Earning money while you sleep allows you to increase your income with limited extra effort. Passive income is limited in effort to a degree. You need to put in some initial work to get things going, but not to the level of your day job. An extra income stream can either help you achieve your financial goals quicker, or set larger goals.
$1000 a month in dividends is an awesome goal, and if you’re starting from scratch it may take you some time to get there.
So in the short term, if you don’t need the money to pay bills, you can let the earnings compound towards $1,000 in monthly dividends while you also continue to buy additional shares.
Let’s look at how you could choose the right stocks to pay you $1000 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 $1000 a month in dividends
The actual amount of money you’ll need to invest to create a $1000 per month dividend portfolio depends on the dividend yield of the stocks you buy.
What is dividend yield?
It’s the return on investment in terms of the dividends you receive for the money you invested. The dividend yield calculated by dividing the annual dividend paid per share by the current share price. For money you invest, you receive Y% in dividends back.
Before you start thinking of trying to find higher yields make this process faster, the usual recommendation for “regular” stocks are yields in the range of 2.5% to 3.5%.
Of course this benchmark was prior to the 2020 global situation, so the range may flex while the markets continue to swing. And it also assumes you’re ready to start investing in the market while it’s moving a lot.
For this example, let’s keep the conversation simple by targeting a 3% dividend yield and focusing on quarterly stock payments.
Most stocks that pay dividends do that 4 times a year. To cover all 12 months of the year, you’ll need a minimum of 3 different stocks.
If each payment is $1000, you’ll need to invest in enough shares to earn $4,000 per year from each company.
To estimate how you’ll need to invest per stock, divide $4,000 by 3%, which results in a holding value of $133,333. And then multiply that by 3 for a total portfolio value of around $400,000. Not a small amount of money, especially if you’re starting from scratch.
Before you start looking for higher dividend yield stocks as a shortcut…
You may be thinking that you can shortcut the process, an reduce your investment by looking for higher dividend yield stocks. In theory that could be true, but stocks with dividend yields above 3.5% are generally considered risky.
Under “normal” marketing conditions, higher dividend yields generally reflect there may be a problem with the company. Driving down the share price raises the dividend yield.
Take a look at the stock commentary on a site such as SeekingAlpha. to see if the dividend at risk for a cut. While everyone has their own opinion, make sure you’re an informed investor before deciding you’re willing take the risk.
If the dividend is cut, the stock price generally goes down further. So then you’re out both dividend income and portfolio value. That’s not to say that happens 100% of the time so it’s your call on the risks you’re will to take.
How to choose your stocks to align your dividend earnings to each calendar month
Quarterly dividend payments are the structure you’ll find with most dividend stocks. Some will pay monthly, once a year, twice a year, or even less scheduled.
Focusing on the quarterly payments for this example, you need to buy at least 3 different stocks that follow specific payment patterns.
Before this starts to sound impossible, there are 3 common dividend payment patterns that many stocks follow. Not all stocks follow these patterns exactly but it will give you a place to start.
The three dividend payment patterns align to the month in the quarter:
- First month: January, April, July, October
- Second month: February, May, August, November
- Third month: March, June, September, December
If you buy one stock for each pattern, your investment portfolio will likely pay you dividends each month of the year.
Of course, this is where the footnote needs to be starred to remind you that nothing is 100% guaranteed. Sometimes payments will shift between months, especially if the company usually pays out at the very beginning or end of the month. Or for some reason, the company decides to change its payment schedule. That does happen from time to time.
And make sure to do your research before investing in a company. Just because the stock fits or doesn’t fit the payment pattern exactly, it doesn’t mean you it’s a stock to buy or skip.
7 do’s and don’ts for choosing stocks for your dividend income portfolio
When you’re ready to start building your dividend income portfolio, here are seven things I learned from my own journey.
Start smaller when starting from scratch
In order to earn $1000 per month in dividends, you’ll need a portfolio of approximately $400,000. Today that may sound like an impossibly huge number, especially if you’re not converting an existing IRA.
Instead start building at smaller incremental dividend goals such as $100 a month. Continue to invest and reinvest over time to reach your larger goal.
Now that the large brokerage companies cut trading commissions to $0, it’s easier and efficient to make smaller share purchases more often.
Invest in different stocks
Aside from the simple reality that in order to cover all months of the year with “regular” stocks you’ll need to invest in different companies, $400,000 is a large amount of money. Diversifying the companies you purchase stock in spreads the risk.
3 stocks are putting a lot of eggs in a few baskets. If one of those stocks goes bad, a huge percentage of your portfolio would be impacted.
And investing in different stocks allows you to cover different industries and buy something at a better value at the time.
Maybe divide it up so that no stock accounts for more than $200 or $250 of a single month’s dividend income.
Look for stocks with consistent dividend payment histories
The only guaranty when it comes to the stock market is that it will go up and down. And the only guaranteed dividend is one that’s actually paid out.
BUT, starting with stocks with long dividend payment histories generally have a better chance of continuing to pay in the future.
The long term payers usually want to continue their payments in the future, because their share price will likely go down if they stop.
Company or market conditions could result in a dividend schedule change. Or the dividend strategy might change because of a merger or acquisition.
Double-check the stock’s next ex-dividend date
Before you purchase your shares check to see if you’ll qualify to receive the next dividend payment.
The ex-dividend date means the stock is trading excluding dividend. You need to own the shares before that date to be eligible to receive the future dividend payment.
Do a quick check for the next ex-dividend and payments dates.
Even if you don’t qualify for the next dividend payment, you may still want to purchase the shares anyway. But depending on what’s on your watchlist, a different stock may be a better purchase for the moment.
Check what taxes you may owe on your income
If you’re building a dividend income portfolio in a regular brokerage account, not a tax-deferred retirement account, you’ll likely owe additional income taxes and paperwork each year.
If your goal is $1000 per month in dividend income, you may a larger investment to cover the taxes.
Give your favorite tax professional or the IRS to confirm your specific situation.
Don’t chase dividend yield rates
It’s worth saying one more time. High dividend yield rates in regular stocks could indicate a problem with the company that’s pushing down the stock price. Double check your company research. Losing both your dividend income and stock value will be counterproductive for your goal.
Depending on what your research says, you may still want to take the risk on a particular stock. Just go in as an informed investor with your eyes wide open.
REITs (or real estate investment trusts) are a different type of stock investment that is taxed differently so the dividend rates are typically higher than the “regular” stocks.
Reduce the risk by splitting your monthly payments among multiple stocks
Compared to the smaller monthly dividend goals, $1000 per month in dividends requires a large investment in individual stocks.
And it’s worth saying one more time, future results aren’t guaranteed based on past performance. It’s always possible for dividend payments to end, even with the longest paying companies.
To reduce your risk of one stock having trouble, consider purchasing more stocks with the same payout patterns. Maybe it’s 2 stocks that pay $250 per month for the same pattern.
A simple dividend planner made in Google Sheets can help you structure and track your dividend earnings.
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.
Are you planning to invest for $1000 a month in dividends?
Earning $1000 a month in dividends as passive income is a great way to supplement your income, or grow your portfolio on autopilot until you need to spend the money.
Intentional stock selection can allow you to receive a dividend payment each month. Make sure to do your research first to ensure it’s a good fit for your portfolio and not just the calendar.
Remember to spread the risk with stocks in different industries. Splitting up your $1000 monthly goal across multiple stocks ensures you don’t have all of your eggs in one or two baskets.
Start where you can and grow your portfolio over time. Don’t get discouraged if you’re not able to create a $1000 in monthly dividend income from day one.
Over to you, what are your additional tips or strategies for create a dividend income portfolio?
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