Increasing income is one of the 3 rules that I believe will help me reach Financial Independence. And Dividend income plays a big part, because that’s where most of my passive income comes from at the moment.
$500 a month in dividends might not sound like much. But I like to think of it as, I just got a raise of $500 a month. I don’t even need to ask for that raise.
Steps I Took To Generate $500 A Month In Dividends
- Determine Your Desired Dividend Yield
- Work Out How Much Capital Is Needed Based On The Dividend Yield
- Choose Your Stock Or REITs To Make Up Your Portfolio
- Have A Plan On How You Want To Invest
- Reinvest All The Dividend That You’ve Received
Determine Your Desired Dividend Yield
Before you can determine how much capital you need to make $500 a month in dividends, you need to figure out how much dividend yield you want out of your portfolio.
What is Dividend Yield?
Imagine you bought a share of AT&T (T) for $28.91. AT&T currently pays out an annualized dividend of $2.08 per share.
To calculate the dividend yield, simply divide:
Annualized Dividend / Share Price
In our case, $2.08/$28.91 = 0.0719, which will give you 7.19% dividend yield.
How Much Capital Is Needed Based on the Desired Dividend Yield
First up we need to find the annual dividend income which in this case is:
$500 x 12 month = $6,000
To find out how much capital is need, simply divide:
Desired Annual Dividend Income / dividend yield
$6,000 / 7.19% (0.0719) = $83,450.
You will need $83,450 to generate $500 a month based on the 7.19% yield.
Let’s look at another stock: Apple (AAPL). Apple‘s dividend yield is currently at 0.68%.
If you are banking on Apple to generate $500 a month in dividends, then you will need $6,000/0.68% (0.0068) = $882,352!
From the above examples, we can see that the higher the yield, the lower the capital needed.
Choose Your Stock Or REITs To Make Up Your Portfolio
You should not pick a stock based solely on the dividend yield.
These are 3 quick metrics that I look at when choosing a stock for dividend income.
Dividend Yield > 3%
I am picking stocks for income, so it needs to be above 3% dividend yield. Just look at the Apple example. You are going to need so much more capital if the yield rate is very low. Apple is not a stock you buy for dividend income. You most likely buy Apple for the growth.
Payout Ratio < 70%
Payout Ratio is the percentage of earnings that is payout as dividend to the shareholders. For non REITs, I like to keep this under 70% when choosing a stock for dividend income.
Consistent or Growing Dividend Payout for the last 5 years
Since I am depending on these stocks to generate $500 a month in dividends, I would prefer that the dividend payout is stable and consistent. It’s a bonus if the company is able to grow their dividend payout year on year.
Don’t Put All Your Eggs in One Basket
When building a dividend income from stocks, it would be wiser to have a portfolio of dividend stocks, rather than all income generated from 1 stock.
Alternatively, you can consider buying Dividend ETFs such as Vanguard High Dividend Yield ETF (VYM), or iShares Select Dividend ETF (DVY) which invests in a basket of dividend stocks.
As a Singaporean investor though, I wouldn’t recommend buying any US Domiciled stocks for dividend. We get taxed 30% on the dividend.
Personally, I invest in a mixture of blue chip stocks that hits the metrics and REITs. For blue chip stocks to have a dividend yield of above 5% is rare. It is easier to find REITs that has a > 5% yield. So having blue chip stocks and REITs in my dividend portfolio will bring my average yield to around 5%.
Have A Plan On How You Want To Invest
In this example, I know I need to invest at least $1,500 a month. You can consider investing every month, or save a lump sum and invest every quarter to save on fees if needed.
If you are based in Singapore, you can check out this post on OCBC BCIP (Blue Chip Investment Plan) if you are considering to invest every month.
Reinvest All The Dividend That You’ve Received
When you are starting out to build your dividend income, it would be better to reinvest those dividend in the initial stages.
If your stock offers DRIP (Dividend Reinvestment Plan), opt in for it! These can add significant wealth over time, if you let it compound long enough.
Conclusion
The initial process of generating $500 a month in dividends might be tough. But do not give up.
I started this 6 years ago, and currently, my dividend portfolio is generating around $9,000 in dividend annually which is around $750 a month.
Once I have done the groundwork for the initial selection of stock. I then usually just look at my portfolio every year to make sure those fundamental metrics still holds for the stocks.
Other than that, these dividend are truly passive!