Saving money every month

How To Live Off Interest And Dividends

Nidhi Nangia
By Nidhi Nangia. Updated: June 3, 2018
How To Live Off Interest And Dividends

In previous eras, it wasn't uncommon for someone to work for one company their entire working life. When they retired, they received a pension with which they could meet their daily expenses. But today, competition leads people to work for several different companies and pension is something that not everyone receives. This leaves many people with the need to put money away or find their own way to create a pension. It is something the majority of us will find easier said than done. There are other ways of looking out for your financial future. With proper planning, it may be possible to live off the interest and dividends from your investments. This oneHOWTO article will try to find out how to live off interest and dividends.

  1. Invest in mutual funds with monthly income
  2. Invest directly in stock
  3. Buy certificates of deposit and money market accounts
  4. Deferred annuities
  5. Real estate
  6. Calculate the amount you would need
  7. Fight inflation
  8. Conclusion

Invest in mutual funds with monthly income

If you aim at living off interest and dividends, you need to invest in mutual funds that give you a steady income every month. There are several financial firms that offer this kind of income stream. While evaluating the available mutual funds in which you would like to invest your money, give attention to the ratio of bonds to stocks. There are many mutual funds that produce monthly income include both stocks and bonds, but if the percentage of stocks is high, then it may turn out to be riskier than bonds.

However, funds with high stock percentages also give you higher return as compared to funds with a high bond percentage. So, the funds you choose depend on how much risk you can take and how much money you want to earn from your investments. Another benefit of investing in mutual funds to generate income is that they give you an opportunity to earn more after inflation, as compared to a fixed income. Although they may not guarantee the future, they have comparatively better historical odds.

In saying this, investing in stocks and bonds will always carry an element of risk. You will also need to have capital to invest with in the first place.

Invest directly in stock

If you are comfortable investing your money into stocks directly rather than in mutual funds, then you can create a steady flow of income by investing your money in stocks that pay dividends. Many well-established companies trade on the NY Stock Exchange and pay dividends every quarter. Companies in the financial sector, energy sector and public utilities often give out strong dividends. If you choose the right stocks, you will not only get regular dividends, but also get significant increase in your stock price.

Buy certificates of deposit and money market accounts

Certificates of deposit and money market accounts are relatively safe investment options which you can use to create a monthly income. They are even insured by government authorities, which means that you will not lose your money even if the bank goes bankrupt. Please note that money market mutual funds are not insured by any such government authority.

Both money market accounts and certificates of deposit have a minimum amount to deposit. When you buy a certificate of deposit, you cannot cash it until its maturity date. So, it may turn out to be a wrong investment if you need immediate cash under any circumstances. The interest rates paid by these two options are also much less than stocks and mutual funds. So, if you are looking forward to living off your interest, then these may not be your primary choice.

How To Live Off Interest And Dividends - Buy certificates of deposit and money market accounts

Deferred annuities

Fixed deferred annuity is a kind of interest bearing account similar to a certificate of deposit. But unlike a certificate of deposit, it is not insured, but gives guaranteed interest and principal. Interest rates on these annuities are usually higher than Treasuries and certificates of deposit, thus provide a higher level of safety. There are different types of annuities, including the fixed deferred annuity and a variable immediate annuity. A variable immediate annuity uses up your principal amount and its interest rate decrease or increase in value.

Real estate

A good strategy could be to invest your extra money into real estate properties in different parts of your country. Over time, they will increase in value and will be worth much more than you paid for them. If your properties are not generating enough income even to cover their own taxes and maintenance charges, then your best solution would be to go for a 1031 tax free exchange. With this settlement, you sell your existing properties and buy the ones that can create income for you. If done properly, you will be able to sell out your properties without having to pay capital gains tax, which you would have to do if it were taken as profit. This gives you the money for your next real estate deal, allows you to delay capital gains tax payments and helps to preserve your money. With this kind of exchange, you will be able to collect much more rent on your properties to live off them. You may be interested in reading how to save up for a house.

Calculate the amount you would need

Start investing and saving from the beginning of your career. The sooner you start, you larger investment account you could create to provide an income in later years. Contributing to tax-advantage retirement plans is also a wise choice, such as an IRA, 401K account and others. You may also have other taxable investment accounts, like mutual funds or stock brokerage account.

It would be difficult to live off interest and dividends until your portfolio is big enough to generate the required amount of monthly income. This largely depends on your income requirements and rate of interest you may earn. Investing in a conservative government bond earns you merely 1-3%. Working with a high-yield stock or bond may yield as much as 8%. Calculate the amount you would require to live off comfortably and then start investing accordingly.

Fight inflation

One danger you will face while living off your interests and dividends is the increased living cost due to inflation. The monthly income that you need to live comfortably today will not remain the same after your retirement. Rates of things will increase and you would have a limited amount of income. So, if you want to live off your interest and dividends, then you need to make an investment strategy that allows more income to come in the future. One method is to reinvest some of your portfolio earnings. This will increase the size of your portfolio and you will end up receiving a higher amount of income in the future. Another way to grow your income is to make investments in stocks that steadily grow without risk.


There are numerous options to create a monthly stream of income, ranging from investing in mutual funds to buying real estate properties. Here we have enlisted some tried and tested strategies of investment that are sure to serve you best during your retirement years. If you have done your homework and concluded which investment options you need to choose, then you will want to use bonds, annuities, certificates of deposit and others to create your own investment portfolio.

Whatever your strategy is, instead of investing in a single type of option, your portfolio should have a spectrum of options in it. Use different types of options and securities that give you different interest rates, and that mature at different times of your life. Keep reinvesting the spare amount so that it can earn added interest for you and your income generation continues for longer. By doing this, you will have a happier life while living off interest and dividends.

However, if you think this article has made it seem easy, then you are mistaken. Investments are notoriously difficult to get right. Make an appointment with a trusted accountant or financial advisor and don't trust investment brokers when a deal sounds too good to be true. It probably isn't.

Of course, you can also save from your regular job by learning how to live better with less money.

If you want to read similar articles to How To Live Off Interest And Dividends, we recommend you visit our Personal Finance category.

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