How to build a monthly dividend portfolio for passive income

How to quickly set up a monthly dividend portfolio to pay you passive income without it feeling like rocket science

Passive income is a beautiful thing, especially when it pays you additional money each month. A monthly dividend portfolio is one option to add to your multiple streams of income strategy and put you on the path to early retirement.

Setting up monthly dividend income is going to take brainpower and research. If you’re new to investing in the stock market this may feel like a foreign language you’re having a hard time learning.

Don’t worry. It doesn’t have to be.

Below is a step by step process for all of the pieces you need to start building a monthly dividend portfolio.

Yearly planner for setting up a monthly dividend portfolio

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?

Dividends are payments by a company of a portion of profits or reserves to the shareholders. Quarterly payments is the most common schedule, and they can also be paid yearly or even monthly.

A monthly dividend portfolio is a collection of investments selected to align their payout schedule with the months of the year.

To achieve your goal of monthly dividend payments using individual dividend stocks, you’ll need to align their payment schedules with the 12 months of the year. This is where it can get a little tricky, and here are few simple tips to help you successfully build your monthly dividend strategy.

Choosing investments to earn monthly dividends

You can purchase stocks that pay quarterly or monthly. Quarterly payments are the most common and usually tied to the large blue-chip companies you’re familiar with.

Monthly dividend payments you will see with different types of companies such as Real Estate Investment Trusts (REITs) and bond funds.

Always do your research when buying an investment. And if you’re new to investing, check out companies with a long history of paying dividends consistently.

For example, Dividend Aristocrats are stocks with a 25+ year history of annual increases of dividend payments. And Dividend Kings have a 50+ year history. 

You may have heard of the old saying, “past performance doesn’t guaranty future results”, but stock with long histories are still an excellent place to start for ideas of what to include in your portfolio.

While mutual funds are more of a black box in terms of how much they will pay out each quarter, bond funds can be an interesting portfolio addition. In some cases, these types of investments are tax-friendly. You may pay less income tax at the end of the year. Check the research materials for more information about the tax implications and if they have a higher initial investment requirement.

How to figure out how much money you’ll need

The amount of money you need to invest into your dividend portfolio for monthly income will depend on your dividend goals. Don’t get discouraged because there may be a bit of sticker shock when you look at how much money you’ll need to invest.

The dividend yield is the annual dividend amount divided by the current share price. This gives you the dividend return on your investment.

Let’s do some quick math based on an average dividend yield of 3%. For a monthly dividend payment, you will need investment approximately the following amounts.

While you may think finding a higher yield stock will help you need less money, it can be an indication of a concern with the company. In typical blue-chip stocks, a high dividend yield may also be at risk for a dividend cut!

Instead, start with a smaller monthly goal and increase your goal over time as part of your monthly dividend strategy. If you initially reinvest the dividend payments, your portfolio will also grow on auto-pilot. You’ll need to have some patience with this investing approach. It’s going to take time.

The secret to choosing the right stocks to fill your calendar

Dividend payments are usually predictable over time, especially when the stock has a long payment history. There are 3 common payment patterns you can use to fill your calendar.

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

If you start with finding one stock for each of the patterns, you’ll have a monthly dividend portfolio that covers all 12 months.

You can use a list of the dividend aristocrats and dividend kings as a starting point along with the NASDAQ dividend history site to make your initial selections. Then continue your research using sites such as Seeking Alpha to check on the health of the company.

And a few more things to keep in mind as you build your portfolio

Always go into your investing journey with your eyes wide open. Here are a few things to keep in mind as you build your dividend portfolio.

1. You will need to pay taxes on the dividends if it’s in a regular brokerage account and not a retirement account.

This isn’t to stop you from investing in a regular brokerage account, but you will likely have additional paperwork at the end of the tax year. Check with your favorite tax professional to understand your specific situation.

2. Pay attention to how many shares you would receive with dividend reinvestment.

With each dividend payment, you’ll receive additional shares in the company when you automatically reinvest them. This is great for growing your portfolio but can take multiple dividend payments to create one full share depending on the size of your dividend payment.

If you decide to move your dividend portfolio to a different brokerage company, typically the partial (or factional) shares will be sold. If your portfolio hasn’t reinvested to a full new share yet, you’ll start over at the new brokerage company with growing your holding.

3. Don’t buy a stock just because it pays in the right months.

Do your research before making a purchase. Just because the stock pays dividends in the right months, it may not be the best investment right now. It’s also ok to buy a great stock that doesn’t fit the months you want to cover.

For stocks that have a long history of payments, they’ll likely continue paying unless there’s an issue with the company’s health or there’s a merger.

But if the share price is near its 52 week high, it may not be the best value for the moment. Don’t try to “time the market”. Focus on buying the best investment for the value at the time.

And over time between dividend increases and reinvestment, your portfolio will probably not pay the identical amount every month.

4. Make sure you know the country of the company’s headquarters

There can be tax implications for dividends paid from companies outside of the country you live in. If you live in the United States you may want to confirm the company’s headquarters location.

This is another one you should check with your tax professional to confirm. There could be tax implications if you buy stock for a company that’s headquartered outside of your home country.

5. It may take a while for your portfolio to begin paying monthly

What? You need to own the stock by a specific date to receive the next dividend payment. This is called the ex-dividend date.

The sooner you get started, the better. Don’t expect a stock you bought yesterday to pay you the dividend that’s due tomorrow. In some cases, you’ll need to own the stock for almost a month before the payment to qualify for the dividend. 

When you’re doing your research, make a note of the historical ex-dividend dates to help you understand when you typically need to own shares to qualify for future dividends.

Having a basic understanding of the timing can help you prioritize what stocks you want to buy over the course of the year.

Wrapping up building a monthly dividend portfolio

I hope these tips and strategies will help you build your portfolio dividend income monthly without feeling like you needed a degree in rocket science. There are common payment patterns and stocks with long histories you can use as a starting point.

Start small to build confidence and build your portfolio over time. Dividend investing is always a long game.

Over to you. What questions do you have or what has worked for you in your monthly dividend strategy?

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How to build a monthly dividend portfolio for passive income