With additional passive income each month you could cover your utility bills, pay down debt, or grow your investments.
And if you don’t need the income right now to pay your bills, let the dividends reinvest to snowball into larger income for the future.
Setting up a passive income portfolio is easier than you may think it is. Yes you’ll need money upfront to create an investment portfolio.
Let’s look at how you could set up a portfolio to pay you a monthly income of $200 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 $200 a month in dividends
The amount of money you will need to invest to create a $200 per month investment portfolio will depend on the dividend yield of the stocks.
The dividend yield is the annual dividend paid per share divided by the current share price.
For this example let’s assume the dividend yield of each stock in the portfolio is 3%.
Most stocks pay 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 REIT (Real Estate Investment Trusts) or bond funds that pay monthly as well.
Keeping with our example of a portfolio of 3 quarterly dividend stocks, each stock would need to pay about $800 per year so you will receive $200 per payment.
Dividing $800 by 3% results in a stock value of approximately $26,667. Your total portfolio would be valued at around $80,000 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. It might indicate there’s a concern with the company. When the stock price goes down, the dividend yield goes up. There could also be a risk of a dividend cut in the future.
How to align dividend payments to the calendar
Most stocks pay their dividends quarterly, so to build a monthly dividend portfolio, you’ll need at least 3 different stocks to cover all of the months in the year.
While it may sound impossible to find stocks to cover all the months, there are 3 common payment patterns. Not all stocks will follow the patterns exactly but many do.
The common payment patterns focus on which month of the quarter the dividend is paid in: the first month, the second month, or the third month. The 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 partners, your portfolio will pay dividends each month of the year.
When you are choosing stocks for your portfolio to earn $200 a month in dividends, do your research before buying. Just because a stock fits the pattern you need, it doesn’t mean it’s the best stock to buy.
Related: Dividend Aristocrats Payout Schedules and Patterns
Tips for choosing stocks for your dividend income portfolio
When you’re ready to start building your dividend portfolio, here are a few things I learned from my journey to help you.
Choose stocks with consistent histories of paying dividends
While no future dividend is 100% guaranteed, you have a reasonable chance of continuing to receive your payments in the future. Dividend kings and dividend aristocrats are two categories of long history (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 mean they need to make changes to their dividends or merger/acquisitions will change the assumptions. You’ll do the best you can with the information available at the time. If needed, you can course-correct in the future.
Take note of the next ex-dividend date
Depending on when you buy the stock shares, you may not receive the first dividend payment. Double-check the ex-dividend date if the next dividend payment 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.
Don’t chase dividend yield rates
As noted above, high rates in regular stocks (i.e not REITs) could indicate 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.
Always do your research into the company before making a purchase.
Don’t forget about income taxes
If you’re creating a dividend portfolio in a regular brokerage account (i.e. not a tax deferred retirement account), you’ll probably owe income taxes each year. Check with your favorite tax professional or the IRS for more information.
If you’re aiming for $200 per month in dividend income, you may need extra money to cover the taxes. Consider investing additional money for a higher dividend payment to cover the related taxes.
It’s ok to start smaller if you need to
If you don’t have approximately $80,000 to build your portfolio right now, start with the money you have and let it grow over time.
Fortunately the large brokerage companies started to reduce their trading commissions to $0 so you can invest smaller amounts of money without the fees. Follow the same approach above but with a smaller monthly target. f you don’t need the income now, let the income reinvest so you’ll grow your portfolio on autopilot.
For example, a $100 per month portfolio could be created from $40,000. And $20,000 could create a $50 per month dividend income.
And when you can, buy additional shares in the future either in the same stocks or with stocks that fit the payment patterns to help your portfolio grow faster.
Wrapping up. Are you planning to invest for $200 a month in dividends
Earning $200 a month in dividends can be a great way to pay your bills with passive income or grow your investment portfolio on autopilot.
With a little upfront planning you can align the dividend payments each month of the year. Make sure you don’t just pick a stock because it fits your schedule.
Make sure you spread the risk between different industries and ideally buy stocks that are at a better value (i.e. probably not stocks that are at the top of their 52 high low chart). Do the research first.
If you don’t have enough money initially, start where you can and 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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