Dividends are the bread and butter of income investors. You don’t have to sell your assets or spend hours every day managing your accounts. Instead, dividend stocks simply generate income on their own. However, building a portfolio that generates at least $1,000 in dividends each month takes some work. See how to proceed.
For more help generating sufficient income through your investments, consider working with a financial advisor.
What are dividends?
Dividends are payments that a company makes to its shareholders. For example, let’s say ABC Corp. issue a dividend of $0.50 per share. Someone who owns 1,000 shares of that stock would receive a check for $500.00.
Typically, a company will issue these payments based on its profits. When he has made a lot of money, he will distribute some of it among his shareholders.
Companies do not have to pay dividends, although most do. Depending on the size of the company, 54% to 84% of companies issue dividend payments at least from time to time.
There is no legally binding schedule for companies to make dividend payments. When a company does this is entirely up to its discretion, although members of a class of stock known as “dividend aristocrats” tend to issue them regularly. Most payments are issued quarterly.
Capital Required for Investment in Dividends
The number 1 question people ask when it comes to investing in income is, “How much will I need to reach my goals?” This is an excellent question. Unfortunately, the number can be very large.
Now, there is no fixed amount of money that you need to invest in order to receive dividends. It all depends on the yield on your investments, so understanding “yield” is essential to understanding dividend investing. (Note that the definition below is how “yield” applies to stock dividends. In general, yield defines how much money an investment makes when you hold it rather than sell it.)
Yield is the amount a share pays in dividends per share based on the price of that share per share. So, for example, let’s say ABC Corp. cost $100 per share. Let’s also say that the company pays an annual dividend of $5. The yield on this stock would be:
This is a 5% yield. If you invest $100 in this stock, you will earn $5 each year in dividends. By market standards, this is pretty good.
At the time of writing, the S&P 500 was paying an average yield of 1.37%. This means that across the market, on average, investors receive dividend payments amounting to around 1.37% of their initial investments. Fortunately, this is below historical standards. Typically, the S&P 500 tends to have an average yield of around 2%.
So where does that leave us?
Let’s go back to our formula. We want to make $12,000 a year on average in a market that pays approximately 2% in income each year. This gives us the following formula:
Solving for X, we get $600,000.
In a market that generates a 2% annual yield, you would need to invest $600,000 upfront to reliably generate $12,000 a year (or $1,000 a month) in dividend payments.
How can you earn $1,000 a month in dividends?
Here are the steps you can take to build a sufficient dividend portfolio.
Look for $12,000 a year in dividends
To earn $1,000 a month in dividends, it’s best to think in annual terms. Companies list their average earnings annually, not based on monthly averages. So you can get a lot more sense of how much you can earn if you also build your numbers around annual goals.
So this is the place to start. You’re looking to make $12,000 a year in dividends.
Find stocks that pay dividends
The next step is to look for stocks that reliably pay dividends. Not all companies issue a dividend payment, and of those not all are consistent.
You are not looking for an occasional gain. You want companies with a history of making regular payments on a regular schedule. To do this, research stocks that have a strong payment history. The more consistent a company has been with its dividends in the past, the more likely it is to continue to be so in the future.
Look for strong but sustainable yields
Remember, yield is the ratio of the dividend payout to the share price for any given stock. When you look at the yield on a stock, you want to balance two concerns.
On the one hand, strong yields mean that the stock pays more money relative to the stock price. This is usually a good thing. If one stock yields 3% and another stock yields 1.5%, you will earn more money per dollar invested in the former than in the latter.
However, when a stock’s yield is very strong, it can be a sign of trouble. An unusually high yield may indicate that the share price has recently dropped. Investors aren’t getting more money; in fact, capital gains investors are losing money. It could also indicate that the company is wasting its money, blowing its operating budget on shareholder value. Any of these issues (or others) signals that this company’s dividend payments may not be sustainable.
A good rule of thumb is to look for dividend payouts that are strong but not unusually strong relative to the market at large. In recent history, the market has averaged about 2% yield per year. If you see a 3% or 3.5% yield, this could be a great investment. If you see a 5% yield, you might want to dig a little deeper.
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Start with large companies and ETFs
Generally speaking, you can expect the best performance from older, larger companies. Historically, companies listed on the S&P 500 tend to be the most likely to issue regular dividend payments and also tend to issue the highest dividend payments per share.
You can also start by investing in dividend-oriented exchange-traded funds (ETFs). This has become an increasingly popular area for ETFs, and you can find many that are organized entirely around investing in dividend-paying stocks. You can often avoid a lot of trouble by looking for an ETF with strong historical performance rather than a portfolio of different stocks.
Reinvest your payments
The truth is, most investors won’t have the money to generate $1,000 a month in dividends; not at the beginning, anyway. Even if you find a series of investments that outperform the market with an average annual yield of 3%, you would still need $400,000 in start-up capital to reach your goals.
And that’s okay. You don’t have to get there all at once. Instead, patiently reinvest your dividends once they arrive. This will create compound returns where your payouts will start generating their own payouts. Over time, you will find that the base capital of your investment portfolio can actually grow to meet your goal.
the bottom line
Earning $1,000 a month in dividends will require patient investment – whether buying stocks or funds – or lots of start-up capital. But with the right combination of income and patience, you can get there.
Dividend Investment Tips
You can never know too much about your investments. If you want to start investing in dividends, take our crash course on how to calculate dividend yield. It’s an eye opener.
A financial advisor will help you build a strong dividend portfolio. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your field, and you can interview your advisor peers at no cost to decide which one is right for you. If you’re ready to find a consultant who can help you reach your financial goals, start now.
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