Monthly passive income gives you extra money each month, while you sleep. You can use the money now to pay your bills or reinvest it to create even more income in the future. One decision you’ll need to make is how you want to use the money.
To help you get started, here are 5 steps to create a dividend portfolio to earn $200 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
A monthly dividend portfolio typically doesn’t start paying passive income immediately, especially when you’re starting from zero. Define solid goals and create an easy-to-follow plan. With enough time, continuous investment, and reinvestment, you’ll get there dividend by dividend.
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 $200 or any amount you need.
One quick note I should mention. I’m not a licensed financial planner or financial advisor. 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 $200 a month in dividends?
To earn $200 a month in dividends you’ll need to invest between $68,571 to $96,000, or an average of $80,000.
The actual amount of money you’ll need to invest to make $200 per month from a dividend portfolio will depend on the dividend yield of the stocks.
The dividend yield is the annual dividend paid per share divided by the current share price.
For regular stocks, it’s usually recommended to focus on dividend stocks with a dividend yield in the range of 2.5% to 3.5%.
One thing to keep in mind is the stock market in 2020 moved a lot and 2021 has the potential to be equally wild. The target dividend yield range flex slightly compared to previous years as the stock prices fluctuate based on market conditions. You’ll also need to decide if you’re ready to invest in a stock market at this time.
The math behind the portfolio investment estimate
Most stocks pay dividends quarterly so to cover all 12 months of the year you’ll need at least 3 different stocks. You could also check out REIT (Real Estate Investment Trusts), ETFs, or bond funds that pay monthly as well.
For this example, let’s use the middle of the dividend yield range, 3%, and assume it’s a portfolio of 3 quarterly dividend stocks. You would need enough shares to pay $200 per payment, or $800 total per year per stock.
Multiply $800 by 3 for a total annual dividend income of $2,400 and then divide by 3% (the dividend yield), which results in a total portfolio value of $80,000. Each stock holding value would be approximately $26,667.
Before you think about finding higher dividend yield stocks so you can invest less, stocks above 3.5% are generally considered risky. It might indicate there’s a concern with the company. When the stock price goes down, the dividend yield goes up. There could also be a risk of a dividend cut in the future.
5 steps to make $200 a month in dividends with an investment portfolio
Here are 5 steps so you can get started on your path to creating a monthly dividend portfolio. Unless you happen to have a large amount of money waiting to be invested, reaching your goal may take time. Remember that’s ok. This is a long game, not a get-rich-quick strategy.
1) Open a brokerage account, if you don’t have one already
Start by opening a brokerage account if you don’t already have one. Or if you already have one, you may choose to start an account at a new company, or open a separate account so you easily monitor your progress.
When you’re looking at brokerage companies make sure you keep the following things in mind:
- Trade commissions and minimum balance requirements
- Decide if you want to base your portfolio in a taxable or retirement account
- Direct deposit instructions are available and you can setup electronic transfer from your checking account
Avoid having commissions and minimum balance fees from chipping away at your investment portfolio. In 2019 most if not all of the major brokerage companies shifted towards $0 trade commissions and low-to-no minimum account balance requirements. If you’re starting your monthly dividend portfolio from scratch, both of these will be important to keep your strategy on track.
You’ll need to decide if you’re opening a regular taxable brokerage account or a tax-deferred requirement account. Consider having a conversation with a tax professional to understand which is better for your specific situation. Remember with a retirement IRA you’ll likely be limited to the total amount of new money you can contribute each year to the portfolio.
Finally, make sure the direct deposit information is easy to find and use. If the availability of direct deposit is not readily available online, check with the company’s customer service for more information before opening an account. Some companies will provide you with the exact numbers you’ll need to provide to your paycheck manager. Others are a bit more cryptic about it.
You’ll also want to ensure you can set up an electronic transfer from your regular checking account so you can grow your account with money beyond your paycheck. The connection from your checking account will also help you get started investing the money you have ready and waiting, no matter how small.
Automating your transfers to your brokerage account will keep you on track with reaching your investing and dividend goals in the long term. Next, take a look at your budget to figure out how much you can invest each month.
2) Determine how much you can invest each month
Next, look at your budget and determine how much money you can find to contribute to your dividend portfolio each paycheck or month. You’ll need a sizable amount of money to reach your goal of $200 a month in dividends. Contributing regularly to your portfolio will help you get there, deposit by deposit and dividend payment by dividend payment.
Taking a deep dive into your budget, look for opportunities to save money on your bills or possibly reduce extra spending. Typically eating at home or bringing your lunch to work will help free up some money.
Even if your budget is currently tight, find something to put aside no matter how small. Start somewhere and continue to increase that over time.
You could also start with a smaller, short-term dividend goal. Setting smaller goals lets you see progress towards the larger goal, creating a feeling of accomplishment. Maybe start the first year with a goal of $25 or $50 a month in dividends. And in the next year work up to a $100 per month dividend portfolio on your way to $200 per month. It’s a great stepping stone to building a larger monthly dividend portfolio.
3) Add your brokerage account to your direct deposit
Consistency is key to reaching any goal, including financial ones. Pay yourself first by adding your brokerage account to your paycheck direct deposit. Hopefully, your employer gives you the ability to split your paycheck across a few different accounts. Make sure you continue to pay your bills while investing in your future income.
If you’re not able to add your brokerage account to your paycheck instructions, you should be to transfer money from your checking account instead. Put a reminder on your calendar for each payday to manually transfer money between the accounts. There’s always a backup plan if the original option isn’t available.
4) Select stocks that fit your dividend strategy
Stock and investment selection is a relatively personal decision. Research the companies you want to invest in. When it comes to creating a dividend portfolio, you’ll want to consider a few things for each company:
- Company’s health
- Industry categorization
- Length of paying and increasing dividends
- How well their earnings are covering their dividend payments
No future dividend is 100% guaranteed. Paying attention to a company’s health will determine if future dividends are likely to be paid on the same trend based on history.
Ideally, you’ll invest in multiple industries to spread the risk. Sometimes economic conditions impact certain industries and not others. Diversity in your investments protects your overall portfolio.
Typically companies with long histories of paying and increasing their dividends will keep the trend unless an outside factor comes into play. Market or economic conditions might force a dividend payment strategy change. Or if the company is bought or sold, the dividend schedule could also change or even be stopped.
Start creating a watchlist of the stocks you might want to buy once you have enough money in your account. Having a shortlist of target stocks will help you take into action when you’re ready to start trading.
5) Buy shares of stock
The final, and repeating step for you to reach your monthly dividend goal is to buy shares of stock in the companies you choose. With the money from each paycheck direct deposit or other transferred funds, you’ll have cash available to make your purchases.
Before you make a purchase, look at your watchlist to see which companies are the best value at that moment. It’s not an attempt to “time the market”, which typically doesn’t work, but more about being efficient in your purchase.
Checking your watchlist also helps you avoid decision overwhelm and research fatigue. If you’re buying stocks you’re already comfortable with, then it’s about looking to see if you’ll qualify for the next dividend payment. Or maybe the share price went down, making it a good deal to buy additional shares to add to the ones you already own.
Assuming you choose a brokerage company with $0 trade commissions, you can buy smaller numbers of shares without fees taking away from your investment value. Progress made in small purchases.
How to align your dividend payments to the calendar
Most dividend stocks pay quarterly, so to build a portfolio that pays you at least once per month, you’ll need at least 3 different stocks. And it’s not as impossible as you think to cover all 12 months.
There are 3 common payment patterns. Not all stocks will follow the patterns exactly but many do. And that’s not to say you should limit your purchase strategy based on payment patterns. It’ more of a starting point for your research and selection.
The common payment patterns align to the month of the quarter the dividend is paid out: the first month, the second month, or the third month. The three common dividend payment patterns are:
- January, April, July, October
- February, May, August, November
- March, June, September, December
If you buy one stock per pattern, your portfolio will likely pay dividends each month of the year. The asterisk is there because sometimes stocks that pay at the very beginning or end of a month shift calendar months. Not a huge problem. It’s just something to be aware of.
When you are choosing stocks for your portfolio to earn $200 a month in dividends, do your research before buying. Just because a stock fits the pattern you need, it doesn’t mean it’s the best stock to buy. And in reverse, there are potentially great stocks for your portfolio that don’t 100% match the pattern too.
5 tips for building your dividend income portfolio
When you’re ready to start building your dividend portfolio, here are a few things to keep in mind while on your journey.
Choose stocks with long, consistent histories of paying dividends
No future dividend is 100% guaranteed. But if you choose a company that is healthy and has a long history of paying and increasing its dividends, there’s a reasonable chance of the trend continuing in the future.
Companies such as the dividend kings and dividend aristocrats are two categories of long dividend payment histories (50+ and 25+ respectively).
Most of these stocks generally continue to follow a consistent pattern year over year down to the dates, but it is always possible something will change.
Sometimes company or economic conditions force a company to make changes in its dividends. Or a merger or acquisition could change the dividend strategy. Do the best you can with your selections based on the information available at the time. You can course-correct in the future if you need to.
Take note of the next ex-dividend date
Depending on when you buy the stock shares, you may not receive the next dividend payment. It make take some time for your new dividend portfolio to start paying in full.
Double-check the ex-dividend date if the next dividend payment was announced. You may want to prioritize buying shares where you will get the next payment. Or If the stock fits your strategy, you could still buy the shares and simply miss out on the upcoming dividend payment.
Don’t chase dividend yield rates
As noted above, high dividend yield rates in regular stocks (i.e not REITs) could indicate issues with the company. While buying high shares with high yield rates seems like a shortcut to building your portfolio, it could backfire.
The dividend yield rises when the share price goes down. 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 both income and portfolio value.
Always do your research into the company before making a purchase. That’s not to say you shouldn’t take a risk. It could work out in your favor. Go into every stock purchase as an informed consumer, aware of the risks.
Don’t forget about income taxes
If you’re building a dividend portfolio in a regular brokerage account and not a tax-deferred retirement account, you may owe income taxes on the dividends.
You may also want to consider setting a higher goal than $200 per month so you have extra money 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 dividends vs ordinary dividends.
Check with your favorite tax professional or the IRS for more information.
Start with smaller dividend goals
If you don’t have approximately $80,000 in cash right now, start with the money you have to reach your dividend goal over time. You can buy in smaller share increments to grow your portfolio thanks to the $0 trade commissions most large brokerage companies have.
The same steps apply as discussed above, just in smaller increments. Also, consider reinvesting your dividends so you can grow part of your portfolio automatically.
For example, a $50 per month portfolio could be created with approximately $20,000 or a $100 portfolio built from approximately $40,000. You can build up to $200 and even $500 a month in dividends in the future, for example.
Buy additional shares of the same stocks or stocks that fit the payment patterns to help your portfolio grow faster.
What other questions or thoughts do you have about investing for $200 a month in dividends
Earning $200 a month in dividends can be a great way to receive passive income to pay your bills or reach your financial goals with extra money.
Upfront planning will help you choose dividend stocks that align with each month of the year. Make sure you don’t just pick a stock because it fits your schedule.
Do the research first. Spread the risk by purchasing stocks in multiple industries. And try not to buy stocks at the top of their 52-week high price.
It’s ok to start small. Set dividend goals based on the money you have and grow from there. Purchasing new shares and the reinvestment will get you to your larger goals with time and patience.
What additional strategies or tips are you thinking about for your passive income from dividends?
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