You’re already stretched to the max to find extra time with the demands of your life. And while you’d like extra money, the idea of finding time is overwhelming.
Setting up a passive income portfolio allows you to earn extra money while you sleep. You’ll need to put the work and money in upfront so you can earn extra money without having to split your time further. And that upfront effort won’t likely need as much time as you spend working at your day job.
$2500 a month in dividends is a sizable goal. If you’re starting from zero with a new account, it will likely take time to reach your target income.
If you can reinvest your earnings for the near term, instead of using the dividend income to pay bills, your portfolio can grow automatically while you also invest additional money. The combination of reinvestment, new money, and dividend increases will help snowball your way to larger dividend goals.
Let’s look at how you can plan your stock purchases so you receive $2500 in monthly income or any amount you need.
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.
How much money do you need to invest to make $2500 a month in dividends?
To make $2500 a month in dividends you need to invest between $857,143 and $1,200,000 with an average portfolio of $1,000,000. The exact amount of money you will need to invest to create a $2500 per month dividend income depends on the dividend yield of the stocks.
Dividend yield is the return on investment for the stocks you buy in terms of dividends. To calculate dividend yield divide the annual dividend paid per share by the current share price. You receive X% in dividends back for the money you invest.
The general recommendation for “regular” dividend stocks is to target dividend yields in 2.5% to 3.5% range. You may think a shortcut to your goal is to pack your portfolio with stocks with higher dividend yields, but that may be a risky approach. Higher dividend yields may indicate an issue with the company.
For the example in this discussion, all math will be based on a 3% dividend yield and focus on quarterly stock payments to keep things simple.
Most dividend stocks pay dividends 4 times a year. To cover each month of the year, you need to buy at least 3 different stocks. 3% is the middle of the “regular” dividend stock target dividend yield range.
If each payment is $2500, you’ll need to invest in enough shares to earn $10,000 per year from each company, or 4 times $2500. Per year your portfolio will generate about $30,000 in dividends.
To estimate how you’ll need to invest per stock, divide $10,000 by 3%, which results in a holding value of $333,333. And then multiply that by 3 for a total portfolio value of around $1,000,000. Not a small amount of money, especially if you’re starting from scratch.
And at that total value, you’ll likely want to invest in multiple stocks so spread the risk. Investing in the stock market always has a degree of risk involved.
A word of warning about trying shortcut process with higher dividend yield stocks…
After looking at the math above, you may start to think about buying stocks with higher dividend yields so you reduce the amount of money you need to invest.
In theory, this could work, but “regular” dividend stocks with yields above 3.5% are generally considered risky.
Under “normal” marketing conditions, higher dividend yields in “regular stocks” may reflect a problem with the company. The share price is being driven down by concerns about the company. The lower price per share raises the dividend yield.
Do your research and spend time reading comments about the stock. SeekingAlpha is one place to try.
You’ll see different opinions, but as you gather more insight into the company, you’ll start to pick up a general feeling about the safety of the dividend. There may be a general consensus that the dividend is at high risk of being cut.
Nothing is 100% guaranteed either way but, if the dividend is cut the stock price will likely go down further. Not only will you be out the dividend income, but you’ll also have a decreased portfolio value at that point. The size of the portfolio decrease will depend on how much the market has “priced” in the anticipated cut into the share price.
Ultimately it’s your decision on which risks you’ll choose to take. You can only do your best with the information publically available at the time. As with all investment purchases, make sure you’re an informed investor before deciding.
How to choose dividend stocks to receive dividend payouts each month
Dividends can be paid monthly, once a year, twice a year, or sometimes even less scheduled. Quarterly dividend payments are the most common payout structure you’ll find.
Keeping with the original example focusing on quarterly payments, you need to buy at least 3 different stocks that follow specific payment patterns to be paid monthly. You’ll also probably decide to invest in more than 3 stocks given the size of your goal.
The good news is that many stocks follow one of three common divided patterns. And if they don’t follow the pattern exactly, they’re typically pretty close. As you decide what to include in your portfolio, you can buy stocks that don’t it a pattern exactly.
The three dividend payment patterns align are as follows and actually map to the “month” in each quarter:
- January, April, July, October: the first month of the quarter
- February, May, August, November: the second month of the quarter
- March, June, September, December: the third month of the quarter
If you buy one stock for each pattern, your investment portfolio will likely pay you dividends each month of the year.
Dividends that pay at the very beginning or end of the month sometimes shifts between the months because of how the calendar works that year. Typically the pattern down to the date of payment is fairly close year over year, but it’s possible to change from time to time.
Always do your research into the company before investing in it. Buy the best stocks for your portfolio. Don’t skip or buy a stock just because it doesn’t pay exactly to a certain payment pattern you need to fill a gap in your dividend payment schedule.
7 things in mind to keep in mind when starting and growing your dividend income portfolio
When you’re ready to start your journey building a dividend income portfolio, here are seven things to keep in mind for your monthly dividend portfolio plans.
Start small, especially if you’re starting from scratch
Based on the math above, you’ll need to invest about $1,000,000 to earn $2500. It’s not a small amount of money, especially if you’re starting with a new account rather than trying to convert an existing IRA or account into a dividend portfolio.
Set your initial dividend goals at smaller levels such as $100 a month or $200 a month. It’s going to take you time to reach your larger goal of $2500. Between reinvestment and new investment over time, you can build your portfolio up to the larger goal.
In 2019 the large brokerage companies their trading commissions to $0, so you can make more frequent purchases of small blocks of shares without losing money to fees. Instead of wasting money on fees that money can go towards another stock share.
Setting incremental goals also gives you the opportunity to decide as you go if you want to keep buying the same stock or switch to a different investment.
Buy different stocks to spread the risk
At a basic level to cover all 12 months of the year with “regular” stocks, you need to buy shares in at least 3 different companies. In reality, putting approximately $1,000,000 into just 3 companies creates a fair amount of risk. If something happens to one of those companies, that’s a large impact on your overall portfolio.
Having a portfolio of 3 stocks means putting a lot of eggs in a few baskets. Diversifying the companies you purchase stock in spreads the risk.
Spread the risk by not investing in both different companies as well as different industries. Also aim to buy shares in companies that are a good value at the time.
You may want to consider setting guidelines in your portfolio strategy so that no single stock accounts for more than $200 or $250 of a single month’s dividend income.
Start with stocks that have consistent dividend payment histories
The only guaranty with the stock market is that it will go up and down. And as investors were reminded in 2020, the only guaranteed dividend is one that’s already been paid out. Sometimes extreme market conditions will get the best of consistent dividend stocks.
All that to say, under normal circumstances stocks with long histories of dividend payment have a better chance of continuing to pay out in the future. These companies usually try to continue their dividend payment trends otherwise face a price drop if they cut or stop.
Aside from market conditions, changes in the company could result in changes to the dividend schedule so never 100% bank on a payment.
Check the next ex-dividend dates
To qualify for the next dividend payment you need to own the shares prior to a specific date. The ex-dividend, or excluding dividend date announced as part of the dividend declaration.
As part of your watchlist or portfolio plan, take note of the ex-dividend date if announced or estimate is based on the past. Before you make a purchase double check that data again.
If the stock is already past its ex-dividend date, you decide to continue with your purchase and wait longer until your first payment for that stock. On the other hand, you may decide to purchase something else from your match list if it’s a good value at the moment and you would also receive the next dividend.
You’ll strike a balance between growing your next dividend payment and using your investment money efficiently.
Research the potential incomes taxes you may owe
Depending on the type of account you open, you may owe income taxes as part of the next filing or in the future. Income in general means additional taxes and paperwork.
If you’re building your portfolio in a regular brokerage account, and not a tax-deferred retirement account, you’ll likely have additional taxes to pay (or a reduced refund).
One thing to keep in mind for the future is if you want to receive at least the full $2500 per month, you’ll need to set a larger investment goal. With the larger goal, you can use some of the income to cover the taxes.
Check with the IRS or your tax professional to confirm your specific situation. They may also have additional advice on how to proceed.
Avoid chasing dividend yield rates
High dividend yield rates, while they seem like a shortcut to a goal, could indicate a problem with a “regular” stock company. The stock price is being pushed down for some reason.
Make sure you do your company research on any and all companies you plan to buy stock in. You want to be an informed consumer and reduce the risk of losing your income and portfolio value.
Maybe based on your research, you decide to take the risk and buy that particular “regular” stock even though the dividend yield is higher. Ultimately you need to decide what’s best for you and your risk tolerance.
One quick note. REITs (or real estate investment trusts) are a different type of stock investment that is taxed differently so the dividend rates are typically higher than the “regular” stocks.
Reduce the risk by owning multiple stocks to cover your monthly payments
As mentioned above, it’s risky to put all of your eggs into a few baskets. Compared to a smaller goal, $2500 a month in dividends requires a large investment in individual companies.
It’s worth mentioning again. Future results aren’t guaranteed, even with the long-paying companies. It’s always possible for dividend payments to end or something to happen to the company.
Consider buying shares in several different companies for each of the payment patterns.
Create a simple dividend planner in Google Sheets to help you plan and track your dividend earnings.
Ultimately you’ll do the best you can with the information you have at the time. Course correct in the future if you need to.
The other benefit of being open to buying different stocks is that you may find a better buy for your money at that moment.
Are you planning to invest for $2500 a month in dividends?
Earning $2500 a month in dividends as passive income can really help you supplement your income or continue to grow your portfolio until you need the money.
Intentionally choosing stocks will create a portfolio that pays you dividends each month.
Buy stocks in multiple industries to spread the risk and consider splitting up your $2500 monthly goal across multiple stocks. Reduce the risk by not having all of your eggs in one or two baskets.
Always make sure to do your research upfront and right before making a purchase to confirm the company is a good fit for your portfolio, not just the calendar.
Incremental goals will allow you to grow your portfolio over time without getting discouraged. It’s ok to build your way up to $2500 in monthly dividend income over time. And then once you reach one goal you can level up further to earning $3000 a month in dividends.
Over to you, what additional strategies or questions do you have about creating a dividend income portfolio?
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