How to make $500 a month in dividends in 5 steps

Learn how to make $500 a month in dividends by setting up a dividend portfolio aligned to the 12 months of the year.

Passive income allows you to earn extra money while you sleep. Regardless of how you want to use the money, an extra monthly income stream puts you on a path to achieving your long-term financial goals.

While you could use dividend income for any purpose, letting your dividends reinvest grows your future earnings. Compounding a dividend snowball creates larger passive income in the years to come.

Don’t let the idea of setting up a passive income portfolio feel overwhelming. A dividend investing plan and building a savings habit will give you on your way.

5 steps to create a dividend portfolio to earn $500 a month in dividends include:

  1. Open a brokerage account for your dividend portfolio, if you don’t have one already
  2. Determine how much you can save and invest each month
  3. Set up direct deposit to your dividend portfolio account
  4. Choose stocks that fit your dividend strategy
  5. Buy shares of dividend stocks

Building a monthly dividend portfolio doesn’t happen overnight, especially if you’re starting from scratch. With a solid plan, you’ll get there over time, dividend by dividend. Here’s a deeper look at the steps and strategies to help you get started.

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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 of carefully selected stocks, mutual funds, and other predictable investments that pay dividends. When curating your investments you’ll want to look at when they pay dividends so that you’ll receive them each month of the year.

There are different opinions on if this is a good investment strategy. Some people prefer different investing approaches. Ultimately you’ll need to decide if creating a monthly dividend portfolio fits with your financial goals and risk tolerance.

When selecting stocks and investments you need to remember that no dividend is 100% guaranteed to pay based on its past history, typically there’s a higher probability of the payment pattern to continue in the future.

5 steps to make $500 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 and waiting to be invested, this will take you some time to build. And that’s ok.

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. Check out the trade commission fees and minimum requirements the brokerage company requires. In 2019 many of the large brokerage companies reduced their trade commissions to $0 per trade.

The shift to $0 commissions per trade is good news for you because that allows you to build your dividend portfolio with smaller purchases without fees eating into your plan.

Also, make sure to confirm any account balance minimums as some companies charge a fee for having an account if the balance is below a certain number. As in 2019 many companies reduced their balance minimums to $0, but always double-check this too.

When you open your account and start your strategy, you’ll need to decide if you’re opening a regular brokerage account or a tax-deferred retirement account. Consider having a conversation with your favorite tax professional to understand what makes the most sense for your specific situation.

And finally, you’ll want 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. Central to building an investment portfolio of any size is consistently adding to it. Automation makes it easier to reach your goals by taking a step out of the process. And if you don’t have a direct deposit option through your employer, being able to transfer money from your checking account is an alternative.

If you have cash ready to add to your portfolio, start the 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 $500 a month in dividends, you’ll need to invest approximately $200,000 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 $500 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.

Consider setting a smaller, short-term dividend goal so you will see progress towards your larger goal. Maybe reaching $50 or $100 a month in dividends is a goal you can reach this year. It’s a great stepping stone in the years to come to building a larger monthly dividend portfolio.

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 transfer instructions within 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, a few important factors you’ll want to consider for each company include:

  • 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 you need to look at 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 that when you have the cash available you can start buying shares to grow your dividend income.

Related: Monthly and quarterly dividend calendars for Dividend Aristocrats

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.

How much money do you need to invest to make $500 a month in dividends?

To make $500 a month in dividends you’ll need a dividend stock portfolio of between $171,429 and $240,000, with an average portfolio of $200,000. The actual amount of money you’ll need to invest in creating a $500 per month dividends portfolio depends on the dividend yield of the stocks you buy and the number of years you have to reach your goal. Dividend growth helps reduce the amount of new money you need to invest.

The dividend yield is calculated by dividing the annual dividend paid per share by the current share price. For $X you invest, you receive Y% in dividends back. Think of a dividend as your return on investment.

For regular stocks, the rule of thumb is usually 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 and going into 2021 was wild. The target benchmark might flex slightly compared to previous years. You’ll also need to decide if you’re ready to invest in a stock market with a lot of movement.

Estimate the amount of money you need to invest

For this example, let’s assume a 3% average dividend yield, middle of the target range.

Many dividend stocks pay 4 times per year, or quarterly. To receive 12 dividend payments per year, you’ll need to invest in at least 3 quarterly stocks.

To estimate the amount of money you need to invest per stock, multiply $500 by 4 for the annual payout per stock, which is $2000. As you need 3 stocks to cover the 12 months, you’ll need to invest enough to receive a total annual dividend income of $6,000.

Dividing $6,000 by 3% results in a total dividend portfolio value of approximately $200,000. For each stock, you’ll invest approximately $66,667

How many dividend stocks do you need to receive payments each month?

You can build your portfolio with as little as 1 monthly dividend stock, or 3 quarterly dividend stocks to receive 12 payments per year. $500 a month, or $6000 a year in dividends requires a large investment portfolio overall. And if you limit your investments to only 3 stocks, it equates to a value of almost $67,000 per individual stock that has a dividend yield of 3%.

To manage the risk, you’ll likely invest in more than 3 stocks across different companies and industries. Unless you have a large amount of cash ready to invest, over time you can decide which stocks to continue to purchase shares in, or you may also decide to start purchasing a new company.

How to align your dividend stocks for payments each month

Most dividend stocks pay out four times per year, or quarterly. To build a monthly dividend portfolio, you’ll need to buy at least 3 different stocks so each month is covered. There are also REITs (Real Estate Investment Trust) and bond funds that pay monthly you may want to research further.

This example focuses on selecting quarterly stocks. There are 3 common dividend payment patterns that many stocks follow. Not all stocks will follow one of these patterns, but it makes it easier to select companies to consider for your portfolio.

The three common payment patterns come from paying dividends in a month within the quarter: first month, second month, or third month. The three stock dividend payment patterns are:

  • January, April, July, October
  • February, May, August, November
  • March, June, September, December 

If you buy one stock per payout pattern, your investment portfolio will typically pay you dividends each month of the year. Sometimes stocks that pay at the very beginning or end of a month will shift months, so it will be close but not always 100% exact.

Related: Monthly and quarterly dividend calendars for Dividend Aristocrats

Of course, you should always do your research first. Just because the stock fits the payment pattern you need, it doesn’t mean it’s the best stock to buy. It’s ok if your portfolio isn’t 100% equal each month of the year and over time with reinvestment and dividend increases it likely won’t be exactly equal each month.

7 tips for choosing stocks for your dividend income portfolio

When you’re ready to start building your dividend income portfolio, here are seven tips to help you in your monthly dividend portfolio journey to earn $500 a month in dividends.

Add stocks with consistent dividend payment histories to your watchlist 

The only sure thing about the stock market is that it will go up and down. And the only guaranteed dividend is one that’s already paid out.

That being said, try looking at stocks with long dividend histories. Those stocks are likely to have future payments compared to companies with shorter dividend histories.

The dividend aristocrats and dividend kings are two categories of stocks with long histories (25+ and 50+ respectively). The other important part of these two categories is that they also include stocks with histories of annually increasing their dividend payouts.

The long-term dividend payers usually want to continue their payments in the future, because the market will drive down the share price if the dividends stop. It’s always possible something will change such as market conditions or a merger that could impact the dividend schedule.

Avoid chasing dividend yield rates

You may think buying stocks with higher dividend yields will speed up reaching your monthly dividend goal. While it sounds like a simple solution, regular stocks (i.e. not REITs) above 3.5% are generally considered risky.

Outside of weird market conditions where all of the share prices are wonky, higher dividend yields may indicate a problem with the company, driving down the price per share. As the stock share price goes down, the dividend yield goes up.

Spend time reading the stock commentary. You’ll notice that stocks with higher dividend yields are usually considered at risk for a dividend cut. A dividend cut means reduced income as well as likely a reduction in your overall portfolio value. Do your research before buying to avoid headaches where possible.

That’s not to say you shouldn’t take the risk, because sometimes things can work out in your favor. Go into every stock purchase with your eyes wide open and aware of the risks!

Know the stock’s next ex-dividend date

The ex-dividend date means the stock is trading excluding dividends. If you buy shares on or after the ex-dividend date you won’t qualify for the next announced dividend payment.

As part of your dividend research check to see if the next dividend has been announced and the associated dates.

You can use history as a guide to estimate the next dates, but sometimes they will shift.

If you missed the upcoming dates you can still buy shares for the future and simply remember it might take longer for your dividend portfolio to start paying out. Otherwise, check your watchlist to see if there’s a different stock you might want to buy at the moment.

Understand any potential income taxes you may owe

When you open your brokerage account you can open a retirement tax-deferred or a regular, taxable account. If you’re building a dividend income portfolio in a regular brokerage account you’ll likely owe income taxes on your dividend income.

if your goal is $500 per month in dividend income and you build it in a taxable account, you may want to aim for a slightly larger portfolio 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 for more information about your specific situation. They can guide you to the right resources and tax considerations.

Reduce the risk by investing in multiple stocks

Compared to the smaller monthly dividend goals, $500 per month in dividends requires a large investment in individual stocks. And future results aren’t guaranteed with any stock, even the ones with long dividend histories.

If you decide to create a monthly dividend portfolio, also consider reducing your risk by purchasing multiple stocks for each payout pattern. Maybe you want to split the $500 per month across 2 or more stocks. And also consider investing in different industries, not just multiple companies.

You can create a simple dividend planner in Google Sheets or Excel to structure your portfolio and keep track of your dividend earnings.

When it comes to investing in the stock market you do the best you can with the information available at the time. Keep an eye on things and course-correct in the future as needed.

Turn on Dividend Reinvestment

Dividend reinvestment is an automatic process that takes the dividends you receive and “purchases” new shares and partial shares in the same stock. There are varying opinions on if you should always reinvest in the same stock, or if you should do it manually.

There are pros and cons to the arguments. Now that trading commissions are down to $0 it’s easier to do now assuming you have enough money to buy a full share.

If you’re doing a buy-and-hold approach for the long term, automatically reinvesting your dividends makes the process easier. On the other reinvesting adds to the paperwork if you decide to sell the shares.

Take a closer look at the strategy you build for yourself to decide what fits your plans better. But if you decide to reinvest, double-check that it’s turned on for each stock you buy. Sometimes the brokerage companies default to cash dividends rather than automatically reinvest.

Build incrementally over time

If you’re starting your dividend portfolio from scratch and don’t have $200,000 in cash ready to invest, don’t worry.

Start with the steps above and create a plan to save money to invest. Consider breaking down your larger goal into smaller targets. Maybe start with building a $50 or $200 a month dividend portfolio in the first year or two. Keep investing and reinvesting to hit your larger $500 goal in the future. And you don’t have to stop there. Consider increasing your monthly dividend goal up another $100 to $600 per month, and then continue to build towards $1000, $2000, $3000 $4000 per month or more.

Since the large brokerage companies have cut their trading commissions to $0, fees won’t eat into your investing strategy. You can make smaller stock purchases over time.

Also, consider automatically reinvesting your dividends to help your portfolio grow on autopilot. The dividend snowball takes a while to get started. And over time it really picks up speed to help you reach your goal sooner.

Frequently Asked Questions

Do you have additional questions about building an investment portfolio for monthly dividend income? Check out these questions and answers.

What is a monthly dividend portfolio?

A monthly dividend portfolio of carefully selected stocks, mutual funds, and other predictable investments that pay dividends. When curating your investments you’ll want to look at when they pay dividends so that you’ll receive them each month of the year.

How much money do you need to invest to make $500 a month in dividends?

To make $500 a month in dividends you’ll need to invest between $171,429 and $240,000, with an average portfolio of $200,000. The actual amount of money you’ll need to invest in creating a $500 per month in dividends portfolio depends on the dividend yield of the stocks you buy.

What other thoughts do you have about investing for $500 a month in dividends?

Earning $500 a month in dividends is a great way to grow your portfolio with passive income over time until you need to pay your bills.

Start by opening a brokerage account followed by upfront planning. Build your watchlist and buy stock when you have the money available. Also, keep an eye on their historical payout patterns to get an idea of how the dividends might be paid in the future.

You’ll spread the risk by buying stocks in different companies and different industries. Avoid having all of your eggs in one basket by splitting up the $500 per month goal across multiple stocks.

Always do your research to make sure you know which companies are the best to invest in at the moment.

Remember you can start where you are and grow your portfolio over time. Don’t get discouraged if you’re not able to create a $500 dividend income on day one.

Over to you, what are your additional tips or strategies for creating a dividend income portfolio?

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How to make $500 a month in dividends