Dividend investing is a popular strategy for a number of reasons. For one, dividend-paying stocks have traditionally been considered less risky than the average stock, although they often appreciate less in price for the same reason. For buy and hold investors, dividend stocks offer an incentive to hang on to stocks for the long haul — seeing your cash balance grow every quarter or month is a compelling form of positive feedback. That income also allows you to reinvest however you want or even use the money to take care of living expenses.
The dream, of course, is to have enough dividend income coming in that you can replace your income, allowing you to work less or even stop working completely. Early retirement sounds amazing, but how much would you need to have invested to get there?
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The Cost of Living
According to data from the U.S. Bureau of Labor Statistics, the average expenditure for one person comes in at $3,693 monthly or $44,312 annually. Obviously this is just an average and could be vastly different for each individual based on their location and lifestyle, but it gives us a baseline to understand how much dividend income is needed to stop working completely.
Once we know the dollar amount we need to replace, we can figure out how much needs to be invested in dividend stocks to provide that income. Using an assumption for dividend yield — the annual amount paid out by the stock divided by its market price — will let us screen out the stocks that don’t pay enough.
While there are stocks out there that have a dividend yield in excess of 10%, those are pretty rare and tend to be harder for a company to maintain over the long term. For the purposes of risk mitigation, let’s assume a yield of around 6 to 10%, which should increase the likelihood of our dividend income being sustainable. A minimum yield of 6% would mean at least $750,000 invested is required to clear $44,312 or more per year — actually even 5.9% would be just enough. Fortunately there are a number of quality stocks that meet the required yield, with data obtained from Google Finance.
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Verizon (VZ)
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Dividend yield: 6.6%
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Annual payment: $49,500
Originally known as Bell Atlantic, one of the “Baby Bells” created by the breakup of AT&T in 1984, telecommunications giant Verizon provides wireless services to businesses, governments and individual consumers worldwide.
AT&T (T)
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Dividend yield: 6.3%
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Annual payment: $47,250
Despite the aforementioned breakup AT&T remains a monster in the telecom industry, offering wireless voice and data services, sells handsets and other wireless devices, provides networking and cloud solutions and houses customer equipment for governments and businesses.
Altria (MO)
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Dividend yield: 8.63%
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Annual payment: $57,750
Formerly known as Phillip Morris, this vice stock manufactures and sells smoking and smokeless tobacco in the U.S. under a number of brands such as Marlboro and Skoal. If you don’t mind owning a tobacco stock Altria offers an outstanding yield for a product that has stayed in demand despite the obvious health risks.
Realty Income Corp (O)
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Dividend yield: 5.96%
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Annual payment: $44,700
One of the best-known monthly dividend stocks, Realty Income is a Dividend Aristocrat, meaning it has consistently raised its dividend every year for at least 25 consecutive years. As a real estate investment trust (REIT), Realty Income pays its dividend out of the cash flow generated by rent for the over 15,000 properties it owns, most of them commercial real estate.
Apple Hospitality (APLE)
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Dividend yield: 6.76%
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Annual payment: $50,700
A different Apple than most investors are used to hearing about, Apple Hospitality is another REIT — this type of company is required to pay out most of its income as dividends, so REITs are often among the highest-yielding stocks. Apple Hospitality functions in much the same way Realty Income does but specializes in hotel real estate.
AGNC Investment Corp (AGNC)
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Dividend yield: 15.02%
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Annual payment: $112,650
Yet another REIT, AGNC specializes in mortgage pass-through securities and collateralized mortgage obligations. While that sounds risky if you lived through the financial crisis of 2007, these days such securities are much more heavily regulated. Having said that, they are still sensitive to the housing market, so their eye-popping yield of 15% could come down if the market goes south.
Kinder Morgan (KMI)
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Dividend yield: 6.05%
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Annual payment: $45,375
Kinder Morgan is an energy infrastructure company, which is a fancier way of saying that they own and operate fossil fuel pipelines. In Kinder Morgan’s case those pipelines are mostly for natural gas. Most big energy companies pay some kind of dividend.
Whirlpool
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Dividend yield: 7.77%
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Annual payment: $57,750
Literally a household name, Whirlpool manufactures and markets home appliances like refrigerators, laundry machines, dishwashers and more all over the world. As a very established company, they aren’t going to grow much, but that means significantly higher dividend payments than a faster-growing company could afford.
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This article originally appeared on GOBankingRates.com: If Millennials Invested $750K in These Stocks, They Could Stop Working Forever
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