How to live off Dividend Income in India (2021)?

How to earn regular income from high dividend stocks?

For many, this is a dream. To have a large enough portfolio of stocks and live happily ever after on dividend income. I love dividends too. In fact, it was dividends that put me on the path to become an investor eventually. In an old interview of mine (link), I had mentioned this:

“There were two things which got me interested in investing. First was when my father used to occasionally bring home a copy of The Economic Times. He had his money invested in shares of a few MNCs and would check their prices every few months. My father told me that I could buy pieces (shares) of businesses that featured in the list of stock quotes provided in the newspapers. Being a kid, I felt excited to be able to buy part-ownerships in companies without having to set up any infrastructure or factories! The second thing that got me excited was the constant flow of dividend cheques, which used to arrive in our mailboxes from these MNCs. I just loved the concept that you are being paid to hold pieces of paper (physical shares). It was the concept that I am still happy to quote every now and then. You should not work for money. Rather the money should work for you. I really liked the system of getting a regular flow of passive income (cash flow) without going to work for somebody else.

Over the course of time, I eventually moved away from focusing solely on dividend investing. But it’s still a reasonably good way to look at things.

So…

How large a portfolio do you need to live off Dividend Income in India?

Or 

How much Capital is required to live off dividend income in India?

Or

Is it possible to really be living off dividend and interest income in India?

Let’s try to answer these simple questions.

Suppose you have monthly expenses of Rs 50,000 per month (or Rs 6 lakh per year). You need to put in place a good portfolio of dividend-paying stocks so that you can get an annual dividend income of more than Rs 6 lakh per year.

Note – This is just a simple illustration of how this can be done. Though there are many other nuisances related to dividend reinvestments, taxation of dividend income, etc. But for simplicity, let’s ignore these for now.

So how much capital do we need to generate Rs 6 lakh per annum dividend income?

If you invest in the 50 companies of the popular index Nifty50, then you will get a dividend yield of 1-2% depending on what market conditions are (in Bear markets, your yield will increase and in Bull markets, it will decrease)

Note – Check the latest dividend yield of Nifty50 on the NSE site here.

So for a portfolio of stocks that has a 1% dividend yield, you need a portfolio of Rs 6 crore to generate an annual dividend income of Rs 6 lakh. And for a portfolio of stocks that has a 2% dividend yield, you need a portfolio of Rs 3 crore to generate an annual dividend income of Rs 6 lakh. So that is the capital required to live off dividend income at 1% and 2% dividend yield.

As you might have noticed, the higher the dividend yield, the lower will be the corpus requirement. So how do we find stocks with high dividend yields? You can pick ones yourself by looking at a list of high dividend-paying stocks. But there is a risk. Many times, high dividend payers are slow-growing businesses. And in such cases, the high dividend can be a double-edged sword. It will provide you with dividends that you need, but it might also mean a lack of returns, which will eventually come around to hurt you in long term.

Also, high dividend yield may not be sustainable in the long run and hence, these aren’t ideal for long-term dividend investing.

But there is another option.

There is an index dedicated to stocks that are known to a reliable source of high dividends. This index is one of the many different Nifty indexes and is called the – NIFTY Dividend Opportunities 50 Index. You read more about it here and here. This NIFTY Dividend Opportunities 50 Index is designed to provide investors with income requirements with exposure to high dividend-yielding companies.

The methodology used for the selection of stocks in the index uses yield-driven selection criteria that aim to maximize dividend yield while providing stability and tradability. Have a look at the actual criteria below:

Methodology Nifty Dividend Opportunity Index

At the time of writing this post (mid-June 2021), the dividend yield of the NIFTY Dividend Opportunities 50 Index is around 3.0% to 3.25%

Dividend Yield Nifty Dividend Opportunity Index

Image source – link 

So if we assume that in general, the NIFTY Dividend Opportunities 50 Index will have a dividend yield of 3%, then you would need a portfolio of Rs 2 crore to generate an annual dividend income of Rs 6 lakh.

And are there any Best Dividend Paying Mutual Funds and ETFs that track the NIFTY Dividend Opportunities 50 Index?

Yes, there are quite a few Dividend Yield mutual funds in India:

  • ABSL Dividend Yield Fund
  • HDFC Dividend Yield Fund
  • ICICI Prudential Dividend Yield Equity Fund
  • IDBI Dividend Yield Fund
  • Principal Dividend Yield Fund
  • Tata Dividend Yield Fund
  • Templeton India Equity Income Fund
  • UTI-Dividend Yield Fund
  • Nippon India ETF Dividend Opportunities

Though these dividend yield funds can invest across market capitalization and sectors, these funds generally tend to invest primarily in large-cap dividend-paying stocks (mostly above 50-60% large-cap bias) that are mature businesses with healthy and predictable cash flows.

These funds might be a good option for investors looking for dividend income. But for those who don’t have any dividend requirement, I feel this category of dividend yield funds can be simply ignored. Such investors are better served by diversified equity fund categories like large-cap funds, index funds, Flexi-cap funds, large & mid-cap funds, etc.

If you want to pick the right mutual funds for your portfolio, then you can consider Stable Model Mutual Funds. A premium subscription service that provides you with instant access to a ready-to-use list of investment-worthy Equity& Debt Mutual Funds. The fund recommendations are monitored and reviewed on an ongoing basis (and you are updated once every quarter), so you can rest assured that you can continue to remain invested in good funds. If you wish to pick the right funds for your MF portfolio, then you can SUBSCRIBE Here.

But don’t confuse yourself with the Dividend option of Mutual Funds (now renamed to ‘Income Distribution cum Capital Withdrawal’ option). This option is available in non-dividend focused funds as well and hence, may or may not be the best option for generating dividend income

So with reference to the dividend yield and the required portfolio to generate Rs 50,000 per month in dividend income, then here is a summary:

  • For a portfolio with a dividend yield of 1%, you need Rs 6 crore portfolio to generate an annual dividend income of Rs 6 lakh.
  • For a portfolio with a dividend yield of 2%, you need Rs 3 crore portfolio to generate an annual dividend income of Rs 6 lakh.
  • For a portfolio with a dividend yield of 3%, you need Rs 2 crore portfolio to generate an annual dividend income of Rs 6 lakh.

Note – Talking of crores of Rupees, here is How to build a Retirement Corpus of Rs 5 crore?

That was a kind of Living off dividends calculator for you. And that is your answer to – How much I need to invest to get Rs 50,000 a month in dividends?

So in a way, if you really want to live off dividends in India, you do need a multi-crore portfolio of stocks. And if your annual expense is low, the corpus you need for the dividend portfolio will be lower and vice versa.

As I mentioned earlier, the above is a simple calculation to illustrate the capital requirement to live off dividend income. In reality, there are taxes on dividend income too. After the abolition of the Dividend Distribution Tax (DDT), dividend income is now taxable in the hands of the recipient shareholders. So you need to adjust the post-tax dividend yield accordingly. It will lead to an increase in the portfolio size required to get the same amount of dividend in-hand after taxes.

What about inflation and the annual increase of your Rs 6 lakh expense (as mentioned in the earlier example)? The hope is that with the earnings growth of the dividend-paying companies in your portfolio, the dividend too will increase over the years and take care of inflation. But that’s a hope and not a strategy. Remember that companies can cut dividends too. So you should be prepared to live with temporary dividend cuts as well if you are focused on a dividend portfolio alone.

So what can you do to de-risk your plan to live on dividend income alone?

Save more than what is required. Don’t just rely on companies increasing dividends in the future. Keep a cap on your spendings. Don’t just put money in stocks to earn dividends. Also, keep money in debt instruments that give 6-8% interest (or capital gains). A judicious mix of dividend-paying stock portfolio and debt instruments can be a better bet than just depending on dividends for the rest of your life.

Many people have this dream to Invest, Live off dividends and never work again. Kind of planning early retirement. I have a friend who is currently living off dividends at 40. So his motto is ‘Dividend for living’. But as I have highlighted earlier in this post, you need to be careful if you want to Plan your Retirement with Dividends as the income source.

Though it doesn’t get much traction in India, dividend investing remains a very popular investment strategy outside India and primarily in developed countries.

Before I close, I just remember a quote that I have loved for very long – “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.” It was said by the legendary and one of the wealthiest person ever, John D. Rockefeller. He was one hell of a guy. You should read about him (wiki link and great docu-series here).

So depending on the age you wish to achieve your dividend nirvana, do try to answer How can I retire at 40 and live off dividends? Or How can I retire at 45 and live off dividends? Or How can I retire at 50 and live off dividends? Or How can I retire at 55 and live off dividends? Or How can I retire at 60 and live off dividends? I am sure if you spend some time on it, you will know exactly how much money to live off dividends?

Some conservative and risk-averse people like the safety of fixed deposits. So Fixed deposit too can be one source of regular monthly income and to live off on fixed deposits in India. If you want to know how much monthly interest you can get from your bank fixed deposits, then you can read – Monthly Interest on Rs 1 crore Fixed Deposit OR Monthly Interest on Rs 2 crore Fixed Deposit OR Monthly Interest on Rs 5 crore Fixed Deposit OR Monthly Interest on Rs 50 lakh Fixed Deposit in India in 2021-22.

So I hope you now know How much you need to live off dividends in India? and also How much money do you need to invest in stocks to live off dividends in India?

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