With additional passive income each month you could cover your utility bills, pay down debt, or grow your investments.
If you don’t need the extra income to pay your bills right now, reinvest the dividends to compound and snowball for a larger future income.
You’ll need money to start to buy the stocks, but setting up a passive income portfolio is easier than you think.
Let’s look at how you could buy the right stocks to pay you $100 in monthly income or any amount you need.
One quick note I should mention. I’m not a financial planning professional. I’m sharing what’s working for me as part of my investing strategy. Always do your own research and consider your own circumstances before making any financial decisions. You could also check with your favorite financial professional to understand what would be best for your situation.
How much money do you need to create a portfolio that pays $100 a month in dividends
The amount of money you will need to invest to create a $100 per month dividend portfolio depends on the dividend yield of the stocks.
The dividend yield is the annual dividend paid per share divided by the current share price. Think of this as a return on investment number. For X amount of dollars you invest, you receive Y% back in dividends.
For regular stocks, the usual practice is to focus on dividend yields in the range of 2.5% to 3.5%
For this example let’s use a dividend yield of 3% for each stock in the portfolio.
Most stocks pay dividends quarterly so you’ll need to invest in at least 3 different stocks in order to cover all 12 months of the year.
You could also check out REITs (Real Estate Investment Trusts) or bond funds that pay monthly. For this example, we’ll focus on “regular stocks”.
Keeping with our example of a portfolio of 3 quarterly dividend stocks, each stock would need to pay about $400 total per year so you will receive $100 per payment.
Dividing $400 by 3% results in a stock value of approximately $13,333. Your total portfolio would be valued at around $40,000 in this example.
Before you think about finding higher dividend yield stocks so you can invest less, stocks above 3.5% are generally considered risky.
A higher dividend yield may indicate a problem with the company, driving down the price per share. When the stock price goes down, the dividend yield goes up. Stocks with higher dividend yields are usually considered at risk for a dividend cut.
How to align your dividend payments to a yearly calendar
Most stocks pay their dividends four times per year. To build a portfolio that pays you monthly you need at least 3 different stocks so each month of the year is covered.
While it may sound impossible to find stocks to cover all of the months, there are 3 common payment patterns. Not all stocks will follow the patterns exactly but many do.
The common payment patterns focus paying once per quarter and align to the month in the quarter: the first month, the second month, or the third month. The dividend payment patterns work out as:
- January, April, July, October
- February, May, August, November
- March, June, September, December
If you buy one stock for each of the patterns, your portfolio will pay dividends each month of the year.
When you are choosing stocks for your portfolio to earn $100 a month in dividends, don’t forget to research the company first. Just because a stock fits the pattern you need and has a long history of paying dividends, it doesn’t mean it’s the best stock to buy.
5 tips for choosing stocks for your dividend income portfolio
When you’re ready to start building your dividend portfolio, here are five things I learned from my journey.
Choose stocks with consistent dividend payment histories
Nothing is 100% guaranteed when it comes to the stock market beyond it will go up and down.
But, stocks with longer dividend payment histories usually continue their payments in the future. Dividend kings and dividend aristocrats are two categories of stocks with long histories (50+ and 25+ respectively).
Most of these stocks generally continue to follow a consistent pattern year over year, but it is always possible something will change.
Sometimes company conditions change meaning they need to make changes to their dividends. A merger or acquisition might change the dividend strategy.
When it comes to investing in the stock market you will do the best you can with the information available at the time. If needed, you course correct in the future.
Double-check the next ex-dividend date
The ex-dividend date is the date you need to own the shares by to be eligible to receive the next announced dividend payment.
Depending on when you buy the stock shares, you may not receive the first dividend payment.
Before you purchase your shares check if the next dividend payment along with the ex-dividend date was announced.
For your dividend portfolio to start paying in full, it may take some time.
If the stock fits your strategy, it may be ok to buy the shares now and simply miss the upcoming dividend payment. Otherwise, it might make sense to buy another stock from your watchlist for now.
Don’t chase dividend yield rates
As mentioned earlier, high rates in regular stocks (i.e not REITs) could suggest issues with the company. If there’s a problem with the company and the dividend is at risk of being cut, you’ll find yourself with a loss in portfolio value.
Save yourself the headache and do your research into the company before making a purchase. If you decide to take the risk, make sure you jump in with your eyes wide open!
Consider the potential income taxes
If you’re building your dividend portfolio in a regular brokerage account (i.e. not a tax-deferred retirement account), you’ll probably owe additional income taxes each year. Check with your favorite tax professional or the IRS for more information about your situation.
If you’re aiming for $100 per month in dividend income, you may need to earn extra money to cover the taxes. Consider investing more money for a higher dividend payment to cover the related taxes.
Start smaller if you need to
If you don’t have approximately $40,000 to build your portfolio right now, start with the money you have and let it grow over time.
The large brokerage companies are cutting their trading commissions to $0 so now it’s easier for you to invest smaller amounts of money without losing money to the fees.
Follow the same approach as we reviewed above but focus on a smaller monthly target. If you don’t need the income now, you can increase your dividend income over time either by reinvesting your dividends, buying more shares, or both. At a minimum, automatic reinvesting will help your portfolio grow on autopilot
For example, a $50 per month portfolio could be created from $26,667. Again assuming the 3% dividend yield.
In the future buy additional shares in either the same stocks or with stocks that fit the same payment patterns to grow your portfolio faster.
Wrapping up. Are you planning to invest for $100 a month in dividends?
Earning $100 a month in dividends as passive income is a great way to cover your monthly bills or grow your investment portfolio on autopilot.
Some upfront planning is needed to align the dividend payments to each month of the year. Make sure you don’t simply buy a stock because it’s your income schedule.
Look at buying stocks in different industries to “spread the risk” and avoid having all of your eggs in one basket. Look for stocks that are at a better value (i.e. probably not stocks priced at near their 52 week high). Do the research first to find the best to stock to buy at the moment.
Start with the money you have instead of waiting for later. Let your portfolio grow over time with reinvestment or purchasing new shares when you can.
Over to you, what are your additional tips or strategies for building your passive income from dividends?
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