Generating passive income is often the goal of investing. It can be achieved in various ways, including buying real estate or a small business. But those have very high capital requirements and other associated costs.
When generating monthly income, we prefer high-quality dividend stocks such as Dividend Aristocrats.
In this article, we’ll make use of dividend stocks to generate income and how you can use them to generate $100 of passive income with dividend stocks each month.
In short, dividend stocks are an easy, capital-efficient way to generate income for investors. These are companies using spare cash to return directly to shareholders rather than buying back their own stock, making an acquisition, or simply keeping that cash on the balance sheet.
Dividend stocks, therefore, offer investors two ways to compound their wealth.
First, the value of the stock can rise, just like a stock that does not pay dividends. That can create capital gains over time. Second, the dividend stock provides a predictable income stream the investor can use to fund living expenses or buy more stock to generate even more income.
Unlike real assets, dividend stocks can be bought or sold each market day, generally for a low cost. It means investors can buy dividend stocks with very low capital requirements and build their position over time. When considering alternatives to generate passive income – such as real estate – that’s a huge advantage.
Dividends are generally paid quarterly for most stocks, but some pay monthly, so that’s a consideration for the shareholder. Monthly dividend stocks are rare but can provide additional compounding leverage for the holder over time.
Finally, dividend stocks offer significant liquidity advantages over other forms of passive income, which means the holder can buy or sell quite and in whatever dollar amount suits them.
With real assets, transactions are slow and generally quite costly; dividend stocks don’t have that issue, irrespective of how small or large the transaction amounts are.
That’s a rundown of why we like dividend stocks, but it is also important to remember that not all dividend stocks are created equal. Let’s now take a look at how to find great dividend stocks.
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There are thousands of stocks available to any investor today. That amount of choice can be overwhelming, but we have some tools at our disposal to understand how to find the great ones and weed out the ones that may be forced to cut their payouts when times are tough.
Within the realm of dividend stocks, there are different kinds of companies with varying goals for their dividends.
In other words, there are dividend stocks that want to have a very high current yield. Some pay out most of their available cash to shareholders, some want to have very high rates of dividend growth, and some that are happy to pay a small amount to shareholders and hold the rest of their cash on the balance sheet.
These different styles have advantages and disadvantages, and each investor must determine the best for them. Is it high levels of current income? Is it a good dividend growth characteristic? Is it safe payouts that won’t be cut during recessions?
There are high-quality stocks available for these situations or a blend of the different types for investors to choose from. But how do we find the best ones?
Great dividend stocks generally have the same set of characteristics. One characteristic we look for in a great dividend stock is earnings growth. Earnings are the basis for any company to pay a dividend, so we want to ensure the company can continue to grow its earnings over time.
We do this by ensuring the company has a track record of doing so, demonstrating it can grow earnings reliably through different parts of the economic cycle.
So long as earnings move higher over time, the company should be able to continue to increase its dividend over time. Companies with reliable earnings growth don’t need to cut their dividends either. So this characteristic lends itself to better dividend safety and the ability to grow the payout.
Companies that do this have some durable competitive advantage and some measure of recession resistance.
These are key markers of a great company – which then makes for a great dividend stock – and we asses by examining the company’s performance during tough times.
Companies with great competitive advantages tend to see small downturns in earnings during recessions, while companies with weak or no advantages tend to have outsized negative impacts on their business during recessions.
It generally leads to weak earnings, which can lead to a dividend cut. That’s why we like examining a dividend stock’s performance during recessions to assess its competitive advantages and the likelihood that a dividend cut would be needed during the next recession.
Part of this equation is the stock’s payout ratio, which is the annual per-share dividend divided by the company’s earnings-per-share annually.
This number gives the investor an idea of how safe the payout is while also considering the other variables we’ve already touched on. In general, a higher payout ratio is riskier than a lower payout ratio because that means the margin of safety for things like recessions is low.
An example, a stock paying out 90% of its earnings has very room to grow the dividend, while a stock paying 20% earnings has a huge margin of safety.
Of course, the particular company’s earnings growth rates and recession resistance come into play. But a payout ratio is a powerful tool for assessing dividend safety and dividend growth potential.
By combining the company’s earnings growth potential with the payout ratio, we can assess the company’s ability to raise the payout over time. An example of a low-growth scenario is a company growing earnings at 2% annually and having a 90% payout ratio.
That company is unlikely to be able to raise its payout by more than 1% or 2% without undue hardship on its ability to pay because earnings growth is low, and current usage of earnings is very high.
On the other side, a company growing earnings at 10% annually and a 20% payout ratio have an enormous runway for raising the payout. These are some of the variables that investors must weigh when selecting dividend stocks.
Now, let’s look at some of the best dividend stocks available in the market today.
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Your first step to receiving $100 in dividends monthly? It is to select the desired dividend yield. The dividend yield is calculated by dividing a company’s yearly dividend payment by its stock price.
Let’s say, for illustration, that Company X declares an annual dividend of $3 per share. And the share price of Company X is $100. The dividend yield is calculated as $3 divided by $100, or 3%.
A stock’s dividend yield fluctuates daily. And it varies for two causes. First off, the price of a stock and the dividend yield are inversely related. In other words, a stock’s dividend yield will decrease as its price rises. And vice versa.
The dividend yield of a stock fluctuates on a daily basis due to this. Management is the second factor that can cause a dividend yield to vary. It is because investment management has the option to decide whether to raise or lower the dividend per share on the stock.
They can do this at any time. However, management-related adjustments to dividend yield occur far less frequently.
And finally, I favor dividend yields between 3% and 5% when selecting dividend equities. Why? Considering that the dividend yield provides crucial information.
In my perspective, stocks with dividend yields of less than 3% do not pay out enough dividends. On the other hand, shares of companies with dividend yields higher than 5% may pose a bigger risk to investors.
Naturally, I have exceptions to my general guideline of a 3-5% dividend yield. However, it’s a fantastic place to start when picking dividend stocks. I hope you can also appreciate the importance of the dividend yield.
Why is it crucial to choose a target dividend yield? Next, let’s discuss it. Step 2 of our strategy is discovering how to receive dividend-paying stocks.
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Your dividend income portfolio’s stocks will all have a dividend yield. The dividend yield for the dividend investment accounts will be produced by adding each dividend stock.
So let’s say the overall yield of my dividend portfolio example is 4%. That falls squarely inside my 3-5% bracket. And the yield on your portfolio could be different.
Take the total annual dividend growth from all your dividend investments to determine yours. And then divide that by the portfolio’s market value of dividends.
You may calculate how much money you need to invest to earn $100 in dividends monthly by finding the yield on your dividend income portfolio. Here’s how to do it.
Take $100 a month times 12 months to determine the minimum investment amount. It results in a $1,200 annual dividend income for us.
Then divide that $1,200 by your desired dividend yield. In this case, 4%. Consequently, $2,000 divided by 4%, or.04, gives you $30,000.
Therefore, if your portfolio yields 4%, you will need to invest $30,000 to earn $100 per month in dividends. Perhaps saving $30,000 and making investments feels out of reach. In that case, you might review your desired dividend yield.
Consider increasing your desired dividend yield to 6%. And do this if you have chosen to invest in stocks with the highest paying dividends.
You must save and invest $20,000 at a 6% dividend yield. The amount is 6% of $1,200.
Remember that higher dividend yields on equities can indicate increased investing risk. The term “dividend safety” can also be used to describe this. A corporation with low dividend safety may not be able to continue paying dividends in the future.
What might occur if a stock’s dividend isn’t guaranteed? There are numerous options. Management could decide to do the following:
A dividend that has stopped growing may be a warning indicator. It can serve as a warning sign before a payout is reduced or suspended.
A significant roadblock in receiving $100 in dividends each month is dividend suspensions and cutbacks. So make every effort to steer clear of riskier dividends.
I hope I didn’t scare you away with this, as it is just investment advice. And because you have a wide variety of reliable and dependable top dividend stocks to choose from when there is minimal to no risk to the dividend.
So hopefully, you’re still curious about how to obtain stock dividends. If so, move on to step 3 of our plan to generate $100 monthly in dividends.
The moment has come to choose credible dividend stocks. When choosing dividend stocks, there are several factors to consider for receiving a high dividend yield.
However, a handful is more crucial if you want to receive $100 in dividend payments every month. As a result, you should pay particular attention to the following.
Past performance does not necessarily provide a reliable forecast of the future. But dividend history can provide a wealth of information on dividend-paying businesses.
You should include dependable dividend-paying companies in your dividend income portfolio. Businesses with a lengthy history of paying dividends to income investors and consistently raising their dividend payments.
Three listings of corporations that pay dividends are helpful in this regard. The Dividends Kings come first. These businesses have increased and paid dividends for at least 50 years.
The Dividend Aristocrats come in second. They speak for the S&P 500 stock index’s listed companies. Additionally, they have increased and paid dividends for at least 25 years.
Let me conclude by describing the Dividend Achievers list. They are equities that have consistently increased dividends for at least ten years.
Don’t overlook step 1 when creating a dividend portfolio for consistent income. You made that decision on your intended dividend yield aim.
The dividend yield gave us insight into the capital needed to generate $100 in dividends each month. Additionally, it aids in dividend stock selection.
For instance, look for businesses that achieve the 4% target dividend yield. Most businesses won’t have a dividend yield that is 4%. As we have explained, dividend yields fluctuate daily.
Decide on a range. Let’s choose a range of 3.75% to 4.25%.
You might fall somewhere in the middle of this range, from 1 to 25, for receiving dividend income. As I already stated, there is no precise response to the query, “How many stocks do you need?”
Start with at least three dividend stocks. Remember, there isn’t a need for more than 20.
Be sure to diversify the industries in which you hold your stocks. Don’t buy a ton of utility stocks because they have a 4% dividend.
The fourth step in our plan to earn $100 in dividends monthly could be the most challenging. However, this is crucial if you want to learn how to receive dividends from stocks. How come?
It is because it is simple to choose dividend equities and invest in them. Most people can learn how to make dividends with the correct information, research, effort, and tool.
Making more money can be your biggest personal finance difficulty. Likewise, try to live within your means.
This straightforward equation generates surplus funds for your scheme to receive stock dividends. In another way, you must generate extra cash to invest in dividend companies of your choice.
Reinvesting your monthly and recurrent dividend payments is an option you have.
You can automate dividend reinvesting first. It means that you instruct your brokerage provider to automatically reinvest dividends received from a company back into its stock.
Automated dividend reinvesting has the benefit of being set up once and forgotten. Additionally, your dividend income is reinvested in dividend equities.
Investment choices, on the other hand, are made independently of you.
An automatic reinvestment in shares of an overpriced stock is possible. You already have too much Ora stock. Or, in the worst-case scenario, a stock whose dividend has lost its safety.
Allowing your dividends to grow as cash is the second alternative. Then, when you buy your dividend stocks on a monthly basis. Add the dividends you have earned to the money you are saving each month. Then invest that money in your preferred dividend equities.
Both of these dividend reinvestment strategies are acceptable. Personal taste is what matters. And by all means, reinvest your dividends automatically if you think you’ll be tempted to spend them.
Finally, you have the choice to stop reinvesting after you reach your target of $100 in monthly dividend payments. Your decision depends on you once you’ve succeeded in your objective!
Maybe you’ll be tempted to raise your monthly dividend goal if you hit $100 in dividends monthly. And carry on the process.
Because whether you want to earn $100, $500, $1,000, or more per month in dividends. The five-step strategy we talked about today remains the same.
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Dividend stocks are often grouped based on their consecutive annual dividend increase streaks, with the best of the best in the Dividend Aristocrats. It is a group of stocks with consecutive annual dividend increase streaks of at least 25 years and is a component of the S&P 500 index.
That means these companies are all recession resistant to an extent, have durable competitive advantages that have stood the test of time, and are willing and able to return cash to shareholders over time.
In short, Dividend Aristocrats embody many of the characteristics we like in dividend stocks, which is why we favor them over stocks with shorter dividend increase streaks, all else equal.
Unsurprisingly, the list of Dividend Aristocrats is anchored in non-discretionary sectors such as Consumer Staples and Industrials. These sectors tend to have more reliable earnings than retailers or banks, given their recession resistance is typically higher.
There are only 65 companies out of the 500 in the S&P 500 index that meets this strict set of criteria, which highlights how difficult it is to achieve such a long streak of dividend increases.
Below, we’ll look at some examples of great Dividend Aristocrats we think investors should consider generating passive income.
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For investors looking to generate $100 in monthly income, the list of Dividend Aristocrats is a great place to start. Several dividend stocks have made the grade, including high-dividend stocks; and high-growth dividend stocks.
We’ll discover how investors can use both to their advantage when generating passive income.
One Dividend Aristocrat we like for a few reasons is AT&T (T). It is the century-old telecom operator known for its wireless service, including its wide and diverse entertainment content portfolio.
AT&T is an example of a stock with relatively low earnings growth, a relatively high payout ratio, and a low stock valuation, the combination of which creates a sort of bond equivalent for shareholders.
We estimate AT&T will grow at 3% annually for the foreseeable future, and its current payout ratio is about two-thirds of its earnings. With the stock at just ~8 times this year’s earnings estimates, it is cheap as well, meaning that the dividend yield is several times that of the broader market at 8.1%.
It is the yield you’d expect from a real estate investment trust or REIT, not a world-class telecom operator.
AT&T’s dividend growth potential isn’t very high, given its growth characteristics. But its payout ratio is sustainable, and with a yield of more than 8%, it’s easy to generate meaningful income levels through ownership.
For instance, if an investor wants to generate $100 per month of income with AT&T, with the current quarterly payout of $0.52, the investor would need about 575 shares or just under $15,000 worth of AT&T stock.
AT&T pays quarterly, so the dividend of 52 cents per share would be $300 every quarter with 575 shares, or $100 per month, on average.
On the other end of the spectrum in the Dividend Aristocrats is Stanley Black & Decker (SWK), a manufacturer of tools and equipment for professionals and consumers. In contrast with AT&T, this company has high rates of growth earnings, a relatively low yield, and high rates of dividend growth.
We expect Stanley Black & Decker to grow at 8% annually for the foreseeable future, creating a long runway of potential dividend increases along the way.
The stock’s payout ratio is 27% on this year’s earnings, so it has significant safety against earnings downturns and nearly limitless room for increases in the coming years. Stanley Black & Decker is a great example of a stock with very high rates of growing earnings and a low payout ratio creating a supercharged dividend growth rate.
The yield is much lower than a stock like AT&T, and Stanley Black & Decker comes in at 1.8%. That’s still well above the S&P 500’s average yield of 1.3%, to be fair. Because the yield is lower, generating $100 in monthly income would require 380 shares at the current payout of 79 cents per share, paid quarterly.
That amounts to just over $68,000 worth of stock to create that income, which is more than four times what is required for AT&T shares to generate the same income.
However, Stanley Black & Decker has enormous room for dividend growth for years to come, so that income stream, we believe, will grow nicely over time. Stocks that already have high yields, like AT&T tend to see much less growth.
Investors must choose which kinds of dividend stocks best fit their goals and pick the best ones based on that. Or, investors could have a mix of stocks like AT&T and Stanley Black & Decker to get the best of both worlds. An example, an older investor that is retired may want to focus on high-income levels to fund living expenses.
A young investor with decades until retirement may choose instead to focus on dividend growth names that will raise their payouts for years to come.
Either way, dividend stock investors can compound their wealth over time by carefully choosing the best dividend stocks to fit their needs.
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Investors are faced with an almost overwhelming level of choice when it comes to selecting dividend stocks. However, using some simple criteria, we can determine which dividend stocks are most likely to sustain their earnings during recessions, continue to pay shareholders, and even raise those payouts over time.
There are different styles of dividend stocks available, including high-yield and high-growth, and investors can build their dividend portfolio based on which mix best fits their goals.
We see dividend investing as the best way to compound wealth over time, having many essential advantages over other ways to generate passive income.
Generating an income stream of at least $100 per month is achievable for any portfolio if built with passive income in mind.
Yes. On dividend stocks, you might incur losses. When buying any stock, there are no guarantees. If a company’s business does poorly, its stock price may drop. Additionally, when there is a correction, bear market, or crash in the entire stock market.
On the other side, you can improve your chances. Picking stocks whose management has consistently raised dividend rates over several years.
Technically, receiving a dividend payment requires only a single day of holding a stock. You must have really owned the stock on the day PRIOR to the ex-dividend date, at the closing of the stock market trade.
As a stockholder prior to the ex-dividend date. You are entitled to the declared and authorized company dividend rate per share by the number of shares you own.
The procedure of approving a dividend for a firm includes determining the ex-dividend date. Likewise, whenever a business declares a dividend. The public is informed of the ex-dividend date.
Typically, the answer is yes. On the dividends you receive, you will have to pay taxes. The amount of tax, however, varies. It relies on your total tax status first. Sometimes there won’t be any taxes owed.
Additionally, it depends on the kind of dividend stock you buy. Dividends from some companies are “qualifying” and are subject to special tax treatment through reduced tax rates. Dividends from other companies are not eligible. In relation to the sum of your dividend taxes, lastly. Make sure your research is situation-specific. or get advice from a tax specialist.
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Last updated: May 31, 2023
