Last month I received over $1000 of dividends. This is the first time I received over $1000 per month while I am sitting on the couch and watching TV all day. Dividend income is really passive income that requires limited in effort. The extra money coming each month would help me achieve my journey to financial freedom quicker.
Another way to achieve $1000 a month in passive income is purchasing a rental property and hiring the property management addressing any repairs and dealing with tenants. It is good to have multiple streams of income. I would love to have the rental income as part of my passive income.
It is my great achievement to generate $1000 a month in dividends. This is just a beginning of my journey. I am reinvesting this $1000 dividends by letting the magic of compounding interest generating more dividends. My goal is able to achieve enough dividends to cover my living expenses.
How much money you you need in a portfolio to generate $1000 a month
In my case, my portfolio is over $300,000 and the current yield is 4.11%. This portorfolio would generate over $12000 in dividends per year .
From the table below, you can see the amount you would need to invest in order to get $12000/year or $1000/month. The amount is varied from high yield to lower yield.
If you invest in higher yield company like Iron Mountain IRM, your portfolio only needs to have $132,680. However if you invest in everyone favorite dividend company Johnson and Johnson JNJ, you will need at least $439,366 in your portfolio. If you like Apple or Microsoft, you will need almost 1.2 M or 1.4 M. For a low yield dividend Visa, you may need to invest around 2 M. Investing in 1 stock to generate $1000/month income would take too much risk for an individual.
The Ideal Portfolio
To have a perfect portfolio to generate $1000/month in dividends, one should have at least 30 stocks in at least 10 different sectors. No stock should not be more than 3.33% of your portfolio. If each stock generates around $400 in dividend income per year, 30 of each will generate $12,000 a year or $1000/month.
Diversification can help an investor manage risk and reduce the volatility of an asset’s price movements and dividend cuts. You can reduce the risk associated with individual stocks, but general market risks affect nearly every stock and so it is also important to diversify among different sectors.
However the ideal portfolio is difficult to implement because the price movements and company cuts or increases dividend. Also when some stocks go down, you tend to buy more of these stocks to average down the costs or some stocks rises faster than other, then your 3.33% of the portfolio would be like 8%. The riskier the stock, the more yield it pays. The faster grow of the stock, the riskier the stock is. Stocks in Financial, REIT, Energy sectors tend to pay higher yield than Technology or High Growth Stocks.
A well-diversified portfolio is your best bet for the consistent long-term growth of your investments.
Shortcut - Investing in higher dividend yield stocks
Investing in higher dividend yield can reduce the amount of investment. I have seen people investing in higher yield stock that paying 15-20% to reach their dividend income faster. Higher dividend yields generally reflect that there is a problem with this company.
Normally, Energy stocks will pay around 5-6%. However in the current situation, there are companies that paying 7-12% in dividend. The average equity REIT (which owns properties) pays about 5%. The average mortgage REIT (which owns mortgage-backed securities and related assets) pays around 10.6% and these companies are risky. I recommend you stay away from these investments.
Consistency and reinvest dividends
To build a sizable dividend stock portfolio, in my case $300,000, one needs patient and consistency. Patient and consistency mean you need time and regular monthly contribution to build your sizable dividend portfolio.
The table below shows how monthly investments of only $1,000 can get $300,000 — and how investments of more annually will get you there faster:
| Growing at 8% | $1,000 Invested Monthly | $3,000 Invested Monthly | $5,000 Invested Monthly |
|---|---|---|---|
|
$100,000
|
6.42 years |
2.58 years |
1.58 years |
|
$200,000 |
10.58 years |
4.67 years |
3 years |
|
$300,000 |
13.75 years |
6.42 years |
4.25 years |
It would take 4.25 years (51 months) with $3000 contribution per month at 8% growth rate to build a $300,000 dividend portfolio. Let see if we increase our growth rate at 10%:
| Growing at 10% | $1,000 Invested Monthly | $3,000 Invested Monthly | $5,000 Invested Monthly |
|---|---|---|---|
|
$100,000 |
6.08 years |
2.5 years |
1.58 years |
|
$200,000 |
9.83 years |
4.42 years |
2.92 years |
|
$300,000 |
12.58 years |
6.08 years |
4.08 years |
By increase the risk level to get 10% return, it would take 4.08 years (48 months) with $3000 contribution per month.
With dividend reinvestment, you are buying more shares with the dividend you’re paid, rather than taking the cash. The biggest advantage of reinvesting dividends is the power of compounding returns over time. Your dividends buy more shares, which increases your dividend the next time, which lets you buy even more shares, and so on. In a lot of circumstances, reinvesting the dividends can super-charge your returns, and that should be your first choice if you want your dividends grow faster.
Here is some of the math to prove it:
Say you invest $10,000 in Enbridge (ENB). On Jan 4, 2000, the price of Enbridge is $4.91, this will buy you total of 2037 shares. By reinvesting these dividends over the span of 20 years, on Jan 4, 2020, the number of share you are owning with our original $10,000 of investing is 4416 shares. On Jan 4, 2020, Enbridge was paying $2.30 in dividend/share at the price of 39.71. You would be collecting $10,159 per year in dividends and your original investment would grow to $175,399. Your total return is 1654% or 15.39% annually.
But if you say no to reinvesting dividends, your total return on $10,000 invested in Enbridge 20 years ago is 1073% or 13.09 annually. The end investment is $117,238 and the difference is $58,161.
Dividend Reinvestment is automatic, no fees is paying when you buy more shares. Many companies even offers price discount when you are enrolled in DRIP program. With no fees and price discount, your purchase of the new shares can significantly lower.
Summary
Within 3 years of patience, combining with consistency ($5,000- $6,000 per month) and reinvesting the dividends, I have built a $300,000 diversified stock portfolio that can generate more $1,000 per month in passive income.
Remeber, do not use ‘Short Cut’ to get ahead of goal and diversify your stocks in many different sectors to minimize your risk and contribute frequently and consistently. Patiently, your portfolio will grow over time.
Happy investing everyone!
Sam
Get a head start on an investment account with an exclusive offer from Questrade.
You could get up to $250 cash when you open and fund any Questrade self-directed account.
Sign up with my link, get up to $1000 of free IBKR stock when opening an account at Interactive Brokers!
Disclaimer: I am not a licensed investment Advisor or Tax professional; therefore all content posted on this blog represents my personal views and opinions and should never be considered as professional advice. This blog should be viewed for entertainment or educational purposes only. Not as recommendation to buy/sell certain stocks. Please do your own research before buy/sell stocks.