Is the idea of finding time to make extra money overwhelming? You’re already stretched to the max with all the demands on your life?
Earning money while you sleep allows you to increase your income without figuring out how to split your time even further. Put the work in upfront so you can continue to earn passive income with little extra effort. The upfront effort is not likely to the amount of time you spend on your day job.
$2000 a month in dividends is a sizable goal, especially if you’re just starting. It may take you some time to get there.
If you don’t need the money in the short term to pay your bills, consider letting the earnings reinvest so you can continue to build your portfolio automatically while you also buy additional shares.
Let’s look at how you can plan your stock purchases so you receive $2000 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 in a portfolio that pays $2000 a month in dividends
The amount of money you’ll need to invest to create a portfolio that pays your monthly goal depends on the dividend yield of the stocks you buy.
Dividend yield is the return on investment for the stocks you buy in terms of dividends. To calculate dividend yield divide the annual dividend paid per share by the current share price. You receive X% in dividends back for the money you invest.
You may think a shortcut to your goal is to pack your portfolio with stocks with higher dividend yields. The general recommendation for “regular” dividend stocks is target dividend yields in 2.5% to 3.5% range.
The benchmark range was based on the stock market prior to the 2020 and the unexpected year it’s proven to be. So you may want to check the dividend yield at the average price and 52- week high to see how the stock really lines up versus looking at it for just the current price.
To keep this example simple, let’s do all the math based on a 3% dividend yield and focus on quarterly stock payments.
Most dividend stocks pay dividends 4 times a year. To cover each month of the year, you need to buy at least 3 different stocks.
If each payment is $2000, you’ll need to invest in enough shares to earn $8,000 per year from each company.
To estimate how you’ll need to invest per stock, divide $8,000 by 3%, which results in a holding value of $266,667. And then multiply that by 3 for a total portfolio value of around $800,000. Not a small amount of money, especially if you’re starting from scratch.
And at that total value, you’ll likely want to invest in multiple stocks so spread the risk. Investing in the stock market always has a degree of risk involved.
And before you try to shortcut the process by finding higher dividend yield stocks…
If you go back to the math above and realize you could reduce your investment by purchasing stocks with higher dividend yields hang on for a minute.
In theory, this could work, but dividend stocks with yields above 3.5% are generally considered risky.
Under “normal” marketing conditions, higher dividend yields in “regular stocks” may reflect a problem with the company. There’s concern about the company diving down the share price. The lower price per share raises the dividend yield.
Spend some time reading the commentary on a site such as SeekingAlpha. While everyone has their own opinion, you may gather some insight into the current status of the company and the general feeling about the security of the dividend. Is there a consensus that the dividend is likely going to be cut?
If the company cuts the dividend, the stock price will likely go down further. You’ll find yourself both out dividend income as well as portfolio value.
It’s not 100% certain what will happen and you can only guess based on the publicly available information. It’s your call on the risks you’re will to take. As with all investment purchases, make sure you’re an informed investor before deciding you’re willing to take the risk.
How to choose dividend stocks to receive dividend payouts each month
Quarterly dividend payments are the most common payout structure you’ll find. Some dividend stocks may also pay monthly, once a year, twice a year, or even less scheduled.
Keeping to the original example using quarterly payments, you need to buy at least 3 different stocks that follow specific payment patterns. And given the goal size, you’ll probably want to invest in more than just 3 stocks.
Before this starts to sound impossible, many stocks follow one of the 3 common dividend payment patterns.
Not all stocks will follow these patterns exactly, and of course you can still buy stocks outside the patterns. This is simply a place to start looking.
The three dividend payment patterns align are as follows and actually map to the “month” in each quarter:
- January, April, July, October: the first month of the quarter
- February, May, August, November: the second month of the quarter
- March, June, September, December: the third month of the quarter
If you buy one stock for each pattern, your investment portfolio will likely pay you dividends each month of the year.
Likely is the keyword there because nothing is 100% guaranteed.
The company may shift the payment between months, especially if the dividend usually pays out at the very beginning or end of the month. It’s also possible the company changes its payment schedule. That does happen from time to time.
Make sure you research the company before investing in it. Don’t assume you should buy or skip a stock because it fits or doesn’t the payment pattern your portfolio needs.
Keep these 7 things in mind when building your dividend income portfolio
When you’re ready to start your journey building a dividend income portfolio, here are seven lessons to keep in mind.
If you’re starting from scratch, start small
Based on the calculation above, you’ll need invest about $800,000 to earn $2000. That may sound like a huge number, especially if you’re not starting from an existing IRA or another account.
Start setting incremental monthly goals such as $100 a month or $200 a month. Continue to invest and reinvest to build your portfolio up to your larger goal.
In 2019 the large brokerage companies their their trading commissions to $0, so buying smaller blocks of shares is efficient. You don’t lose money to fees that you could have used for more shares.
The other benefit of setting incremental goals is you can decide where you want to keep buying the same stock or switch to something else.
Spread the risk by investing in different stocks
At a basic level to cover all 12 months of the year with “regular” stocks, you need to buy shares in at least 3 different companies. In reality, putting all of approximately $800,000 into just 3 companies creates a fair amount of risk. What is something happens to one of those companies?
Diversifying the companies you purchase stock in spreads the risk.
Having a portfolio of 3 stocks means putting a lot of eggs in a few baskets. If something happens to one of those companies, a huge percentage of your portfolio is impacted.
You can spread the risk by not only investing in different companies but also different industries. Buy shares in companies that are a good value at the time.
Consider dividing up your portfolio so that no single stock accounts for more than $200 or $250 of a single month’s dividend income.
Keep an eye on stocks with consistent dividend payment histories
When it comes to the stock market, the only guaranty is that it will go up and down. Ultimately the only guaranteed dividend is on that’s already been paid out. That was potentially a recent reminder in 2020.
All that aside, generally stocks with long histories of dividend payment have a better chance of continuing to pay out in the future.
These companies usually want to continue their payment trends otherwise face a price drop if they cut or stop.
Of course, market conditions or changes with the company could impact the dividend schedule. so nothing is 100%.
Track the stock’s next ex-dividend date
To qualify for the next dividend payment you need to own the shares prior to the ex-dividend date. Ex-dividend, or excluding dividend is a date announced as part of the dividend declaration.
As part of your watchlist or portfolio plan, note the ex-dividend date (either announced or take a hint from the past). And then before you make a purchase double check that data again.
If you missed the ex-dividend date, you may still want to buy the shares and wait longer for your first payment. Or you may decide to move onto something else on your watchlist that’s as good of a value at the moment.
Know what taxes you may owe on the income
Depending on the type of account you’re building your dividend portfolio in, you may income taxes now or in the future. Income in general means additional taxes and paperwork.
If you’re building your portfolio in a regular brokerage account, and not a tax-deferred retirement account, you’ll likely have additional taxes to pay (or a reduced refund).
One to thing to keep in mind for the future. If you want to receive the full $2000 per month, you may need to actually invest a larger amount of money to have extra to cover the taxes.
Contact your tax professional or the IRS to confirm your specific situation, and to see if they have any additional advice on how to proceed.
Avoid chasing dividend yield rates
High dividend yield rates, while they seem like a shortcut to a goal, could indicate a problem with a “regular” stock company. The stock price is being pushed down for some reason.
Make sure you do your company research on any and all companies you plan to buy stock in. You want to be an informed consumer and reduce the risk of losing your income and portfolio value.
Maybe based on your research, you decide to take the risk and buy that particular “regular” stock even though the dividend yield is higher. Ultimately you need to decide what’s best for you and your risk tolerance.
One quick note. 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 owning multiple stocks to cover your monthly payments
As mentioned above, it’s risky to put all of your eggs into a few baskets. Compared to a smaller goal, $2000 a month in dividends requires a large investment in individual companies.
It’s worth mentioning again. Future results aren’t guaranteed, even with the long paying companies. It’s always possible for dividend payments to end or something to happen to the company.
Consider buying shares in several different companies for each of the payment patterns.
Create a simple dividend planner in Google Sheets to help you plan and track your dividend earnings.
Ultimately you’ll do the best you can with the information you have at the time. Course correct in the future if you need to.
The other benefit of being open to buying different stocks is that you may find a better buy for your money at that moment.
Are you planning to invest for $2000 a month in dividends?
Earning $2000 a month in dividends as passive income can really help you supplement your income or continue to grow your portfolio until you need the money.
Intentionally choosing stocks will create a portfolio that pays you dividends each month.
Always make sure to do your research upfront and right before making a purchase to confirm the company is a good fit for your portfolio, not just the calendar.
Buy stocks in multiple industries to spread the risk and consider splitting up your $2000 monthly goal across multiple stocks. Reduce the risk by not having all of your eggs in one or two baskets.
Incremental goals will allow you to grow your portfolio over time without getting discouraged. It’s ok to build your way up to $2000 in monthly dividend income over time.
Over to you, what additional strategies or questions do you have about creating a dividend income portfolio?
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