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The dream of all investors is to build an investment portfolio capable of generating a regular and sustainable income per year or even per month. But, achieving this is easier said than done. Even with the advent of advanced research tools and improved services from investment advisors, there is no assurance that your money can earn as much as you want it to be.
In this article, investors like you will learn what you need to do to earn $1000 a month. Also, we will demystify the concept of dividend stocks to make sure that you get all the necessary information in making the right investment decisions. Lastly, we tell you how much money you need to prepare before you have a portfolio that is giving you regular money per month.
What are DIVIDEND STOCKS?
The term “dividend” refers to an amount of money given by a company to its shareholders of its profits on a regular basis. Since each of the shareholders owns a piece of the company, they get to take a slice of the profit as well. It is the company’s sole prerogative to determine the number and the value of each dividend it wants to give to its shareholders.
In the case of investment, the term “dividend stocks” refers to the share of the investors of a company’s profits paid on a regular basis. This share may be paid monthly, quarterly, bi-annually, annually, or in rare conditions, in a lump sum. Also, it may come in the form of cash or additional stocks.
How DIVIDEND STOCKS work?
Most dividends are paid in cash. The investor is paid a certain amount of money based on the number of shares he owns. For example, if a company pays 1 dividend for $100, investors with 100 shares will be paid at $10 000. Since dividends are often given regularly, you can expect $10 000 of income on a regular basis.
Another way dividends are paid is in the form of stocks. They are in the form of percentages. For example, if a company issued a 10% stock dividend, an investor who owns 200 shares will have 220 shares after the dividend is given. To turn this into cash, you will have to sell the stocks you own.
Take note that there is no guarantee that you will receive a dividend. The decision to give out dividends is based on what the board of directors of the company has agreed upon. This setup is different from owning a bond where a bond investment earns a fixed-rate income called the “coupon rate.” When it comes to a dividend, the board of directors has the prerogative to reduce the dividend or remove it altogether.
Why Do People Invest in Dividend Stocks?
While there is no guarantee that investors can receive dividends immediately, a lot of people continue to do dividend investing because it can be a profitable investment for the future. We list some of the best reasons why investing in Dividends gives you the best investment options
Regular Stream of Income
Retirees choose to invest their retirement fund in dividend stocks, knowing that they will receive a dividend every month in the future. While they may not get a return on investment (ROI) immediately, their retirement money can give them a regular stream of funds in the future.
Invest while you’re Young
Dividend investing has also become an option for young people because, with the stock dividends option, they get to own more stocks, reinvest it now, and then cash in stocks they have gained in the past years. One important reminder, though, even if you choose to reinvest your dividends, they are still taxed in the same year that you got them. Tax-exemption is only applied to accounts like an individual retirement account.
Secured Investments and Returns
Compared to bonds and mutual funds, dividends gain higher yields when the interest rates are low. Dividends also has the potential for share price appreciation. Meaning, even if the stock market or the share price falls, dividends can survive because of their steady income. If you decide to reinvest the additional dividends you earned, you will have more shares per dividend because of the lower share price.
How to Find the Best Dividend Stocks?
Despite the numerous advantages of dividends, it is not free from market instability and risks. Investors must also be careful in choosing which shares to buy to make sure that their dividends earn a profit. People must look for a dividend portfolio with a high dividend yield. Below are tips on how you can find the best stocks in the market.
1. Look beyond dividend yield
A lot of beginner investors are lured when they see high dividend yields. They believe that buying dividends with high returns or yields guarantees their financial success. But in reality, yields or return is not the bottom line. There are many other factors to consider, including interest rates, fees and expenses, compound interest, market volatility, and more.
For one, you must look at the sustainability of the stock prices. You need to know the history of the stock you are being and the company you are buying it from. Remember that companies can make dividends appear profitable by increasing the yield. As an investor, you have to look for trustworthy companies with established history and reputation.
Also, pay attention to the sector and structure where your investment belongs to. Take note that despite the high yield of your investment structured as real estate investment trusts, they are taxed higher. This means that you must also pay attention to other factors and not only the dividend yield. It is best that you set a realistic goal, so you do not get disappointed in the end.
2. Recognize red flags
As mentioned above, the yield is not the bottom line of dividends. Consider some discrepancies on the yield as warning signs. Here is an example. If a company has a high dividend payout ratio but took debt to pay the dividend, the company is most likely experiencing financial troubles. Instead of paying attention to the yield of the stocks, check if the company has strong balance sheets or has an efficient cash flow.
Also, do not start investing unless you have seen the performance of the company in the past years. If a company faces financial trouble, the dividend investors will surely suffer. Avoid small business companies that have not proven their performance in the market. If you can, choose companies with a good record in the past 30 years or so.
Most importantly, do not be lured by companies assuring you of earning $1000 a month immediately after creating your funds. Any seasoned investor would tell you that earning a regular and sustainable income from dividends takes time. Instead of trying to get as much as $1 000 a month during your first year as an investor, try to grow your shares each month or per year first. It is only through this slow and certain way that you can ensure your income from investments.
3. Diversify to minimize risk
To assure a high return on investment, combine your high-yield stocks with growth stocks. It is risky to invest in growth stocks because it has a high-win high-lose scheme. To balance it out, spend on stocks that have more conservative growth. By doing so, you are making sure that you do not lose everything on a single investment.
Also, try not to pour your investments into one sector or industry. While the technology and communications sector have high yields in recent years, it is not wise to focus on it alone. If the sector experiences a crash, you could lose big. Try to diversify your investments by including other industries like real estate in your portfolio.
Moreover, you need to understand how factors like rising rates, inflation, consumer spending, company balance sheets, and many more affect your investment. As an investor, you can only set your goal if you have the essential information about funds, expenses, income, risk tolerance, and more. Without understanding the stock market data, you cannot get started in building your income portfolio.
How Much Money Do I Need to Invest to Make $1,000 a Month?
So, the million-dollar question is: how much do you need to invest to earn $1 000 a month? If you have a high-yield investment, you might need at least $100 000 invested in your dividend portfolio to make $1 000 per month. In most cases, where the stocks only have moderate growth or yield, you might even need to invest $200 000 to make $1 000 per month.
Income investments of one hundred thousand or more can be overwhelming for many. Do not worry, though, because you do not have to put in these investments all at once. Get started by putting in the money based on your available funds. When you earn stock of cash dividends, put your earnings back into your portfolio. By doing so several times in a decade or so, you will be able to grow your investment exponentially.
When it comes to the stock market, it is best to think of it as a long term investment. It is not a get-rich-quick scheme where investment can make you a millionaire overnight. Instead, it is meant for people willing to take long term waiting. One has to wait several years or even several decades before being able to own a big sustainable investment portfolio.
Check out 7 Dave Ramsey Baby Steps to achieve financial freedom.
Investing in dividends to earn $1 000 per month can be a challenging feat. You need to spend time, money, and effort before you can expect $1 000 a month regularly coming into your income portfolio. If you are a beginner, you may want to learn basic concepts of stock market investing first before putting all your savings into a single investment. Do not expect 1000 a month of return just yet. Instead, make your goals attainable.
This article is a product of extensive research by the Investoralist team. If you feel that you need more information about dividends, stocks, bonds, and other related topics about investing, the Investoralist team has more articles to help and guide you. We have written materials dedicated to helping out investors who do not have prior knowledge and experience about the trade. Our materials are guaranteed to guide you in navigating the investment industry.