Learn how to create monthly income from just four dividend stocks to pay your bills
Readers of the blog will know that I absolutely love dividend stocks. These income investments work on so many levels and are a constant source for positive return.
Stock prices can crash but the dividends you collect on your stocks will always be positive cash flow.
One problem with dividend stocks is that most companies only pay their dividend every three months. That might not be a problem if you’re reinvesting the money but its tough for anyone living off their investments.
That’s why I’ve put together a list of dividend stocks you can use to create monthly income and you can do it with just four stocks. This group of companies not only doubles the dividend yield of the S&P 500, it also offers upside potential on price return.
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Why Everyone Loves Dividend Investing
Few investing themes are as popular as dividend investing and there’s good reason for that. Dividend stocks offer some of the best returns and a solid source of income.
Over nearly four decades, dividend stocks have easily beaten others on returns. Companies that consistently increased their payouts gave investors a 9% total return and even companies that weren’t able to consistently increase those dividend payments grew at more than 7% a year. That compared to a total return of less than 2% on shares of companies that paid no dividends.
There are a few reasons why dividend stocks are going to outperform but I want to get to our topic and that is how to create a stream of monthly cash flow from dividends.
My Favorite Dividend Stocks for Monthly Income
So most companies pay their dividends four times a year on a pretty consistent basis every three months. Investors come to expect the dividend in a certain month so companies generally keep to that schedule.
There are some companies that pay dividends every month but these tend to be in a specific industry called Business Development Corporations or BDCs. I’m not a big fan of these BDCs. There are some good companies but they tend to pay out everything in dividends and have to rely on a lot of debt and other funding to grow the business.
So for most companies, you’ve got that three-month dividend payment which makes it difficult to get consistent cash flow every month. But by being strategic about the stocks you buy, you can build that portfolio of monthly cash flow with just a few stocks.
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How to Create Monthly Passive Income with Dividends
I’m going to share my favorite dividend stocks for monthly cash flow, three stocks and one dividend fund that are going to balance solid income and upside price appreciation. These don’t have to be the only investments in your portfolio but it’s a great start to an income investing plan.
The first here is the iShares Select Dividend ETF (ticker DVY). Now this is a fund that holds shares in 97 dividend paying companies and pays a 3.3% dividend in March, June, September and December. Starting your dividend portfolio with this fund gives you instant diversification and is going to smooth out the ups-and-downs from the other stocks you buy.
As a dividend fund, the ETF is naturally overweight in typical dividend-paying sectors like utilities, consumer goods and financials. Companies in these sectors are like cash machines that pay investors to own the shares but growth may not be as easy as you find in other sectors like tech and energy.
So what we’re going to do is balance out this dividend fund with a few other stocks in other sectors to get a little more growth as well as solid cash flow. The dividend fund trades for 18.6-times trailing earnings so that’s a little cheaper than the rest of the market and has provided a strong 15% annual return over the last five years.
Best Monthly Dividend Stocks that Don’t Pay Monthly
First on our list of individual dividend stocks is General Electric (ticker GE). Now you’re going to think I’m crazy to start with a stock that has fallen 53% from the beginning of 2017 but GE is a solid company and there’s huge price upside for investors coming in at this point.
Management has started talking about selling parts of the company or even breaking off some of the segments, something that would have been unthinkable just a few years ago but also something that could unlock a lot of value for investors. Just the breakup value of GE is easily around twenty-one or $22 a share which is almost 50% higher than the current price.
GE cut its dividend in half last year to protect cash flow but that dividend payment is hugely important for the 126-year old company and they’re going to be boosting it back up as soon as possible. Even after the cut, the stock pays a 3.2% dividend yield and that doubles when the company gets back on track.
Shares of GE trade for 1.7-times book value which is a 30% discount to the five-year average. I’ve got the fair value of the shares between $19.50 to $23 per share based on cash flow and earnings. GE pays its dividend in February, June, September and December and could be the best investment you make over the next five years.
The second stock in our monthly dividend portfolio is AT&T (ticker T) and one of the strongest names in telecom. AT&T is just a few years into its DirecTV acquisition and is trying to close its merger with Time Warner. These mergers are going to give it a huge advantage in cross-selling services and lowering costs.
In the shorter-term, I’m looking at the entire telecom sector to be a huge beneficiary of the new tax cuts. Taxes for telecom companies were among the highest because it’s almost entirely a U.S.-focused business, plus it’s a business that costs billions a year in capital spending which is now immediately deductible and is going to save these companies millions in taxes. AT&T is expected to grow its earnings by 14% this year which is huge for a telecom company.
Of course, one of the biggest reasons to love AT&T shares is the 5.5% dividend yield paid in January, April, July and October. Shares trade for just 12-times earnings, less than half the price of the overall stock market so this is one value stock you don’t want to miss.
Finally in our dividend portfolio is Exxon Mobil with a 4.1% dividend yield paid out in February, May, August and November. Now investors were disappointed in Exxon’s recent earnings report and the shares are down almost 15% in less than a month but the weakness in the earnings was all one-time charges and compared to last year when the company sold some of its assets. Investors aren’t seeing the bigger picture and that could mean easy gains for new investors.
Exxon is not only a strong dividend stock but the company also buys back billions of its own shares every year which increases its earnings per share and is like another cash payment for investors. OPEC started cutting its own oil production a couple years ago to support oil prices and its all going to U.S. producers and none are as strong as Exxon. The company books nearly half its production from long-life wells which means it doesn’t have to reinvest as much money and can send it back to shareholders.
Energy is also going to be a major beneficiary of deregulation and the new tax cuts.
How Much Can You Make a Month from Dividend Stocks?
Just these three dividend stocks and the fund gives us an average dividend yield of 4% if you spread your money evenly in each. You get diversification in nearly 100 dividend paying companies and cash payments in every month of the year. On a $100,000 stock portfolio, you’ll average $335 a month plus price appreciate that could hit double-digits in each of these names.
The dividends alone aren’t going to make you rich but these companies hold enough back for growth to grow those earnings and send the share prices higher as well. A 12% annual total return including dividends will triple your money in just ten years and increases it ten-times over two decades.
If you don’t need the monthly cash flow then reinvest these dividends into the stocks to make more money on that money. If you do need a monthly cash flow to pay expenses then this portfolio will provide a few hundred a month to supplement your income and you’ll still see your nest egg grow from that price appreciation. Dividend stocks are a great way to balance current income with future earnings and this portfolio is an easy way to get started.