Passive income allows you to earn extra money while you sleep. Regardless of how you want to use the money, an extra income stream can help you achieve your financial goals.
You could use the additional passive income each month to pay some of your bills including pay down debt. Or if you don’t need the money right now, you can use the dividend income to grow your investments for the future.
By letting the dividend reinvest, your future earnings compound and snowball for a larger passive income.
Don’t worry if the idea of seeing up a passive income portfolio feels overwhelming. Simply start by saving extra money so you have the money to invest.
Let’s look at how you could buy the right stocks to pay you $500 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 $500 a month in dividends
The actual amount of money you’ll need to invest to create a $500 per month dividend portfolio depends on the dividend yield of the stocks you buy.
The dividend yield calculated by dividing the annual dividend paid per share by the current share price. Think of it as a return on investment number. For $X you invest, you receive Y% in dividends back.
For regular stocks, the usual recommendation is to look for stocks that have a dividend yield in the range of 2.5% to 3.5%.
Granted that was the benchmark prior to the global craziness of 2020 so that number might flex slightly while the markets gyrate. And then it will be up to you if you’re ready to jump into a market while it’s moving a lot.
To keep the numbers relatively simple through this example, let’s use a 3% dividend yield.
Since most stocks pay 4 times per year, you’ll need to invest in at least 3 quarterly stocks where each stock pays $2,000 in dividends per year so you’ll receive $500 per payment.
Dividing $2,000 by 3% results in a stock value of approximately $66,667. Your total portfolio would be valued at around $200,000 in this example. Ultimately not a small amount of money, depending on where you’re starting.
1 quick thing before you start looking for higher dividend yield stocks
While it may sound like a simple solution to just find stocks with higher dividend yields, stocks above 3.5% are generally considered risky.
Outside of weird market conditions where all of the shares prices are wonky, higher dividend yields may indicate a problem with the company, driving down the price per share. As the stock share price goes down, the dividend yield goes up.
And if you spend time reading the stock commentary, 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 dividend stocks pay out our times per year, quarterly. To build a portfolio that pays you monthly you need at least 3 different stocks so each month of the year is covered.
There are also REITs (Real Estate Investment Trusts) and bond funds that pay monthly you may want to look into. For this example, let’s focus on quarterly stocks.
The good news is that there are 3 common dividend payment patterns. Not all stocks follow the pattern exactly, but it makes a process that seems impossible much easier.
The three common payment patterns generally focus on paying the dividend in a month in the quarter: first month, second month, or third month.As a result, the three dividend payment pattern are:
- January, April, July, October
- February, May, August, November
- March, June, September, December
If you buy one stock per pattern, your investment portfolio will pay you dividends each month of the year.
Of course, you should always do your research first. Just because the stock fits the payment pattern you need, it doesn’t mean it’s the best stock to buy.
6 tips for choosing stocks for your dividend income portfolio
When you’re ready to start building your dividend income portfolio, here are six things I learned from my own journey.
Look for stocks with consistent dividend payment histories
The only thing guaranteed about the stock market is that it will go up and down, but looking at stocks with long dividend histories can be more predictable than new dividend payers.
The dividend aristocrats and dividend kings are two categories of stocks with long histories (25+ and 50+ respectively).
The long term payers usually want to continue their payments in the future, because their share price will likely go down if they stop. But it is always possible something will change. The only guaranteed dividend is one that’s actually paid out.
Sometimes company conditions change forcing them to change their dividend schedule. Or the dividend strategy might change because of a merger or acquisition.
Chasing dividend yield rates could be counterproductive
As mentioned above, high dividend yield rates in regular stocks (i.e not REITs) could be a red flag in your company research. If there are problems with the company and the dividend is cut, you’ll find yourself with both a loss in income and portfolio value.
Do your research before buying to save yourself the headache. That’s not to say you shouldn’t take the risk, but make sure you if you do, purchase shares with your eyes wide open!
Double-check the next ex-dividend date
The ex-dividend date means the stock is trading excluding dividends. You need to own the shares before that date to be eligible to receive the future dividend payment.
Before you purchase your shares check to see if the next ex-dividend and payment dates have announced.
Even if you missed the dates, that’s not to say you shouldn’t shares for the future, as it may take a while for your dividend portfolio to pay in full. If the stock fits your strategy, it may be ok to buy the shares now and simply miss the upcoming dividend payment. Otherwise, check your watchlist to see if there’s a different stock to buy for now.
You may owe income taxes on your dividend earnings
If you’re building a dividend income portfolio in a non-tax deferred retirement account (aka a regular brokerage account), you’ll likely owe additional income taxes each year.
If you’re aiming for $500 per month in dividend income, you may need to buy additional investments to cover the taxes.
Depending on your tax bracket, your dividend income is likely taxed at a lower rate than your paycheck. You’ll see this referred to as qualified dividend vs ordinary dividends.
Give your favorite tax professional or the IRS to confirm your specific situation.
Start where you can and let it build over time
If you’re starting your dividend portfolio from scratch and don’t have $200,000 in cash ready to invest, don’t worry.
Start with the money you have and let it grow over time. Build a plan to hit dividend goals year over year.
The good news is the large brokerage companies cut trading commissions to $0. It’s now efficient for you to invest in smaller purchases without losing money to the fees.
Start by building a $50 per month portfolio if that fits your budget. Keep investing and reinvest to hit your larger goal of $500 per month in the future.
Automatic reinvesting will help your portfolio grow on autopilot. And continuing to invest new money over time will get to your goal faster.
Reduce the risk by splitting your monthly payments among multiple stocks
Compared to the smaller monthly dividend goals, $500 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 can course-correct in the future.
Are you planning to invest for $500 a month in dividends?
Earning $500 a month in dividends as passive income is a great way to grow your portfolio on autopilot until you need the money to pay your bills.
With upfront planning, you can select stocks so you receive a dividend payment each month. Just make sure you don’t simply buy a stock because it’s your income schedule.
Spread the risk by buying stocks in different industries. Avoid having all of your eggs in one basket by splitting up the $500 per month goal across multiple stocks.
Always do your research first to figure out which stocks are best to buy at the moment. And that can include looking for the best immediate value including potentially not buying stocks near their 52 week high price.
Remember you can start where you are and grow your portfolio over time. Don’t get discouraged if you’re not able to create a $500 in dividend income today.
Over to you, what are your additional tips or strategies for creating a dividend income portfolio?
More Dividend Investing Ideas
- 3 things I wish I knew before I started dividend stock investing
- 4 places to start looking for dividend stock ideas to build your portfolio
- Simple Dividend Calculator Spreadsheet
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Why not put the $200k in a s&p 500 index fund, and keep taking out 3% every year (or 0.25% every month)?
S&P 500 grows at least 7% per year (historic annualized average return is 10%)
That way the $200k keeps growing better than inflation, and investor can keep taking 3%, in both up and down markets, as the 0.25% per month will not create big impact on portfolio even in a bad bear market.
Hey Cheenu –
Yes that’s another option along with potentially investing in real estate or going through a financial planner. Everyone has to decide what’s best for them in terms of their goals, risk tolerance and preferences. Thanks for stopping by and good luck in your investing journey!
– Cara
This is fools folly investing strategy. Sounds like someone has never bought or invested in a stock. First, you save to invest, then you invest for GROWTH and when you’ve built a nest egg, then you invest for DIVIDEND payouts or better, buy a fixed annuity. THIS IS A BS strategy, do your research and check if any of your broker friends set things up this way, my bet is that they will tell you this a JOKE…
Hey Julie –
Thanks for stopping by and leaving a comment. I’ll need to go back and double check the steps laid out above because it sounds like there’s a disconnect. The idea isn’t to save everything and then invest. The good news especially now that trade commissions are now $0 it’s more cost effective to buy smaller blocks of stock shares with each paycheck or two.
I’ll make sure that’s clearer above. The intention was to make sure to set aside money each paycheck to stay on target with reaching a dividend goal, buying along the way. In this case $500 per month.
Ultimately each person needs to find the right strategy for themselves. After being at this for more than a few years, it’s an approach that works for me. 🙂
“Save to invest” specifically means that I save monthly to a self directed stock fund and make stock buys as I go, after considerable research. I’m not holding money back to build a nest egg. Most of my stock choices have given me consistent 12-22% returns and several stock buys I made have doubled, which has brought enormous gains to my portfolio. But as an investing strategy, I invested for growth stocks first (in my 20s and 30s) and when that reaches certain benchmarks I look for dividend or annuity options, but would not consider using any invested money for payouts until after 55, it not good for taxes, it gives a false sense of financial security and people I have known who rested on their laurels generally do poorly in the end. Too many risks along the way to interrupt the gains you could make.
Thanks again Julie for stopping by. Sounds like you have a great strategy working for you. Wishing you continued success with your portfolio building!