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Today I am going to explain to you – how to make $500 a month in dividends.
This is a post I have been waiting to write for some time. That is because I wanted to actually reach $500 a month in recurring dividend income … and my wife and I are almost there!
I figured it was better to explain it after reaching this milestone … rather than speculating on how to hit it.
Just to be clear … it will be a while before we actually earn $500+ every month in dividend income. However, we will soon hit $6,000 of annual recurring (and growing) dividends … which averages out to $500 a month.
Companies pay their dividends at different times throughout the year … most of them each quarter.
The months of March, June, September, and December have always had the best results in our portfolio. That is because most of the dividend paying stocks we own pay during those months.
On the other hand – January, April, July, and October tend to be the lowest. Average all twelve months out though and we will soon (in 2022) be earning $500 a month in dividend income.
Before I get started … I wanted to point you to all of our past dividend income reports for reference. Those reports contain all of the dividend income we have earned since starting our portfolio back in 2008.
Now let’s take a look at how you can make $500 a month in passive income from dividends.
How to Make $500 a Month in Dividends
The math on how to make $500 a month in dividends is actually fairly simple.
First you take the annual amount of dividends you are trying to earn – $6,000 (12 months * $500).
The next step is to figure out a good dividend yield that one could expect to get from investing in high quality stocks.
Just to be clear here … my wife and I try to buy long term dividend growth stocks. Most of the time (not always) we avoid the high yield stocks above 5%.
Most of the companies we invest in pay a yield between 2% and 4%. So on average, we can expect to get 2.5% to 3.0% yield on new investments.
These are the numbers we will use here.
The final step is to calculate how much we’d need to invest at the average yield to earn $6,000 annually. The formula looks something like this –
Investment Amount * Average Yield = Annual Dividend Income
Another way to look at this equation when solving for the investment amount would look like –
Investment Amount = (Annual Dividend Income / Average Yield)
For a portfolio of dividend stocks with an average yield of 2.5%, we would need to invest $240,000.
$240,000 = $6,000 / 2.5%
Now if our portfolio can average a bit higher yield of say 3.0%, then we would need to invest $200,000.
$200,000 = $6,000 / 3.0%
You can play around with the numbers a bit more … but I’d caution anyone building a portfolio with a current yield over 4.0%.
I think that is just too much risk having a portfolio average much higher than 4% to 5%.
How We Make $500 a Month in Dividends
I know what you are going to say … who has an extra $200,000 dollars just sitting around to invest? That is what it would take to average $500 of monthly dividend income at a 3% yield.
Most investors likely don’t have an extra 200K available to dump into a portfolio of dividend stocks. So what can you do?
You see, building a solid passive dividend income portfolio takes time. Most investors these days are looking for quick returns, which is fine … but not for my wife and I. And probably not for you if you have read this far along.
We started our portfolio back in 2008 and earned a whopping $29.46 in dividends … for the entire year!
Now we are on track (in 2022) to earn over $6,000 of dividends for the year.
And guess what? We haven’t invested $200,000 into our portfolio. At the time of this writing … we had invested just over $150,000.
Our calculation would tell us we are averaging a 4.0% yield.
Well the numbers don’t lie … but I can guarantee you that when we buy new shares of stock … they are hardly ever giving us a yield of 4% (or higher). Most of the time we are adding new shares with a 2% to 3% yield.
There are a few exceptions like – Altria (MO) and Verizon (VZ) … but it isn’t too often.
So how is this possible?
By staying in the market and not selling our shares … we get the benefit of annual dividend increases.
Holding onto your dividend income shares for the long term helps investors take advantage of compounding dividend increases.
This assumes that the companies you invest in continue to increase their dividends annually.
Here is a closer look at how we passed (or soon will pass) the $500 a month dividend threshold in more detail.
Our Annual Dividend Income
At the time of this writing, we have invested $154,741.91 into our taxable brokerage account since 2008.
Our average yield on cost calculates out to 3.89%.
Note – Yield on cost is the actual yield an investor is getting based on the purchase price of their shares (not the current share price).
Based on the money invested and the yield on cost, we are projected to earn $6,078.58 in dividend income over the next 12 months.
Dividend Income ($6,078.58) = Amount Invested ($154,741.91) * Yield (3.89%)
In case you are wondering … that amount averages out to $506.55 of dividend income per month.
This is what we often refer to as our projected 12 month forward dividend income.
This projected dividend income assumes a couple of things –
- no dividend cuts – companies maintain or grow their dividends
- no shares are sold – we don’t sell any of our shares
I can count on one hand the number of companies over the past decade in our portfolio that have cut their dividend. And in those cases, we follow our process for selling a dividend stock.
Building a Solid Foundation of Dividend Stocks
Figuring out how to make $500 a month in dividends is not difficult. But it is NOT a get rich quick strategy … it takes time.
It does require an investor build a solid foundation of quality blue chip companies that pay a dividend.
Those blue chip companies also need to consistently raise their dividends each year … hopefully by 6% or more.
Investors need to continually add more funds for months and years to their portfolio to help get those compounding dividends.
And while building your portfolio, it is critical to reinvest all those dividends you are earning to leverage the compounding. My wife and I are reinvesting all of the $5,000+ of dividend income we will earn this year (2021) back into our portfolio.
Diversifying across many different companies (we own over 40+ dividends stocks), sectors, and industries is also a key to building a solid foundation. This helps to lower portfolio risks.
Earning a sustainable $500 per month in dividends that continues to grow is not hard. It takes time, patience, and honestly is a bit boring. But in the long run it can provide a solid stream of passive cash flow that can help investors on their journey to becoming financially independent.
Do you have a dividend income portfolio? How much do you earn per month? How long did it take to build your portfolio?
