One division gives the capital, a second turns it into years of saving, and the yield you assume moves both more than anything else.
Divide the income you want by the dividend yield. One thousand a month is 12,000 a year, so at an illustrative yield of 3 per cent you need 400,000 invested; at 2 per cent you need 600,000, and at 4 per cent 300,000. Investing 1,000 a month at an illustrative 7 per cent total return, a 400,000 portfolio takes about 17.2 years to build.
Worked in full in Stock Market Investing for Beginners by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
| Input | Value |
|---|---|
| Income wanted, a month | 1,000 |
| Income wanted, a year | 12,000 |
| Dividend yield, base case | 3.0% |
| Tax on dividends, where it applies | 15% |
| Total return while building (price plus reinvested dividends) | 7.0% |
| Monthly investment while building | 1,000 |
The yield is the dividend paid over a year divided by the price. It is the single input that decides the answer, and it varies widely between a broad index fund and a fund built to pay income. The figures here are illustrative; check the yield of the fund you actually hold on its factsheet.
Capital needed = annual income ÷ dividend yield
12,000 ÷ 0.03 = 400,000
Excel, with the monthly income in B1 and the yield in B2: =B1*12/B2
Check it the other way round: 400,000 × 3 per cent is 12,000 a year, which is 1,000 a month. The division by the yield is the same as multiplying the income by a multiple: 33.33 times at 3 per cent, 50.00 times at 2 per cent, 25.00 times at 4 per cent. Each point of yield you give up raises the multiple sharply, because the yield sits under the line.
If dividends are taxed at 15 per cent and you want 1,000 a month to spend, the portfolio must pay more than 12,000 before tax:
Gross dividends needed = net income ÷ (1 − tax rate) = 12,000 ÷ 0.85 = 14,117.65
Capital = 14,117.65 ÷ 0.03 = 470,588
Tax adds 70,588 to the target in the base case. Inside a tax-sheltered account the line drops out; whether yours is sheltered, and at what rate dividends are taxed where you live, are questions for the rules of your own country.
While you are building the portfolio, reinvest the dividends and count total return, not yield. Solve the future value of a monthly saving for the number of months:
n = ln(1 + target × i ÷ payment) ÷ ln(1 + i), with i = 7% ÷ 12 = 0.005833
400,000 × 0.005833 ÷ 1,000 = 2.3333; ln(3.3333) = 1.2040; ln(1.005833) = 0.005816
n = 1.2040 ÷ 0.005816 = 207.0 months, or 17.25 years
Excel: =NPER(7%/12, -1000, 0, 400000)
Of the 400,000, 206,997 is money you paid in and 193,003 is growth. The same arithmetic, run for a round million, is in how much to invest a month to reach 1 million.
| Dividend yield | Capital, before tax | Capital, 15% tax | Years at 1,000 a month | Years at 2,000 a month |
|---|---|---|---|---|
| 1.5% | 800,000 | 941,176 | n/a | n/a |
| 2.0% | 600,000 | 705,882 | 21.5 | 14.5 |
| 3.0% | 400,000 | 470,588 | 17.2 | 11.1 |
| 4.0% | 300,000 | 352,941 | 14.5 | 9.0 |
| 5.0% | 240,000 | 282,353 | n/a | n/a |
At 500 a month the 400,000 takes 24.9 years and the 600,000 takes 29.8. The table makes the trade plain: a higher yield lowers the target, but it does not make the money grow faster while you save. The years column is driven by the 7 per cent total return, whatever share of it arrives as dividends.
When a company pays a dividend, its share price falls by roughly the amount paid. The dividend is part of the return, not something on top of it, which is why reinvested dividends are counted inside total return rather than beside it. That has a consequence for the target.
Someone who insists on living only off dividends at a 2 per cent yield needs 600,000. Someone who takes 4 per cent a year from total return, dividends plus the occasional sale of units, needs 300,000 for the same 12,000, as worked in how much you need with the 4 per cent rule. The dividend-only rule costs 2.00 times the capital. At a 1.5 per cent yield, 800,000, it costs 2.67 times.
The opposite error is to chase the highest yield on offer to shrink the target. A yield well above the market's often means a price that has fallen, a payout the company cannot sustain, or an income fund that pays out part of your capital. A smaller target built on a dividend that is later cut is not a smaller target.
Inflation works quietly on any fixed income. A flat 12,000 a year is worth 9,374 in today's money after ten years at 2.5 per cent inflation, and 7,323 after twenty. If dividends grow at 5 per cent a year the same 12,000 becomes 19,547 in year ten, 15,270 in today's money. Growth in the dividend matters as much as its starting level.
Capital = 12,000 ÷ yield: 400,000 at 3 per cent, 600,000 at 2, 300,000 at 4, and 470,588 at 3 per cent if a 15 per cent tax applies. At 1,000 a month and an illustrative 7 per cent, the base case is 17.2 years away. Treat the yield as an input you check, not one you choose for its convenience, and compare the dividend-only plan with a total-return withdrawal before deciding which target to save for. To try your own figures for monthly saving, fees and inflation, use the free workbook for this book. All figures are illustrative and none is advice.
Half as much as for 1,000: 6,000 a year divided by the yield. At an illustrative 3 per cent yield that is 200,000, at 2 per cent 300,000 and at 4 per cent 150,000. Before tax. If dividends are taxed at 15 per cent you need 7,058.82 of gross dividends a year, so 235,294 at 3 per cent.
Arithmetically, total return is what pays you; a dividend is part of the return, not an addition to it. At a 2 per cent yield, living only off dividends needs 600,000 for 12,000 a year, while a 4 per cent withdrawal of dividends and sold units together needs 300,000. Insisting on dividends alone doubles the capital in that case.
At an illustrative 7 per cent total return, compounded monthly, investing 1,000 a month reaches the 400,000 needed at a 3 per cent yield in about 17.2 years, of which 206,997 is your own money. At 2,000 a month it takes 11.1 years; at 500 a month, 24.9 years.
This article is one calculation from Stock Market Investing for Beginners. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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