Investing in stocks, including dividend-paying stocks, can be a fantastic investment strategy. Because of their low volatility, dividends appeal to investors looking for a low-risk, steady stream of passive income, such as folks nearing retirement and retirees, as well as investors looking for a regular cash flow.

In short, dividend stocks are some of the purest sources of passive income that can help investors accumulate high returns. But like any other investment, dividends can be risky if you don’t know what to avoid. So the question that’s on the mind of many investors and aspiring globetrotters is: can you live and travel on dividends alone?

Just picture yourself sipping cocktails on a tropical beach while your investment portfolio generates a steady stream of income. No more punching the clock to earn a meager salary and trading your very limited time on earth for money. Sounds like a dream “job” to me!

But the question remains: is living and traveling on dividends alone feasible or just a pipe dream? Read on because that is exactly what we explore in this blog post.

What Are Dividends and How Do They Work

Before we unpack the intricacies of living and traveling on dividends alone, let’s clarify what dividends are and how payments work.

Dividends are a form of earnings distribution that some companies choose to provide to their shareholders. Basically, when a company with shared capital earns profit, it can distribute a portion of the money back to its shareholders in the form of dividends. These periodic payments (often paid quarterly) are typically made in cash, but they can also be in the form of additional shares of stock.

So, how much money can you earn from dividend stocks, and more importantly, can you live off your dividends?

Unfortunately, it’s impossible to answer this question with a simple “yes” or “no” because how much you can earn from your dividends depends on multiple factors, including the dividend yield of your stocks.

The dividend yield is the percentage of the company’s share price that is paid out in dividends annually. Generally, it ranges from 2% to 6%, but it can vary significantly depending on the company and the market conditions. The smaller this percentage, the lower the dividend yield, and vice-versa.

Let’s say you have a $1 million portfolio with an average dividend yield of 3%. In this scenario, you would receive $30,000 in dividends annually or $2,500 per month. This amount may be sufficient for some people, while others may require more.

Can You Live and Travel on Dividends Alone?

To figure out how much dividend income you’ll need in order to live and travel for the unforeseen future, you first need to figure out how much money you’re likely to spend per year. Naturally, this will depend on several different factors, including your needs, lifestyle, and the cost of living in your part of the world and the parts you plan on visiting.

Personally, I like to factor in not only accommodation and transportation but also healthcare (because you never know when a medical emergency might hit, and it’s good to be prepared), taxes, food, and entertainment, plus other smaller costs that may incur while living and traveling abroad.

So, before you pack your things and go, I highly recommend considering the following factors to determine whether this lifestyle is truly within your reach. You don’t want to travel to another country and pinch pennies – it’s not fun and may not even be feasible in some scenarios!

Portfolio Size and Dividend Yield

The amount of money you can earn from your dividends depends on two things. One, the size of your investment portfolio, and two, the above mentioned dividend yield of your stocks.

The first thing to understand is that having a diversified portfolio with lower-yield stocks is usually better than having a small portfolio with high-yield stocks. This is because while highly attractive, high-yield dividends tend to be much riskier than low and medium-yield dividends, as they can sometimes signal that the company is in distress. So, if you have only a handful of high-yield stocks, you’re playing a risky game.

Of course, if possible, it’s best to have many high and medium-yield dividends. However, if you’re anything like most people and you must choose between having lots of lower-yield dividends and a small number of high-yield dividends, we recommend sticking to a stable but perhaps boring strategy: buying many diverse low- and medium-yield dividend stocks.

Generally speaking, investing in various sectors is best, and I personally recommend investing no more than 25% to 30% in any industry.

Costs of Living and Traveling

It’s no secret that living expenses can vary widely from one country to another, even from one city or region to another. When traveling, this is especially important to keep in mind because while some destinations will offer a lower cost of living, others, especially trendy tourist spots, can be extremely expensive.

To determine whether your dividend income can sustain your desired lifestyle, research and expense estimation are crucial. When I travel, I look for cost-effective accommodation (which is different from the lowest-cost accommodation!) and prioritize the overall richness of experience a country or a city has to offer over extravagance.

This allows me to stretch my budget significantly and visit even more places on my to-see bucket list. And to make sure I stay within my budget (and even save money when possible), I regularly track my dividend payments and make adjustments as needed.

Thankfully, technology has made managing our investments on the go easier than ever. Platforms like SoFi offer convenient investment solutions that allow you to monitor and diversify your portfolio, track dividend payments, set up recurring deposits on the most convenient schedule for you, and more.

Imagine sitting in a charming café in Paris, savoring a croissant and a cup of coffee, all while your investment through SoFi generates dividends that help cover your expenses. Not a big city lover? Replace Paris and croissants with Bali and lounging on its pristine beaches. Whatever rocks your boat!

Best of all, platforms like SoFi also help you keep all your finances in one place, which is invaluable when traveling.

Taxes

Benjamin Franklin said it best: “Nothing is certain except death and taxes.” Like other types of income, dividends are taxable and are subject to federal and state tax, whether you choose to reinvest the money or not.

This said, there are some exceptions. For example, if your taxable earnings are in one of the three lowest federal income tax brackets, you won’t owe a dividend tax. Likewise, dividends that are held in a tax-deferred account like a Roth IRA, 401(k), or a college fund are not taxable.

It’s also really important to remember that different countries have different tax laws and regulations regarding dividend income. For example, last year, when I traveled to Greece with my best friend, I found out that the tax for dividends there is 5%, which is pretty amazing. And when researching dividend taxes in different countries for this article, I discovered that Hong Kong does not tax capital gains at all.

But when all is said and then, the wisest thing to do is seek guidance from a tax professional in a country you plan to travel to or live in.

Final Thoughts

Living and traveling on dividends alone is entirely possible, but not without its risks. This type of lifestyle requires careful consideration and planning, and even then, there may be unforeseen risks and challenges you’ll need to overcome.

Still, if you conduct thorough research, invest carefully, and ensure you have a well-diversified portfolio, you can easily deal with any potential setback.

So, if you’re dreaming of exploring the world while generating a steady income stream from dividends, keep these things in mind. With careful planning and a solid financial strategy, you may just find yourself living your dream life!