Why living solely off stock dividends may not be sustainable

Living entirely off dividends is a dream scenario, isn’t it? Not having to work. Having a large enough portfolio of stocks that give enough dividends regularly for you to live off them for the rest of your life!

All this sounds good. But is it practical? It is achievable. But given the dividend yield of Indian companies, you might need a large portfolio of stocks.

How large should your portfolio be? Let’s see.

Having a large portfolio

Let’s suppose your regular monthly expenses are Rs 40,000 per month. In addition, you may need about Rs 1.5 lakh for irregular expenses during the year. So, you would need Rs 6.3 lakh in a year.

Since dividend income is now taxable in the hands of shareholders, let’s add a small tax buffer to this figure. Let’s say that to get a post-tax, in-hand dividend income of Rs 6.3 lakh, you need to get a pre-tax dividend of about Rs 7 lakh.

Now to generate Rs 7 lakh dividend income a year, how large should your portfolio of dividend-paying stocks be?

This would depend on the average dividend yield of your portfolio. If the portfolio manages a 4 percent dividend yield, you would need a corpus of Rs 1.75 crore. A portfolio of Rs 7 crore would be required if the dividend yield is only 1 percent.

Since dividend yield is the deciding factor here, let’s talk a bit about it in detail now.

Getting 1-2 percent is easily possible. Nifty 50 itself has a dividend yield of 1-2 percent depending on the market conditions. So, if you target a portfolio with a 1-2 percent dividend yield, you can simply invest in Nifty 50 stocks. In that case, you will need a portfolio of Rs 3.5-7 crore.

But that is not a small amount for 99 percent of Indians. So how can you reduce your portfolio requirement? By increasing the dividend yield. But that is easier said than done.

Dividends come from mature businesses

Most stocks that have high dividend yields belong to slow-growing mature businesses. And that can be a problem in the long run if you plan to depend on dividend income for years. The mature business may be disrupted, growth may slow down even further, etc. In such cases, the company’s ability to continue paying high dividends will be compromised. And then, you will be in trouble.

For many other companies, paying high dividends isn’t sustainable. They may be able to pay it for a year or two due to a corporate event or due to an uptick in the business cycle. But that can’t be continued forever. Once again, you will be in trouble if you make a portfolio of such stocks.

There is another option in the form of a passive index. The Nifty Dividend Opportunities 50 Index and the mutual funds based on the benchmark. As of now, this index has a yield of 3 percent and as per its mandate, it tries to maximize dividend yield. You can also check some of the dividend yield mutual funds available in India here. For a 3 percent dividend yield, you still need a portfolio of Rs 2.3 crore to take care of your regular expenses.

And your expenses won’t stay at Rs 7 lakh a year forever. They will increase due to inflation. What will happen then? It is assumed that over the years, the dividend paid by companies, if chosen well, too will increase with the company’s growth. So that will take care of inflation.

One thing to understand here is that dividend isn’t your right. It’s a company’s decision to pay or not. In bad years, a few companies in your portfolio might cut down dividends. When that happens, your dividend income will reduce, albeit temporarily. So you should be able to manage your finances with reduced dividend flow then.

So should you go for the idea of living off dividends in India?

Yes, you can if you are ready to ‘arrange’ for a portfolio of a few crores of rupees. But my suggestion would be to not depend on just dividends. Also, have debt instruments that can give higher interest income. A balanced portfolio of equity dividends and debt interest would work better than retiring on dividends alone.