dividend yield... is this calculation correct?

  • Last Updated:
  • Sep 25th, 2020 7:55 am
Sr. Member
May 2, 2014
505 posts

dividend yield... is this calculation correct?

using an online dividend calculator, i entered the following values:
starting principle: 500,000
annual contribution: 25,000
dividend yield: 5%
years invested: 10

the results indicated that between year 1 and year 10, my annual dividend payout would go from 25k to 68k. how accurate is this assumption? this seems like a pretty good deal, especially for those who currently let their cash appreciate under their mattress - which makes me think, what is the catch? i almost feel like selling my home just to get a bigger dividend payout

is this typical for the stable, dividend paying stocks, like banks, utilities, etc? is this a good type of passive income investing?
3 replies
Deal Expert
Aug 2, 2001
18501 posts
It makes sense that your annual anticipated payout goes up in that scenario, you are contributing $250,000 over 10 years, plus all of your dividend is being reinvested.

I have not run your calculations however using simple math I can see that a $500,000 investment, with a $25,000 annual contribution AND 5% dividend yield being reinvested should have you ending up with $1,000,000+ in value.

That said a couple drawbacks:
a) If done outside a RRSP / TFSA you need to pay taxes on dividends still
b) Dividend paying stocks generally go up less in price compared to stocks that pay a lower / no dividend and focus on growth. Remember the money they give you as a dividend could have been reinvested in the company to grow further.

There is no right or wrong answer, just make sure you know both sides. Historically the Big 5 Canadian banks have been a safe bet. Small banks (Laurentian) have not been as good. That is no guarantee of future performance.
Deal Addict
Sep 2, 2009
2826 posts
The catch is nothing is guaranteed to be linear. Companies can increase, cut, or suspend their dividends. The 500k can also drop to 250k while collecting dividends.

An average return of 5 percent per year in dividends can still mean large fluctuations in capital.

One has to be able to stomach the volatility without flinching. March 2020 is the most recent example where markets crashed... they have also recovered. Many people get caught at minus 40 percent not being able to stomach the temporary loss when "only getting 5 percent per year".

Long-term is a win in the majority of cases but you have to know yourself in the short-term in order to make it to the long-term.