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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
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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

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