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 $150,000 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? 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 investments that balance their shareholder returns between price appreciation and a small dividend yield, which 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. Luckily as interest rates are now higher, you won’t need to have a million dollar portfolio to generate some reasonable dividends!
|Portfolio’s Dividend Yield||Total Portfolio Size|
It is important to remember that dividends are subject to taxes just like other streams of income. Depending on which tax bracket you fall in based on your other sources of income, you will actually need to generate a significantly higher amount in pre-tax dividends to get $1,000 in dividends after taxes.
What should I invest in?
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, each ETF can have anywhere from 50 to 2,000+ holdings, which can help you diversify your portfolio relatively easily. Therefore, if you really want to maximise your chances of making that $1,000 per month while reducing your risk, it’s worth going the ETF route.
It’s worth looking into individual stocks 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 or have the time to do properly, you are much better off just buying the funds I have discussed below.
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!
Understanding Total Returns
When you invest in the market, you generate returns 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 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!
To see in practical terms how much of a difference you can have by focusing solely on dividends at the expense of total returns, see the section on SPY vs SPYD below.
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 math 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 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!
NOBL is ProShare’s ETF focused on dividends. The ETF tracks the S&P 500 Dividend Aristocrats Index, which consists of companies in the S&P 500 that have increased their dividends for the last 25 consecutive years – a tough requirement!
This means the index has only 64 companies. Of course having fewer companies than the benchmark S&P 500 means that the fund is somewhat less diversified. And given the dividend focus, the fund has a significantly lower exposure to the technology sector (around 4.9% weight for the IT sector) than the S&P 500 (26.5%).
Unlike many other indices, this is an equal weighted index, which means all stocks have roughly the same weighting in the index and in the fund.
In order to generate $1,000 a month in dividends from NOBL, you would have to invest $588,235. This is a 100% equity allocation fund, so please consider whether this would be appropriate for your risk appetite.
As of August 31, 2022, the fund has a 5-year annualized return of 11.17% and 3-year annualized return of 10.70%.
The expense ratio for the fund is 0.35% and the fund has $9.6 billion in assets under management.
DVY is one of many dividend focused ETFs from the iShares stable. The fund tracks the Dow Jones U.S. Select Dividend Index, which is composed of 100 US stocks with a 5-year record of paying dividends.
I chose this fund because it has 100 holdings, which means that the fund is well diversified across economic sectors and still maintains a decent 30-day SEC yield of 3.57%. Additionally, as it is US focused, it limits the international exposure risk and attendant volatility.
A few things that stands about DVY are:
- High exposure to the utility sector: DVY has a 27.6% weight in the utility sector compared to 3% in the S&P 500! This makes sense because utilities typically tend to pay a high dividend and generally also have consistent return profiles.
- High exposure to the financials sector: DVY has 21.1% weight in financials compared to 11% in the S&P 500.
- Low exposure to the technology sector: It has a very low weight of 4.8% in tech, compared to 26.5% in the S&P 500. This also makes sense because most tech and IT companies do not pay a dividend.
Compared to NOBL, DVY has more stocks in the portfolio, has a higher dividend yield, but has a lower total return as well.
In order to generate $1,000 a month in dividends from DVY, you would have to invest $336,134. This is a 100% equity allocation fund, so please consider whether this would be appropriate for your risk appetite.
As of August 31, 2022, the fund has a 5-year annualized return of 9.21% and 3-year annualized return of 10.93%.
The expense ratio for the fund is 0.38% and the fund has $19.5 billion in assets under management.
SPDR Portfolio S&P 500 High Dividend ETF (NYSE: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, you would need to invest $252,631. This is a 100% equity allocation fund, so please consider whether this would be appropriate for your risk appetite.
As of August 31, 2022, the SPYD has 5-year total returns of 8.92%. The gross expense ratio for the fund is 0.07%, which is negligible. The fund has $7.27 billion in assets under management.
Before we proceed, a word again about total returns.
SPYD vs SPY
Let’s compare the total returns of the SYPD (shown above in the chart) with the SPY (shown below) over the same time periods. The SPY is the sister fund to the SPYD, and managed by the same company SPDR. SPY tracks the broader S&P 500 index. The SPY has a 30-day SEC yield of only 1.63%.
Over the last 5-year period, SPY delivered total returns (pre-tax) of 11.67% annualized, versus 8.92% for the SPYD. A big portion of the difference in returns can be attributed to the lack of exposure to the technology sector in the SPYD (4.47% weight in IT sector), compared to the SPY (26.8% weight in IT sector). Many of the tech firms tend to fall in the “growth” bucket and hence they do not pay dividends.
Although this 2.75% difference in performance might seem small, it adds up very quickly in just a short amount of time. 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! This would have been sufficient to generate an additional 51 months, or just over 4 years, worth of your $1,000 monthly dividends! This is despite having a lower dividend yield. Crazy, isn’t it?
This is why I do not like dividend focus at the expense of everything else. 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.
I chose this fund simply because I like the ticker! Yay PFF!
Jokes aside, PFF is an interesting ETF as it holds preferred shares, which are a hybrid security. PFF tracks the ICE Exchange-Listed Preferred & Hybrid Securities Index. Preferred shares have the characteristics of both bonds (pay a fixed dividend) and that of stocks (represent equity ownership in a company). Investors often talk about diversification and preferred shares therefore give you a somewhat differentiated exposure to a company.
PFF’s holdings are limited to the domestic US preferred share market so again bring in some of the benefits of being invested in the US, whilst limiting direct FX exposure in your portfolio.
I chose PFF because it has a very juicy dividend yield of 5.61% (30-day SEC yield), which almost puts it close to the high-yield category, but without having to go in to that bucket.
In order to generate $1,000 a month in dividends from PFF, you would have to invest $213,903. I would consider this as a balanced fund and therefore assign it a 50-50 weight allocation between stocks and bonds. Please consider whether this would be appropriate for your risk appetite and return expectations.
As of August 31, 2022, this fund has 5-year returns of 1.95% and 3-year returns of 1%.
The expense ratio for this fund is 0.45% and it has $14.3 billion in assets under management, so it’s no slouch!
IGIB is the more traditional bond product and it tracks the ICE Bank of America 5-10 Year US Corporate Index. Yet another lovely index name! In short, this bond holds US corporate bonds that are of investment grade and with a maturity in the 5 to 10 year range.
Like the other US-based products discussed earlier, you are reducing your direct foreign currency risk and invested in a country with a developed legal framework, which is very important when dealing with bonds.
I chose IGIB because it has a dividend yield of 5.51% (30-day SEC yield), which is reasonably high. IGIB generates this higher yield by going longer in its duration, which means that this fund will be sensitive to changes in interest rates.
IGIB’s standard deviation (a measure of price volatility) of 8.17% makes it more volatile than AGG which tracks the US Aggregate Bond Index. However it is less volatile than the ILTB while offering a similar yield.
In order to generate $1,000 a month in dividends from IGIB, you would have to invest $217,786. This is a pure bond fund, so it has a 100% weighting to bonds. Please consider whether this would be appropriate for your risk appetite and return expectations.
As of August 31, 2022, this fund has 5-year annualized returns of 1.35% and 3-year annualized returns of -1.71%.
The expense ratio for this fund is a miniscule 0.06% and it has $9.3 billion in assets under management.
If you really want to amp up the risk level in your bond portfolio then you must look at GHYG. We have discussed this fund in greater detail in our other article on the best investment opportunities in 2022, so I will not go in too much background detail here.
I chose GHYG here because it has a very high dividend yield of 7.89% (30-day SEC yield). This is achieved by going up the credit risk curve in to high yield bonds, which means the balance sheets of these companies are in a worse position than those companies who are considered investment grade. Additionally, the fund invests in global securities, which means that you are taking direct foreign exchange risk to your portfolio.
Having said that, what I do find very interesting though is that this fund has a 3-year standard deviation of 11.27%, which is actually a tad lower than the 11.36% of the ILTB, which is a domestic US-focused fund and has nearly 41% of its holdings in AAA rated securities!
GHYG’s 5-year annualized performance figure as of Aug 31,2022 is 0.52% and 3-year return is -1.33% annualized.
So this is what is amazing: GHYG outperforms the ILTB on both total returns and volatility despite only holding junk-rated (BB or lower) bonds! And at the same time, it delivers a higher dividend yield! What a crazy world!
If it wasn’t for the perceived label of “high yield”, this would actually be considered an excellent and relatively safe (not the safest though) bond fund. What we will have to now watch is how this fund performs in the coming couple of years as the economic risks continue to pile up. Companies with high leverage will struggle and it’s possible that this fund’s performance may suffer in the near future.
In order to generate $1,000 a month in dividends from GHYG, you would have to invest only $152,091. This is a pure bond fund, so it has a 100% weighting to bonds. Nevertheless on a risk weighting, I would still consider this to be something like a 30% equity fund (in terms of volatility). Please consider whether this would be appropriate for your risk appetite and return expectations.
The expense ratio for this fund is a miniscule 0.40% and it has only $97 million in assets under management.
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.
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.
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.