With additional passive income each month you could cover your utility bills, pay down debt, or grow your investments.
If you don’t need the extra income to pay your bills right now, reinvest the dividends to compound and snowball for a larger future income.
You’ll need money to start to buy the stocks, but setting up a passive income portfolio is easier than you think.
To help you get started, here are 5 steps to create a dividend portfolio to earn $100 a month in dividends:
- Open a brokerage account, if you don’t have one already
- Determine how much you can invest each month
- Add your brokerage account to your direct deposit
- Select stocks that fit your dividend strategy
- Buy shares of stock
Setting up a passive income portfolio is easier than you may think it is. Here’s a deeper look at the steps and strategies to help you get started building a portfolio to pay you a monthly income of $100 or any amount you need.
Table of Contents
Jump to the sections of this article using the links below.
- What is a monthly dividend portfolio?
- How much money do you need to invest to make $100 a month in dividends?
- 5 steps to make $100 a month in dividends with a stock portfolio
- How to align your future dividend payments to each calendar month
- 5 tips for choosing stocks for your dividend income portfolio
One quick note I should mention. I’m not a licensed financial planner. The content on this website should be considered for information purposes and should not be considered investment advice. Always do your own research before making financial decisions. Or check with your favorite financial professional for additional information on what’s best to do for your situation.
What is a monthly dividend portfolio?
A monthly dividend portfolio is a curated collection of stocks, mutual funds, and other predictable investments that pay dividends. When choosing your investments you’ll focus on when they pay dividends so receive income each month of the year.
As with any investing strategy, there are different opinions on if this is a good approach. You’ll need to decide if creating a monthly dividend portfolio fits with your financial goals and risk tolerance. That’s not also to say that you can’t have a monthly dividend portfolio as one piece of your overall strategy. You could also have other types of investments to balance your portfolio.
You should also remember that no dividend is 100% guaranteed to pay in the future based on its past history. Typically there’s a higher probability of the payment pattern to continue in the future.
How much money do you need to invest to make $100 a month in dividends?
To make $100 a month in dividends you need to invest between $34,286 and $48,000, with an average portfolio of $40,000. The exact amount of money you will need to invest to create a $100 per month dividend income depends on the dividend yield of the stocks.
The dividend yield is the annual dividend paid per share divided by the current share price. Think of this as a return on investment number. For X amount of dollars you invest, you receive Y% back in dividends.
For regular stocks, the usual practice is to focus on dividend yields in the range of 2.5% to 3.5%
For this example let’s use a dividend yield of 3% for each stock in the portfolio.
Most stocks pay dividends quarterly so you’ll need to invest in at least 3 different stocks in order to cover all 12 months of the year.
You could also check out REITs (Real Estate Investment Trusts) or bond funds that pay monthly. For this example, we’ll focus on “regular stocks”.
Keeping with our example of a portfolio of 3 quarterly dividend stocks, each stock would need to pay about $400 total per year so you will receive $100 per payment.
Dividing $400 by 3% results in a stock value of approximately $13,333. Your total portfolio would be valued at around $40,000 in this example.
Before you think about finding higher dividend yield stocks so you can invest less, stocks above 3.5% are generally considered risky.
A higher dividend yield may indicate a problem with the company, driving down the price per share. When the stock price goes down, the dividend yield goes up. Stocks with higher dividend yields are usually considered at risk for a dividend cut.
5 steps to make $100 a month in dividends with a stock portfolio
Here is a 5 step plan to help you get started on your journey to creating a monthly dividend portfolio. Unless you happen to have a large amount of cash ready to be invested, you may need to break your plan down across multiple years. With time, determination, and consistency you’ll get there.
1) Open a brokerage account for your dividend portfolio, if you don’t have one already
If you don’t already have a brokerage account, the first step will be to open one. Or even if you already have a brokerage account, you may want to open another one specifically for this portfolio.
You’ll need to consider if you want to open a taxable account so that you can use the dividend income prior to retirement or open a separate tax-deferred account that focuses on putting away money for the future. Consider having a conversation with your favorite tax professional to understand what’s makes the most sense for your specific situation.
Tip: When you’re looking at brokerage companies, confirm if there are any trade commission fees and minimum account balances to avoid fees. In 2019 most of the large brokerage houses reduced their trade commissions to $0 per trade. This is great for you because you can build your dividend portfolio with smaller purchases without fees eating into your plan.
And one final thing to check before opening an account is to confirm how to direct deposit money into your new account as well as how to set up a transfer from your regular checking account.
Consistency is central to building an investment portfolio of any size, and especially when your goal is $100 per month. Automation makes it easier to reach your goals by taking a step out of the process.
If you don’t have a direct deposit option through your employer, being able to transfer money from your checking account is an alternative. Put a recurring reminder on your calendar for payday so that you transfer the money when it’s available.
With any available money you have to start your new portfolio, set up a transfer to your new account as soon as it’s open. Next, take a look at your budget to figure out how much you can invest each month.
2) Determine how much you can save and invest each month
In order to make $100 a month in dividends, you’ll need to invest approximately $40,000 in dividend stocks. The exact amount will depend on the dividend yields for the stocks you buy for your portfolio.
Take a closer look at your budget and decide how much money you can set aside each month to grow your portfolio. Given the sizable amount of money, you’ll need to reach your $100 a month dividend goal, adding regularly to your portfolio will help.
The amount of money you can invest each month will partially determine how long it will take you to reach your goal. If your budget is currently tight, set aside what you can. Start with even a small amount so that it’s something.
Next, take a closer look at your budget for opportunities to reduce your expenses so you can use that money to invest instead.
And you will probably need to plan to work on this goal year over year, focusing on a target increase in your monthly dividend income each year. For example, consider setting an annual goal of growing your monthly dividend income by $25 or $50 per month. It’s a great stepping stone that allows you to make progress without feeling discouraged.
3) Set up direct deposit to your dividend portfolio account
Get the direct deposit information for your brokerage account so that you can update your paycheck instructions. Hopefully, your employer allows you to split your paycheck a few different ways because you still need to receive money into your regular checking account. Make sure you pay your bills in addition to investing in future income!
If you’ve run out of paycheck instructions or your brokerage company doesn’t have clear direct deposit instructions, you should be able to set up free account transfers to your brokerage account. Put a reminder on your calendar for each payday to manually transfer the money you want to invest. Typically there’s always a backup plan if the original option isn’t available.
4) Choose stocks that fit your dividend strategy
Stock selection is a relatively personal decision and requires research into each company you decide to invest in. When it comes to creating a dividend portfolio, you’ll want to consider a few things for each company:
- The company’s health
- How long they’ve been paying a dividend along with their payment increase history
- How well their earnings are covering their dividend payments
- The company’s industry
The company’s health and earnings will help you understand how safe future dividend payments likely are. Researching the company and reading commentary is important to making decisions about which stocks to buy.
The dividend history and payment increase trends give you an idea of when the company will likely payout in the future. Stocks with increasing dividends also help you snowball your way to your dividend goals.
And finally knowing the industries of the companies you decide to invest in allows you to create a balanced and diverse portfolio. Managing risk involves not putting all your eggs in one basket. Diversifying the companies you buy stock in along with the industries represented in your portfolio help spread the risk of your future dividend earnings.
The other aspect to consider is when the company pays its dividends. If you’re looking to earn dividends monthly, you might want to focus on companies that if certain payout schedules. That’s not to say a historical payout schedule should 100% guide you to buy a stock or skip one. It just adds to your decision process.
Create a watchlist of the companies you think you’ll want to invest in so when you have the cash available you can start buying shares to grow your dividend income.
5) Buy shares of dividend stocks
And finally to reach your monthly dividend goal, start buying shares of stock in the companies you want to focus on. With the direct deposit from each paycheck, you’ll have cash ready and waiting when it’s time to make a purchase.
When you buy shares, double-check your watchlist to see which stock is the best value for the moment. It’s not so much about “timing the market”, which typically doesn’t work out in your favor, but making sure you’re being efficient with your purchases.
Fortunately, as most large brokerage companies have reduced their trade commissions to $0, you’re able to buy stock in smaller numbers of shares without fees eating into your investment value.
Checking your watchlist helps you avoid research overwhelm and decision fatigue. If you’re buying shares in bluechip stocks, then it’s about looking at the calendar to see if you’ll qualify for the next dividend payment, or potentially if the price is down you might be able to buy additional shares for your money.
You’ll repeat this step until you reach your goal. With each purchase, you’ll be taking another step towards earning $100 a month in dividends.
How to align your dividend payments to a yearly calendar
Most stocks pay their dividends four times per year. To build a monthly dividend portfolio you need at least 3 different stocks so each month of the year is covered.
While it may sound impossible to find stocks to cover all of the months, there are 3 common payment patterns. Not all stocks will follow the patterns exactly but many do.
The common payment patterns focus on paying once per quarter and align to the month in the quarter: the first month, the second month, or the third month. The dividend payment patterns work out as:
- January, April, July, October
- February, May, August, November
- March, June, September, December
If you buy one stock for each of the patterns, your portfolio will pay dividends each month of the year.
When you are choosing stocks for your portfolio to earn $100 a month in dividends, don’t forget to research the company first. Just because a stock fits the pattern you need and has a long history of paying dividends, it doesn’t mean it’s the best stock to buy.
5 tips for choosing stocks for your dividend income portfolio
When you’re ready to start building your dividend portfolio, here are a few things to keep in mind as your continue on your journey.
Choose stocks with consistent dividend payment histories
Nothing is 100% guaranteed when it comes to the stock market beyond it will go up and down.
But, stocks with longer dividend payment histories usually continue their payments in the future. Dividend kings and dividend aristocrats are two categories of stocks with long histories (50+ and 25+ respectively).
Most of these stocks generally continue to follow a consistent pattern year over year, but it is always possible something will change.
Sometimes company conditions change meaning they need to make changes to their dividends. A merger or acquisition might change the dividend strategy.
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 course correct in the future.
Double-check the next ex-dividend date
The ex-dividend date is the date you need to own the shares to be eligible to receive the next announced dividend payment.
Depending on when you buy the stock shares, you may not receive the first dividend payment.
Before you purchase your shares check if the next dividend payment along with the ex-dividend date was announced.
For your dividend portfolio to start paying in full, it may take some time.
If the stock fits your strategy, it may be ok to buy the shares now and simply miss the upcoming dividend payment. Otherwise, it might make sense to buy another stock from your watchlist for now.
Don’t chase dividend yield rates
As mentioned earlier, high rates in regular stocks (i.e not REITs) could suggest issues with the company. If there’s a problem with the company and the dividend is at risk of being cut, you’ll find yourself with a loss in portfolio value.
Save yourself the headache and do your research into the company before making a purchase. If you decide to take the risk, make sure you jump in with your eyes wide open!
Consider the potential income taxes
If you’re building your dividend portfolio in a regular brokerage account (i.e. not a tax-deferred retirement account), you’ll probably owe additional income taxes each year. Check with your favorite tax professional or the IRS for more information about your situation.
If you’re aiming for $100 per month in dividend income, you may need to earn extra money to cover the taxes. Consider investing more money for a higher dividend payment to cover the related taxes.
Start smaller if you need to
If you don’t have approximately $40,000 to build your portfolio right now, start with the money you have and let it grow over time.
The large brokerage companies are cutting their trading commissions to $0 so now it’s easier for you to invest smaller amounts of money without losing money to the fees.
Follow the same approach as we reviewed above but focus on a smaller monthly target. If you don’t need the income now, you can increase your dividend income over time either by reinvesting your dividends, buying more shares, or both. At a minimum, automatic reinvesting will help your portfolio grow on autopilot
For example, a $50 per month portfolio could be created from $20,000. Again assuming the 3% dividend yield.
In the future buy additional shares in either the same stocks or with stocks that fit the same payment patterns to grow your portfolio faster.
Wrapping up. Are you planning to invest for $100 a month in dividends?
Earning $100 a month in dividends as passive income is a great way to cover your monthly bills or grow your investment portfolio on autopilot.
Some upfront planning is needed to align the dividend payments to each month of the year. Make sure you don’t simply buy a stock because it’s your income schedule.
Look at buying stocks in different industries to “spread the risk” and avoid having all of your eggs in one basket. Look for stocks that are at a better value (i.e. probably not stocks priced at near their 52 week high). Do the research first to find the best stock to buy at the moment.
Start with the money you have instead of waiting for later. Let your portfolio grow over time with reinvestment or purchasing new shares when you can.
Over to you, what are your additional tips or strategies for building your passive income from dividends?
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