I know very little about the stock market other than that people buy stocks and those stocks generate interest. This interest is usually re-invested in order to purchase more stocks, which generate more interest, etc.
But this interest can also be deposited into the owner’s bank account, and people that own a lot of stocks are able to live solely off of the interest generated by their stock portfolio.
So how much stock ownership, at an average interest rate, is needed to generate a modest income - 30 or 40K a year? Why don’t more people just snowball their money into buying stocks for a decade or so and then live this way?
Stocks don’t pay interest, they pay dividends. The average dividend yield of the S&P 500 is 1.58%, so you’d need between $1.9 million and $2.4 million worth of stock to generate $30k to $40k per year (before taxes) in dividends. This is why most people have to work for a living.
Stocks don’t generate interest. Many but not all pay dividends but this varies greatly by the type of stock. It generally isn’t all that much. To get real money out of stocks, you have to sell them.
We will assume a somewhat conservative rate of return of 6% for your question. That allows us to buy some blue chip and other fairly reliable stocks. To achieve your goal of $30 - $40 k a year, you would need abot $600,000+ invested in the market. In reality, you would need more than that to cover any prolonged market downturns and to allow your stock ownership to continue to grow.
You also have to figure in the cost of a professional money manager and the fact that you will have to pay capital gains taxes on your earnings if you want to know your final figure.
Well, stocks can be very erratic. How many people lost a fortune buying early in 2000? There were many, many tech stocks that went from $100+ to under $10 in a two year span.
If you bought the bluest of blue-chips, like this Fidelity fund:
Thanks for the explanation! I have no desire to own any stocks - I think that using them to make money is ethically wrong - but I always wondered why more people don’t just make a living off of owning a bunch of them. It makes more sense now - it’s like asking “why don’t more people just open really big savings accounts and live off of the interest?”
Maybe you could explain that one to us…because it is really a bizarre statement. The whole point of stocks is to raise money so companies can manufacture products that people use everyday. It’s up to you to invest in medical or bioweapons companies.
Oh, it’s just a personal conviction - completely indefensible in any realm of empiricism or logic. Short answer; “capitalism bad, making money off of money rather than work worse.”
Dividends are still taxable income. There are good arguments (in my opinion) to not tax dividends, but I don’t think you’ll ever get Congress to get rid of them.
Money is work is money. You don’t work for free do you? Likewise, you don’t expect others to give you their goods or services for you for free, do you? Money is just a way we store the value of work, so we can exchange it for other work. Money is stored work.
You may want to research things a bit. I can’t see what possible defense you can have for the statement that buying or owning stock is immoral. In fact, if you do the alternate, namely stick your money in your mattress, a case could be made that this is in fact less moral than buying stocks. Likewise, a case could be made that partying your money away is less moral than investing it. In fact, a rational case could be made that giving your money to charity does less good for mankind than investing it (where it creates jobs and better goods and services for everyone).
I don’t believe you understood the explanation. It’s not like a really big savings account. In fact, that was your belief in the OP, and it’s been explained that this was incorrect. Shagnasty has your answer; if you’re interested in an answer, you may want to re-read his response.
An example if you were really trying just to get money out of dividends:
I used to own a few shares of Boeing (we’re talking about 3 and some fraction of shares) which gave me a dividend of about 50 cents, though I can’t remember if it was per quarter or per month. It was also one of the few stocks I owned that actually paid dividends. So call it 20 cents a share, just to make the math easy. (The last numbers I could easily find were 17 cents a share in 2002.) Assuming 20 cents per share of stock paid every quarter, you’d need 50,000 shares of stock (10k per quarter for a total income of 40k). Seeing as how Boeing is currently trading at $66.55 per share, you’d need $3,327,500 dollars to buy the correct amount of stock. Though I wouldn’t be surprised if the number is a bit lower tomorrow as one of the reasons BA is up is because they finally reached an agreement with some of their workers. And this ignores the fact that that is an absolutely awful way to do it. Ideally, you’d want at least 15 or 20 dividend-paying companies in different areas and adjust your share amounts as needed. This, of course, would also have an effect on how much you’d need to invest. It would also better would be to be able to reinvest some of your dividends so that you can latter sell off some stock without touching the basis. For example, say you set it up for extra dividends allowing you to buy about 500 extra shares (I’m just pulling this out of thin air.) This means that each time you reinvest some of your dividends you’ll be getting more next dividend because you now own more stock and if you need some cash you can sell the extra stock (hopefully at a profit) while still getting at least your $40,000 in dividends per year.
The idea is that you invest in stocks throughout your working life. Over a 40-year period, if you factor in the growth in the value of the stocks as well as your regular savings - and you re-invest dividends - accumulating $2mn by age 60 is not that big a deal. (Of course if you buy a house, have 5 kids to send to college, buy new cars all the time, etc, regular savings of this sort might be hard, but the sum saved doesn’t have to be that big, especially if you start early in life. The equivalent of your social security contributions might do it. Check out Motley Fool (http://www.fool.com/) “13 Steps to Investing Foolishly” for examples.)
Here in Hong Kong, you can expect a dividend yield of 3% or so on quality stocks (eg HSBC), and there is no tax on dividends.
The morality issue belongs in GD, but I must say your attitude has me stumped. Any pension/retirement scheme like a mutual fund will invest in the market. How will you eat when you retire? Modern stock markets give ordinary people the chance to own wealth-creating companies - formerly something only tycoons could do. Marx would approve! (Maybe.)
Note that the long term history of managed funds is quite abyssmal. I’ve seen figures less than single digit after inflation. There was a study with a monkey literally picking stocks that did better than mutual funds. What Wall Street brokers do with your money is one of those well-hidden scandals.
Index funds do quite well over the very long term. You (if you have any brains) can do a bit better than index funds.
Forget the overall concept of “blue chips”. E.g., Delta is a blue chip. It went from 70 to .70 in 5 years. Each company has to evaluated individually. The quality of management is the most important concern.
That said, you’ll need at least $3M to get a basic income in stocks. You would do quite a bit better with tax free bonds or Series I saving bonds. (The latter may be the best idea since inflation is likely to be a major problem in the coming years.)
GOOD - earning money from your own work, or talent. Working for a living 9-5 for a regular wage. Work your way up to a senior position with high salary. Write a best selling book, record a gold album make money from the royalties. Invent a clever new device that everyone wants, and will pay you for.
BAD - inherit money, invest it. Gain money from other people’s labour. Do nothing to earn it yourself. Be willing to put other people out of work, or cut back on their wages so that your own profits increase.
My Dad once told me:
“There are two things that make money, people make money, and money makes money. If your smart, you can get it both ways.”
Translation- Work hard for your money, and then make your money work for you.
I wonder if the OP thinks making money off an interest baring savings account is immoral also?
Quite the opposite; I come from parents who taught me humility, pragmatic asceticism, and the value of hard work. If I came from rich parents, I would probably value things like making money off of investments.
