The basic maths
Required capital is simply your target income divided by the portfolio's net yield. At a 3.5% net yield, €35,000 a year needs €1,000,000; at 5%, about €700,000. Higher yields lower the capital needed — but, crucially, often at the expense of growth, raising the risk that inflation erodes your income over time.
Dividends vs the 4% rule
The classic '4% rule' lets you spend 4% of your portfolio and sell assets to top up. A pure dividend-income approach spends only what's distributed, never selling principal. The appeal is psychological — you live off the 'fruit', not the 'tree' — and you're not forced to sell in a downturn. The cost is that optimising for yield can lower total return, so a total-return-plus-selling approach sometimes supports more spending. See Total Return and Income vs Underlying.
The risks to plan for
- Dividend cuts — distributions aren't guaranteed; they fall in recessions. Diversify across funds and asset classes so no single cut is catastrophic.
- Inflation — a flat income loses purchasing power. Keep a growth component so income rises over time.
- Yield traps — very high yields can mean capital is being returned to you, not earned. Screen with the Yield Trap detector.
- Sequence risk — relying on principal early in a downturn is dangerous; living off distributions reduces but doesn't eliminate this.
Don't forget tax
Your spendable income is the net figure after tax. Dividend tax varies enormously by country and can turn a 4% gross yield into 3% net. Check your local treatment in the Tax Assessor and prefer tax-efficient structures (e.g. Irish-domiciled funds — see withholding tax). Build the portfolio itself with the framework in Build a dividend income portfolio.
Enter a target income and yield to find the capital you'd need.