How much do you need to invest to give up work and live only off dividend income?

The ASX share market could be the ticket for creating a lifetime of passive income. But how much is needed to give up work?

Certainly, I don’t think people need to be afraid of buying shares. Yes, share prices move up and down. But, that’s simply a reflection of how much the market is willing to pay for shares on any particular day.

Think of the share market as the business market. Some businesses have been around for decades, and I don’t think they’re suddenly going to disappear.

Companies have the ability to pay out a portion of their profit – say 50% — and invest the other 50% into growth for the business and perhaps improve its balance sheet position. These are the sorts of businesses I like to own.

Some businesses are building a long record of annual dividend growth such as Brickworks Limited (ASX: BKW), Sonic Healthcare Ltd (ASX: SHL), and Coles Group Ltd (ASX: COL).

But, the question is – how much do we need to have invested in ASX dividend shares to live off the passive income?

Dividend requirements

Well, how long is a piece of string?

Everyone has different financial requirements. Someone living in Sydney is likely to have greater financial needs than someone who lives in a regional town.

If a household wants to go on holiday to Europe or America every three months then this will probably cost a lot more than someone just wanting to live a more simple life.

I think it’s a good idea to check out Motley Fool’s guide on how much is needed to retire in Australia.

In that guide, it points out that according to the Association of Superannuation Funds of Australia’s Retirement Standard, to have a ‘comfortable’ retirement, a couple who own their own home will need an income of about $67,000. A single person will need an annual income of more than $47,000.

But, someone else may be targeting annual dividends of $100,000, or even more.

How big does the portfolio need to be?

Investors who want to build their large passive income stream need to build up to that amount.

If we were aiming for a round figure of $50,000 per year, and the portfolio had a dividend yield of 5%, then investors would need a $1 million portfolio.

If the dividend requirements were doubled to $100,000, with the same dividend yield, then the portfolio would need to be (at least) $2 million. I say “at least” because we haven’t factored in any tax payments. Tax may be a factor.

If you own a $2 million ASX dividend share portfolio as an individual, it’s likely you’ll need to pay tax.

It also depends on the dividend yield. For example, a $1 million portfolio with a 6% dividend yield makes annual dividends of $60,000.

Different businesses have different yields. Higher yields can come at a higher risk of a cut but yields around those levels are certainly achievable.

For example, according to Commsec, in FY23, Wesfarmers Ltd (ASX: WES) shares could pay a grossed-up dividend yield of 5.2%, Telstra Group Ltd (ASX: TLS) shares might pay a grossed-up dividend yield of 5.7%, and Charter Hall Long WALE REIT (ASX: CLW) has an estimated distribution yield of 6.7%.

Foolish takeaway

I suggest that investors may need to build a portfolio of at least $1 million to achieve dividends for life. But, it’s important to remember that investors don’t need to build their wealth with just ASX dividend shares – we can use ASX growth shares to do a lot of the heavy lifting to build towards a goal.

The post How much do you need to invest to give up work and live only off dividend income? appeared first on The Motley Fool Australia.

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More reading

• Are these ASX 200 dividend shares must-buys for passive income investors?
• Why Brickworks, Energy Resources, Magellan, and Pilbara Minerals shares are dropping today
• How I’d invest $5,000 today for long-term passive income
• 5 things to watch on the ASX 200 on Thursday
• If a stock market crash is coming, I want to own these 2 ASX shares

Motley Fool contributor Tristan Harrison has positions in Brickworks. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Brickworks. The Motley Fool Australia has positions in and has recommended Brickworks, Coles Group, Telstra Group, and Wesfarmers. The Motley Fool Australia has recommended Sonic Healthcare. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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