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. Conversely, dividend stocks generate income on their own. However, building a portfolio that yields at least $1,000 in dividends each month takes some work. Here’s how to do it.
For more help generating adequate income through your investments, consider working with a financial advisor.
What are dividends?
Dividends are payments a company makes to its shareholders. For example, let’s say that ABC Corp. issues a dividend of $0.50 per share. Someone who owns 1,000 shares of this stock will receive a check for $500.00.
Usually a company will issue these payments based on their earnings. When it has made a lot of money, it will distribute some of it to its shareholders.
Companies do not have to pay dividends, although most do. Depending on the size of the business, 54% to 84% of companies issue dividend payments at least from time to time.
There is no legally mandated schedule for companies to make dividend payments. When a company does this is entirely at its discretion, although members of a class of shares known as “dividend aristocrats” tend to issue them on a regular schedule. Most payments are issued on a quarterly basis.
Capital required for dividend investment
The No. 1 question people ask when it comes to income investing is, “How much will it take to reach my goals?” This is an excellent question. Unfortunately, the number can be quite large.
Now, there is no fixed amount of money you need to invest for dividends. It all depends on the performance of your investments, so understanding “performance” is very important to understanding dividend investing. (Note that the definition below is how “yield” applies to stock dividends. In general, yield determines how much money an investment makes when you hold it rather than sell it.)
Yield is the amount a stock pays in dividends per share based on the stock price per share. So, for example, say that ABC Corp. it costs $100 per share. Let’s also say the company pays an annual dividend of $5. The return on this stock would be:
That’s a 5% return. If you invest $100 in this stock, you will make $5 each year in dividends. By market standards, that’s pretty good.
At the time of writing, the S&P 500 paid an average return of 1.37%. This means that across the market, on average investors are getting dividend returns worth about 1.37% of their original investments. Fortunately, this is lower than historical standards. Typically the S&P 500 tends to average 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 about 2% in return every year. This gives us the following formula:
Solving for X, we get $600,000.
In a market that produces a 2% annual return, you would need to invest $600,000 up front to reliably generate $12,000 per year (or $1,000 per month) in dividend payments.
How can you earn $1,000 per month in dividends?
Here are the steps you can take to build an adequate dividend portfolio.
Look for $12,000 per year in dividends
To make $1,000 a month in dividends, it’s best to think in annual terms. Companies record their average performance on an annual basis, not monthly averages. So you can get a much better idea of how much you could be earning if you build your numbers around annual goals as well.
This is the place to start. You’re looking to make $12,000 a year in dividends.
Find dividend paying stocks
The next step is to look for stocks that pay reliable dividends. Not every company issues a dividend payment, and not all of them are consistent.
You’re not looking for the occasional windfall. You want companies with a history of making regular payments on a regular schedule. To do this, research stocks that have a strong payout history. 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 Returns
Remember, yield is the ratio of dividend payout to share price for any given share. When looking at a stock’s performance, you want to balance two concerns.
On the one hand, strong returns mean the stock is paying more money relative to its share price. This is generally good. If one stock returns 3% and another returns 1.5%, you will make more money per dollar invested in the former than the latter.
However, when a stock’s performance is too strong, it can be a sign of trouble. An unusually high return may indicate that the share price has recently fallen. Investors don’t get more money. In reality, capital gains investors lose money. It can also indicate that the company is spending its money badly, hurting the operating budget and shareholder value. Any 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 payouts that are strong, but not unusually strong relative to the market as a whole. In recent history, the market has averaged a return of about 2% per year. If you see a 3% or 3.5% return, this can be a great investment. If you see a 5% return, you might want to dig a little deeper.
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Start with large companies and ETFs
In general, you can expect the best performance from larger, older companies. Historically, companies listed in the S&P 500 tend to be the most likely to issue regular dividend payments and also tend to issue the largest dividend payments per share.
You can also start by investing in dividend exchange traded funds (ETFs). This area has become increasingly popular for ETFs, and you can find many that are organized solely around investing in dividend-paying stocks. You can often save yourself a lot of trouble by looking for an ETF with strong historical performance instead of a portfolio of diverse stocks.
Reinvest your payments
The truth is, most investors won’t have the money to generate $1,000 a month in dividends. not at first anyway. Even if you find a series of investments that beat the market with an average annual return of 3%, you’ll need $400,000 in seed capital to reach your goals.
And that’s okay. You don’t have to get there all at once. Instead, patiently reinvest your dividends as they come in the door. This will create compound returns, where your payments start generating their own payments. Over time you will find that the principal of your investment portfolio can, indeed, grow to meet your goal.
The bottom line
Making $1,000 a month in dividends will require patient investment – whether you buy stocks or funds – or a lot of upfront capital. But with the right combination of performance and patience, you can get there.
Dividend Investment Tips
You can never know too much about your investments. If you want to start pursuing dividend investing, take our lesson 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 serving your area, and you can interview your advisors at no cost to decide who 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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