and the rate used will depend on what type of income it is.

Combined Federal and Ontario Tax Brackets and Tax Rates:

Source: TaxTips

What if a Market Meltdown Occurs?

If a market crash were to happen tomorrow, it wouldn’t benefit the money that you have already invested today. However, you will receive HUGE benefits by generating outsized returns (and income) from any contributions or dividends that you reinvest at cheaper valuations. That is, you’ll generate greater than the 10% rate of return target and supercharge your long-term portfolio growth and dividend growth.

If you have a decent-sized portfolio that generates hefty dividends, you’ll be able to benefit from reinvesting the dividends. The dividend strategy is a defensive one — receiving hefty dividends periodically allows us to have more cash to work with at any time versus growth stocks that deliver lumpier returns (e.g. Brookfield Asset Management (TSX:BAM.A)(NYSE:BAM) and Tencent (TCEHY)).

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Disclosure: As of writing, we’re long TSX:BAM.A and TCEHY.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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