Whether you are just entering the investment world or are already an experienced investor, you may well be looking to get the best dividend returns for your cash.
If you really want to hit that passive £1,000 of dividends per month target (on a pre-tax basis), which works out to £12,000 of dividends per year, your portfolio value will have to be anywhere from £250,000 to £1.2 million in size! Not a figure for the faint of heart!
So how do you make £1,000 a month in dividends? How much will you need to invest to generate that amount on a post-tax basis? And finally, how can you guarantee monthly returns? Let’s take a closer look.
How much do you need to invest to make £1,000 a month in dividends?
It’s the dividend yield you need to consider when working out your passive returns. The yield is calculated by dividing your yearly dividend per share by the current share price. A high dividend yield will grant you a maximum payout, but it’s unlikely to do much in terms of growth.
It might therefore be worth looking into smaller yields that you can build up over time. It’s never a good idea to go charging into large yields to begin with, as they are not only tricky to keep up to, but they likely won’t sustain you over time, either.
Based on the dividend yield, the table below lays out the total portfolio size you will need in order to generate that £1,000 in dividends on a pre-tax basis.
|Portfolio’s Dividend Yield||Total Portfolio Size|
It is important to remember that dividends are subject to taxes just like other streams of income. The only exemption is for the investments that are held in a tax-free account such as an ISA.
Aside from the first £2,000 in dividends (generated outside an ISA), you will have to pay income taxes on the rest of your dividend income. Thankfully, this rate is lower than the normal income tax rate. Nevertheless, it must be factored in to your calculations.
|Tax Band||Tax rate on dividends over the allowance|
Depending on which tax bracket you fall in based on your other sources of income, you may actually need to generate a significantly higher amount in pre-tax dividends. In the worst case, if you are in the Additional rate bracket already, you may actually need to £1,649 in monthly pre-tax dividends (£19,786 yearly) to generate the £1,000 in after-tax dividends.
What should I invest in to make £1,000 a month in dividends?
Before you start making any strides in company investments, it’s important to consider which avenues to choose. By this, I don’t necessarily mean the specific companies, but the types of investment available to you.
To gain dividends, you’ll generally have the choice between individual stocks, or ETFs. As you may know already, ETFs bring together a range of different options so that you can diversify your options. Therefore, if you really want to maximise your chances of making that cool £1,000 per month while reducing your risk, it’s worth going the ETF route.
Bonds are also an option for generating income, although technically bonds pay coupons, not dividends. Nevertheless, if you invest in an index fund or ETF that holds bonds, the distribution will generally be called a dividend. So aside from the semantics, bonds can also be considered in your list of options!
It’s worth looking into individual investments only if you have the time, knowledge, and inclination to follow the company and the broader markets properly. If that doesn’t sound like something you would be interested in, you are much better off just buying the funds I have discussed below.
Understanding Total Returns
When you invest in the market, your returns come from both share price appreciation and dividend income. Often people see the two streams of returns as separate, and the discussion becomes – should I go for growth or for income?
The growth vs income debate in my mind is misplaced. From a purely financial perspective, one should opt for a portfolio that maximizes total return, which is inclusive of capital gains (rising share prices) and dividends, while minimizing risk. In simple terms, what this means is that your portfolio should be allocated in such a way that you are not concerned about whether your returns are coming from dividends or stock prices going up – you just want the best returns overall.
In fact, since capital gains are typically taxed at a lower rate, it is more tax efficient to “generate your income” by selling down units of the fund that have gained in value rather than to receive an equivalent amount in dividends.
For our situation, let’s consider a simple example: Let’s assume that your portfolio grew by £1,200 in value in a given month and £500 of this came from dividends. This means that you can sell down an additional £500 of your holdings to generate your target income, and meanwhile still have the portfolio grow by £200 in value. This is significantly more tax efficient as well!
The astute reader will ask what happens when the portfolio only goes up £600, meaning £500 came from dividends and £100 from share prices. In that case you will not be able to generate the full £1,000 in dividends, right? Well, that is correct. That is the one drawback of this strategy and the way to adjust for that is to sell a little extra holdings when the portfolio is really up, and hold some cash in reserve to draw upon. It sounds more complicated than it really is!
Nevertheless if that sounds like too much trouble for you, then I think this article will really help you reach your goal: generate the £1,000 of dividends a month, and do not worry about anything else!
What to consider before investing
Naturally, I’d never suggest leaping straight into an investment just for the dividends without considering a few important points first.
Of course, the first thing to consider is how much you want to actually invest. There is always going to be risk, and just because the initial maths suggests that you could make £1,000 per month from dividends, doesn’t ever mean it’s a guarantee. Beyond this, never invest more than you can afford – keep an eye on your outgoings and don’t over-stretch, no matter how positive the signs may be.
It’s also a good idea to avoid investing purely because the dividend yield is healthy. A big company with an equally big yield will naturally be very attractive in the first instance – however, smaller investments in smaller companies are more likely to grow over time. Dividend investing doesn’t always have to be about the long game, but if you really want to thrive on growing your passive income, it pays to think smaller, at least initially.
Finally, remember to take your time. If you are just starting out in the stock market, and have the time to watch things grow, change, and to learn, then you should! Again, do not invest in something simply because it has a high dividend yield. Instead, focus on growing your smaller dividends.
That means taking the time to research the current market, budding companies, and learning how to read the signs. Getting £1,000 a month in dividend income isn’t a race, and even if it was – it’s a marathon, not a sprint! If you are looking for quick ways to generate passive income, dividend investing is perhaps not the best avenue for you to take.
The Best Dividend-Focused ETFs
There are literally thousands of different options one can consider when looking for ETFs to generate dividends.
However firstly, please remember that ultimately total returns drives your overall portfolio performance and dividends are just one component of returns. If you are interested in maximizing your total returns (and not solely focus on the dividends), you can take a look at the funds I discuss in my article on Best Performing Vanguard Funds. In the context of the current market correction, I have discussed more targeted ideas in my guide on Where to Invest in the Market Correction of 2022.
If dividend maximization is your focus (without taking undue risk), then let’s look at a few funds that would help you accomplish your goal. I wouldn’t recommend allocating your portfolio just to one of these funds – always diversify.
Enough with the caveats though, let’s dive in!
Vanguard FTSE 100 UCITS ETF (LSE:VUKE)
VUKE tracks the FTSE 100 Index, a market capitalization weighted index of the largest 100 UK-based companies.
I chose this fund because it has a dividend yield of 4.22%, which is significantly higher than many other equity funds. As this fund holds solely UK-based companies, the holdings have a degree of familiarity (although that shouldn’t necessarily be a criteria when choosing investments). Obviously the downside would be the same – having exposure to only UK-based companies means that you do not get any geographic diversification.
The UK market is trading at discount right now due to fears around the Russian war, high energy prices, high inflation, and rising rates. While its not the most appealing outlook and can appear scary, this is the best time to invest from a long-term perspective.
In order to generate £1,000 a month on a pre-tax basis in dividends from VUKE, you would need to invest £284,360 in this fund. The fund can be purchased in an ISA, which means that you will have some tax protection on your dividend income stream.
This is a 100% equity allocation fund, so please consider whether this would be appropriate for your risk appetite.
As of August 30, 2022, there’s been cumulative growth of 18.25% over the last 5 years and 12.23% over 3 years. The OCF is 0.09%
Vanguard FTSE Developed World UCITS ETF (LSE:VEVE)
VEVE tracks the FTSE Developed Index, which is comprised of large and mid-cap sized companies on global developed markets. This fund features at #3 on our list of Best Performing Vanguard ETFs, which is always nice to see!
I chose this fund because it has a dividend yield of 2.06% (as of Aug 30, 2022), which is higher than what most other broad based equity funds deliver. The geographic diversification also provides exposure to markets other than the US, which is important. This fund however does not provide any exposure to the emerging markets.
The fund holds 2,249 stocks and these are distributed primarily to the US markets (67.3% of the fund), followed by Japan (7.0%), the UK (4.4%), Canada (3.0%), and France (2.8%).
In order to generate £1,000 a month on a pre-tax basis in dividends from VEVE, you would need to invest £582,524 in this fund. The fund can be purchased in an ISA, which means that you will have some tax protection on your dividend income stream.
This is a 100% equity allocation fund, so please consider whether this would be appropriate for your risk appetite.
As of August 30, 2022, there’s been cumulative growth of 44.72% over the last 5 years and 28.54% over 3 years. The OCF is 0.12%
SPDR Portfolio S&P 500 High Dividend ETF (NYSEArca:SPYD)
SPYD is SPDR’s high-dividend yield spin on the S&P 500, the largest benchmark of stocks in the US. The ETF tracks the S&P 500 High Dividend Index, which is composed of the top-80 high dividend yielding companies within the S&P500. So right away a couple of things stand out:
- Relative to the S&P 500, which has 500 stocks, this ETF has only 80 stocks. This makes it more concentrated than the broader benchmark;
- Although “high yield” or “high dividend yield” has a negative connotation, the reassuring factor is that these stocks are chosen from within the 500 largest names in the US markets, so these are not the typical struggling firms that you may find in this bucket.
I chose this fund because it brings of the following factors:
- It brings in purely US equity exposure, which is where some of the best companies are located
- The 30-day SEC dividend yield of 4.75% is very generous.
- As I outlined above, the companies in this index are not struggling companies, but ones from the S&P 500 benchmark, which means they are very solid companies.
In order to generate £1,000 in pre-tax dividends monthly at our newly depreciated rate of 1 GBP is $1.04, you would need to generate $1,040 of dividends monthly. Note that I am not building in any FX conversion charges or the bid-ask spread. To get this much, you would need to invest $262,736, which works out to £252,631.
The one disadvantage of having a USD priced fund is that you take full exposure to USD-GBP currency exchange rate fluctuations. As we’ve seen in the wake of the new finance bill introduce by Liz Truss’s government, FX rates can be quite volatile. Of course in this specific case, GBP devaluation would have helped you tremendously if you already owned USD assets. On the other hand, converting your hard earned British Pounds to the US Dollar will now be painful!
More importantly though, by comparing the SYPD with the SPY, we get to see what a difference the total return metric can make. The SPY is the sister fund to the SPYD, and managed by the same company SPDR. SPY tracks the broader S&P 500 index but has a 30-day SEC yield of only 1.63%
The chart below shows the performance of the SPY over the same period as the above chart for SYPD.
Over the last 5-year period, SPY delivered total returns (pre-tax) of 11.67% annualized, versus 8.92% for the SPYD. We are keeping the data in USD here as I want to compare apples-to-apples.
If you had invested $250,000 in the SPYD, you would have had a total portfolio value (assuming dividends were reinvested) of $383,246. If you had invested in the SPY instead, you would have had $434,137! That’s a mind-blowing difference of $50,891 or nearly £49,000! This would have been sufficient to generate an additional 4 years worth of your £1,000 monthly dividends! This is despite having a lower dividend yield. Crazy, isn’t it?
I must say it again: Total portfolio returns must be your focus, not just dividends.
The Best Dividend-Focused Bond Funds
As I outlined earlier, bonds do not pay dividends. Instead, they pay coupons, which are equivalent to interest-only payment. On the other hand, index funds or ETFs that hold a large variety bonds typically do pay a distribution. For our purposes, this is equivalent to a dividend and so let’s look at a few options here.
Bonds have had a tough time in 2022 due to rising interest rates, so it’s important to remember that the recent performance numbers will not look great. The rising rates bring with them better bond yields, which means new money invested in to bonds should generate reasonable returns over the long-term. On a forward looking basis though, as the pace of interest rate hikes hopefully reduces, bonds should hopefully also encounter lower capital losses in the short to medium term.
It’s also important to remember that bonds typically have a lower expected total return. This means that a 100% bond portfolio will almost certainly underperform a 100% equity portfolio over the long-term. Therefore unless you have an extremely conservative or low risk tolerance, I do not recommend allocating all your capital to a bond fund as your total returns will be very underwhelming. A reasonable allocation, often referred to a balanced allocation, would be around 50 to 60% in equities and the rest in bonds.
Finally, another important item to remember is that in the world of bonds, a high yield likely implies that the bond issuer is under some form of financial stress. Therefore if you were to invest in a “high yield” bond portfolio to chase the yield, it is important to be aware that you could very easily lose your capital should economic conditions worsen. If you have a low risk tolerance, paradoxically, over the long run, you’re likely better off in an all-stock portfolio that tracks the major indices than in a high-yield bond portfolio! The best of both worlds would be to go for a balanced allocation.
Let’s take a look at what I feel are the best dividend focused bond funds which provide a good income potential but without taking undue risk.
Vanguard U.K. Investment Grade Bond Index Fund
This bond index fund tracks the Bloomberg GBP Non-Government Float Adjusted Bond Index – a mouthful! The index mainly includes corporate investment-grade bonds and some government-related agencies. Note though that the latter category does not count as government bonds.
I chose this fund for two reasons: a reasonable dividend yield of 2.42% and the exposure to purely domestic corporates, which means you are mostly eliminating foreign currency exposure risk. Of course there’s also a risk to having only domestic exposure as you do not get any geographic diversification. But you can’t have it all!
At the time of writing, the fund holds 1,128 bonds. 61% of the portfolio is invested in bonds that are rated A or better. The rest of the 39% is invested in BBB rated bonds, the lowest category that is allowed under an investment grade rating.
From a sectoral perspective, 34% of the bonds are from financial institutions followed by 22% from industrial companies. Government related agencies account for another 28%.
In terms of duration, around 41% of the bonds mature in less than 5 years. This helps to reduce the interest rate sensitivity of the fund – but at the same time, it lowers the total return potential as well. In a rising interest rate environment though, having a lower interest rate sensitivity (lower duration) is desirable, as it limits the possibility of capital losses.
In order to generate £1,000 a month on a pre-tax basis in dividends from this index fund, you would need to invest £495,870 in this fund. The fund can be purchased in an ISA, which means that you will have some tax protection on your dividend income stream.
This is a 100% bond allocation fund but Vanguard still classifies this with a risk rating of 4 out of 7, so please consider whether this would be appropriate for your risk appetite and whether it would meet your total return expectations.
As of August 31, 2022, there’s been cumulative growth of -5.1% over the last 5 years and -12.17% over the last 3 years. These terrible returns have mainly driven by a disastrous last 12 months, which have yielded -16.89% in returns.
As I have mentioned before though, the past must not be extrapolated to the future, so if you are interested in bonds, then it makes sense to start allocating some capital here. The OCF of this fund is 0.12% and it has a UCITS structure.
The department of bond fund naming must certainly love their job, right? LQGH is the currency hedged version of the US-listed LQDE. This ETF tracks US-listed corporate bond issuers captured by Markit iBoxx USD Liquid Investment Grade Index.
I chose this fund for a couple of different reasons:
- A decent dividend yield of 3.79%
- Exposure to US firms with the benefit of FX hedging
- Investment grade portfolio
A quick note on currency hedged portfolios: In comparison to an unhedged portfolio, you will benefit if the pound appreciates sharply from here. Conversely, if the pound continues to depreciate, you will lose on a relative basis.
At the time of writing, the fund holds 2,532 different bonds and has a total asset base of £26 million. However the underlying ETF (LQDE) and its variants have a combined asset base of $6.9 billion, so you are not investing in a small “penny bond fund”.
Unlike the Vanguard fund we discussed above, nearly 90% of LQGH’s assets are held in A and BBB rated bonds. The Vanguard fund only has 67% in the same rated bonds. LGQH’s skew towards lower rated bonds (although still in the investment grade bucket) explains why it can deliver a slightly higher yield.
The other reason that the fund can provide a higher yield is because it has a much higher duration. The LQGH has an effective duration of 8.3 years, which is quite high. While Vanguard does not provide the duration of its portfolio, you can gauge it’s much lower from the fact that 27% of LQGH is invested in bonds with maturity of 20+ years, whereas for Vanguard it’s only 12.4%!
Also unlike the Vanguard fund, LQGH has an exposure to a wider variety of sectors, which helps with diversification.
In order to generate £1,000 a month on a pre-tax basis in dividends from this index fund, you would need to invest £316,623 in this fund. The fund can be purchased in an ISA, which means that you will have some tax protection on your dividend income stream.
This is a 100% bond allocation fund and I would classify this as having at least the same risk level as the Vanguard fund discussed above.
As of August 31, 2022, there’s been cumulative growth of -11.09% over the last 3 years. This specific version of the fund does not have a longer track record. These terrible returns have mainly driven by a disastrous last 12 months, which have yielded -17.62% in returns.
The OCF of this fund is 0.25% and it has a UCITS structure.
Where to Invest
If you are ready to start generating that £1,000 of monthly dividends and are looking for a great brokerage account, you have a range of different options and service providers to choose from. Fineco and InvestEngine has some solid offerings to choose from. I have covered these platforms in detailed reviews in the following articles:
- Fineco UK Review: Best Low-Cost Trading Platform?
- InvestEngine Review: Best ETF Investment Platform?
- Best Investment Apps in the UK
- Stake Review: Best UK Trading App for US Stocks?
An Introduction to Dividend Stocks
There are plenty of great ways to make money off of the stock market. However, it can take a lot of time, shrewd knowledge and plenty of gumption to get your hands on regular, worthwhile income. To many people, just thinking about stocks and shares can bring on mild headaches! In this guide, however, we’re going to focus on introducing you to the world of dividend stocks without going into too much technical detail. After all, we all have to start somewhere!
What are Dividends?
Let’s get up to speed. When a company makes a profit, its shareholders are typically rewarded in two ways: through an increase in the stock price and through dividends. Dividends are typically the cash payments that you get back from a company in which you have invested, based on the company’s profits, the number of shares that you have in the company, and the amount that the company’s Board of Directors allocates. Note that sometimes dividends can also be paid in the form of additional shares in the company or one of its subsidiaries or investee companies.
The frequency of dividend payments is also typically decided by the Board (although typically guided by shareholder demands). Companies usually pay on an annual or quarterly basis. However some companies do pay on a monthly basis as well.
Dividends can be a great way to generate income from your investments, but it’s important to remember that they are not guaranteed. If a company is struggling financially, it may choose to reduce or eliminate its dividend payments.
What is a Good Dividend Yield for Stocks?
It’s generally suggested that anything between 3 and 6% yield would be considered a good yield However, higher yields than this, while attractive, do carry their own risks and potential problems. And again, please note my caveat about total returns. Solely focusing on a dividend yield, while ignoring the potential total return of your investment, could be very damaging to your portfolio.
A very high dividend yield may actually imply that the market does not have faith in the company’s prospects or shares and therefore have sold the shares down to a very low level. In such a case, it could be very likely that the company chooses to exercise its right to cancel the dividend process outright.
Therefore, you are going to want to look for a dividend yield which is somewhere in the mid-ground. This should offer you a nice return with little risk in the long run.
While stocks and shares ISAs may not pay dividends themselves, they do hold plenty of benefits for investors. Investment dividends received within an ISA will be protected against taxation up to £2000 – which is a nice little top-up in addition to the general personal allowance, which would otherwise still apply. Of course, these figures won’t matter too much if you are focused on receiving stock dividends as opposed to cash.
However, opting to take out a stocks and shares ISA is a good idea if you are interested in diversifying your portfolio, and are open to cash dividends. As it stands, however, to be able to benefit from stock dividends, you should consult a broker or a company directly to learn more, and to of course keep track of how they are performing. If you have to take cash dividends for a short period in lieu of stock, this is by no means a bad thing!
When Do Stocks Pay Dividends?
Shareholders will normally find out that they are due to be paid dividends when a company decides to announce as such through a public press release. It will also be considered major news for the markets, which means you should keep a close eye on these channels for upcoming news and changes. But when do stocks pay dividends on the whole? Is it a regular occurrence with a set timeframe, or is it more of a random event?
Unfortunately for anyone looking to plan in advance, payouts really do depend on many different factors. It’s probably most likely you’ll see dividend payout announcements made at the end of each quarter, as this will be when companies tie up their financial reports. However, again, it can vary depending on the company involved, their growth potential, and their profit/loss margins. The best thing to do, on the whole, is to try and invest in several different companies. Therefore, you will be able to take on dividends from several brands and names throughout the year. Unfortunately, it’s hard to say exactly when dividends will arrive if at all – as the rules and the goalposts can change, too.
How to get paid dividends monthly
The Complicated Way
Beyond working out how to get paid a specific amount of moment via passive dividends, you should of course consider how to actually get paid out per month. There are a few ways through which you can attain this.
The most obvious way of receiving dividends monthly is by only investing in monthly paying dividend stocks! These, however, are quite rare, and will not necessarily help you in growing a diverse and healthy portfolio. It’s worth thinking a little more outside of the box.
It’s therefore worth taking the time to research the dividend payout days for each individual stock or ETFs that you are interested in.
Most dividends are paid quarterly, as discussed above. Thankfully, most companies follow one of three common dividend payment patterns, each of which follows the trail of the first month in the quarter.
January payouts, for example, are then going to be followed by April, July, and then October. February payouts move one month along – you’ll get your payments in May, August and then November. The key here is to line up different ETFs or shares that stagger across the year – so that you always get some form of return each month, with each of your investments taking it in turns. It’s a pattern that can work well if you plan ahead.
Again, it is essential to remember that not all companies will work on this basis, and nothing is guaranteed to convert. No matter how much care you take in your research, and your investment, there is no guarantee of success. That – again – is the golden rule. It’s entirely possible to make £1,000 per month from dividends, but it’s going to take time, effort, and planning.
The Easy Way
I discussed the complicated way first because I wanted to show you complicated it really is! I personally prefer the easy way because it works just as well. So what is the easy way?
Well, it involves not worrying about dividend payments dates or laddering your investments to match that date. In the investment world, once you start giving emphasis to factors that are not really important (such as the dividend payment date), you are going to suffer lower returns as you are not solely focused on maximizing your returns.
In the easy way, all you are doing is only withdrawing £1,000 per month from your account. If your portfolio is composed of quarterly-paying stocks, bonds, or ETFs, you will receive £3,000 each quarter. Or if you get paid annually, you will get a lumpsum of £12,000 each year. But your job is simple: only withdraw £1,000 a month!
Easy isn’t it? Of course this method requires some self-control, but if you have £250,000 or more to invest, I am fairly certain you have a lot of self-control! You wouldn’t be here otherwise!
Should I Invest in Dividend Stocks?
Investing in dividend stocks, as with all types of investment and long-term saving, can carry risks. With the right research and with the help of a good broker, there is no reason why you won’t be able to turn a healthy profit from investing in a few safe dividend paying companies. However, you’re going to need to keep a very close eye on what’s happening with your dividends on a regular basis.
The fact that a company can choose to alter or even cancel their dividends policy outright may put many potential investors off taking the plunge. However, this isn’t to say investing in stock dividends isn’t worth the effort. What it will mean, however, is knowing when to quit and to sell – and this will all depend on the company you buy with, as well as how likely it is that they will cut their dividends process short.
A wise investor can make a good living from their investments, or at least make a comfortable side income. However, it’s going to take quite a bit of reading, a handful of mathematics, and plenty of risk analysis. There’s also no guarantee you’re going to get the passive payday you’re looking for straight out of the gate. It takes time! You should be looking at dividend investing as a long-term plan.
By doing your fair share of research, spending more time, and sometimes, by taking educated risks, you can increase your dividends to the point of even earning four figures a month.
by Jon Craig
I am the creator of Project Financially Free and I started this journey to both educate myself and share my insights on personal finance. I’m passionate about financial literacy and I invite you to join me on this transformative path. See more.