Dividends are the bread and butter of income investors. You don’t need to sell your assets or spend hours every day managing your accounts. Instead, dividend stocks simply generate income on their own. Putting together a portfolio that generates at least $1,000 in dividends each month takes some work, though. Here’s how to go about it.
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, say ABC Corp. issues a dividend of $0.50 per share. Someone who holds 1,000 shares of this stock would receive a check for $500.00.
Typically a company will issue these payments based on its profits. When it has made a lot of money, it will distribute some of that among its shareholders.
Companies do not have to pay dividends, although most do. Depending on the size of the firm, anywhere from 54% to 84% of companies issue dividend payments at least from time to time.
There is no legally mandated timetable for companies to make dividend payments. When a company does so is entirely at its own discretion, though members of a class of stocks known as “dividend aristocrats” tend to issue them on a regular schedule. Most payments are issued a quarterly basis.
Capital Needed for Dividend Investing
The No. 1 question people ask when it comes to income investing is, “How much will I need to meet my goals?” This is an excellent question. Unfortunately, the number can be pretty big.
Now, there’s no fixed amount of money you need to invest for dividends. It all depends on the yield of your investments, so understanding “yield” is pretty 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 selling it.)
Yield is the amount that a stock pays in dividends per share based on that stock’s price per share. So, for example, say that ABC Corp. costs $100 per share. Let’s also say that the company pays an annual dividend of $5. This stock’s yield would be:
- $5 / $100 = 0.05
This is a 5% yield. If you invest $100 into this stock, you will make $5 each year in dividends. By market standards, that’s quite good.
At time of writing, the S&P 500 paid an average yield of 1.37%. This means that across the market, on average investors receive back dividend payments worth about 1.37% of their initial investments. Fortunately, that’s lower than historic standards. Ordinarily the S&P 500 tends to have an average yield of around 2%.
So where does that leave us?
Let’s return to our formula. We want to make $12,000 per year on average in a market that pays approximately 2% in yield each year. This gives us the following formula:
- $12,000 / X = 0.02
Solving for X, we get $600,000.
In a market that generates a 2% annual yield, you would need to invest $600,000 up front in order to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
How Can You Make $1,000 Per Month In Dividends?
Here are the steps you can take to build yourself a sufficient dividend portfolio.
Look for $12,000 Per Year in Dividends
To make $1,000 per month in dividends, it’s better to think in annual terms. Companies list their average yield on an annual basis, not based on monthly averages. So you can make much more sense of how much you might earn if you build your numbers around annual goals as well.
So that’s the place to start. You’re looking to make $12,000 per year in dividends.
Find Dividend-Paying Stocks
The next step is to look for stocks that reliably pay dividends. Not every company issues a dividend payment, and of those not all of them are consistent.
You’re not looking for an occasional windfall. You want to companies with a history of making regular payments on a regular schedule. To do this, research stocks that have a strong history of making payments. The more consistent a company has been with its dividends in the past, the more likely it will continue to be in the future.
Look for Strong but Sustainable Yields
Remember, yield is the ratio of dividend payment to share price for any given stock. When you look at a stock’s yield, you want to balance two concerns.
On the one hand, strong yields mean that the stock pays more money relative to its share price. This is generally a good thing. If one stock has a yield of 3% and another has a yield of 1.5%, you will make more money per dollar invested in the former than the latter.
However, when a stock’s yield is too strong, that can be a sign of trouble. An unusually high yield can indicate that the stock’s price has recently fallen. Investors aren’t getting more money; in fact, capital gains investors are losing money. It can also indicate that the company is spending its money poorly, blowing the operating budget on shareholder value. Either of these issues (or others) signal that this company’s dividend payments may not be sustainable.
A good rule of thumb is to look for dividend payments that are strong, but not abnormally strong relative to the market overall. In recent history, the market has averaged around 2% yield per year. If you see a yield of 3% or 3.5%, that might be a great investment. If you see a yield of 5%, 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 yield from larger, older companies. Historically firms listed on the S&P 500 tend to be the most likely to issue regular dividend payments, and they also tend to issue the largest 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 stocks that make dividend payments. Often you can save yourself a lot of trouble by seeking out one ETF with strong historic performance instead of a portfolio of different stocks.
Reinvest Your Payments
The truth is that most investors won’t have the money to generate $1,000 per month in dividends; not at first, anyway. Even if you find a market-beating series of investments that average 3% annual yield, you would still need $400,000 in up-front capital to hit your targets.
And that’s okay. You don’t need to get there all at once. Instead, patiently reinvest your dividends as they come in the door. This will create compound returns, in which your payments then start generating their own payments. Over time you’ll find that your investment portfolio’s base capital can, indeed, grow to hit your target.
The Bottom Line
Making $1,000 per month in dividends will take patient investing – whether you’re buying stocks or funds – or a lot of up-front capital. But with the right mix of yield and patience, you can get there.
Dividend Investing Tips
- You can never know too much about your investments. If you want to start pursuing dividend investing, take our crash course in 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 hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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