How to Time Dividend Payments for Monthly Cash Flow
How would it be if your investments paid your bills each and every month? What if you could create a consistent paycheck from dividend stocks alone?
In this video, I’m revealing a dividend portfolio of seven stocks that will generate cash EVERY SINGLE MONTH! Even better, besides the dividends, the portfolio will continue to grow so your dividend payments increase every year.
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How to Create a Monthly Dividend Check
Dividend investing has been hugely popular here on the channel and why not? Who doesn’t love getting those cash payments while you invest? In fact, another video on passive income dividends was the first to really blow up here on Let’s Talk Money with more than 265,000 people learning how to make their money work for them.
But that video is more than a year old so I wanted to update it, improve it by putting together a portfolio of dividend stocks you can use for reliable and consistent cash flow EVERY SINGLE MONTH.
The problem with trying to pay your bills with dividends is that most stocks only pay four times a year, once every three months. There are some monthly dividend stocks but they leave out the best opportunities in cash yield and return. So to solve this problem, I put together a list of dividend stocks so that you’ll collect a solid dividend every month. These are some great blue chip dividend stocks, the most stable dividends you can find with high yields and a return that will grow your portfolio.
I’ll take you through each stock, why I like it and how it fits with a monthly dividend portfolio. Make sure you watch for all seven though because it’s really that entire portfolio that’s going to create those consistent cash payments.
How to Lower Risk Investing in Dividend Stocks
Dividends are an opportunity to see some of your hard earned money grow. You can invest in the equity of dividend-paying companies directly if you want, but a better choice might be mutual funds or exchange-traded funds which offer diversification and professional management for a smaller investment. There's no shortage of options.
You may think that you are investing in the market by choosing to invest in stocks. But what if your choice of stock is not well diversified? Consider risk management and trading costs, as they could outweigh any benefits from a solid investment strategy.
Each approach offers advantages and disadvantages around management, trading costs and convenience so ask your advisor for help reviewing them before making decisions on which products work best with your needs. One risk reduction tactic can be “averaging into” equity markets through regular investments at times when prices have fallen lower than usual – this means less chance of buying high right before another spike up occurs!
How to Pick the Best Dividend Stocks
First I do want to reveal how I picked these stocks. Everyone in the Let’s Talk Money community knows I’m not about just listing out a bunch of stocks to buy. I want to give you the tools to find your own investments, a process you can use to be a better investor.
So I first screened for stocks with a cash yield of 3% or higher and I included a share buyback program in the cash yield because that’s also a return of cash to shareholders.
I then filtered this list for stocks with a history of growing their dividend. That’s hugely important and in fact, research has shown that companies increasing their dividend outperform the rest of the market by more than 7% a year.
Then I looked for companies with a payout ratio that signaled a commitment to returning cash to shareholders but not one so high that it limits future growth.
This is also very important and something we’ve talked about on the channel. I love a good dividend but a company paying out too much of its profits, so a high payout ratio, is leaving itself at risk to lose market share and destroy the stock’s value. So I want to find companies in that sweet spot where the payout ratio makes for a good dividend yield but not so high that it destroys future value of the stock.
Finally, I looked deep into the company’s financial statements to do that fundamental analysis. I’m looking here for higher profitability compared to peers in the same industry, strong cash flows and a competitive advantage that makes it a best of breed.
Looking for more great dividend investing videos? These are the most popular on the channel!
- 3 Best Monthly Dividend Stocks for Passive Income
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Simple Dividend Stock Portfolio for Monthly Cash
What I found was seven bellwether stocks, companies that are icons of their industries, with stable dividends and a history of strong returns.
Ford and the entire automotive sector has had a tough go lately but there’s reason to believe the worst is over and the shares pay a solid 6.3% dividend yield.
The problem with the automakers is there was such a huge rush on car sales after the recession. With the cash for clunkers program and interest rates near zero, new car sales surged all the way to 2015 and have just sputtered since then.
Ford management has done a decent job of cutting costs but knows it has to do more. The company has gone from making cars on 27 platforms in 2007 to just 9 today which gives it a lot more flexibility and efficiency. Ford has a solid year planned for product launches including the Explorer and a new super duty truck later. We’ve already seen some good numbers from the launch of the Ranger and sales should be good this year.
On that industry weakness, Ford hasn’t increased its dividend since 2015 but it’s got a solid history of making the cash payment. Dividends are paid in January, April, July and October. The payout ratio of 78% is a little high but still leaves some room for growth. Earnings are expected 3.8% higher over the next four quarters to $1.35 per share which puts the shares at an extremely attractive 7.4-times price-to-earnings.
There’s a good chance Ford could surprise to the upside. Earnings before interest and taxes, so that EBIT measure, jumped in the first quarter to $2.4 billion from just $1.5 billion last quarter. A lot of this was on a big move in profitability from just 3.5% EBIT margin to 6.1% which is a huge move in one quarter.
Of all the dividend stocks I cover, Realty Income, ticker O, is probably the most popular on its monthly payment and 3.9% yield.
The real estate company is the largest triple-net REIT in the U.S. with nearly 6,000 properties in 49 states and Puerto Rico. Most of the portfolio is in retail space which I don’t love considering the evolution into ecommerce but occupancy for Realty Income has never been below 96% in 23 years of business so these are high-quality properties.
The company has made 86 consecutive quarterly increases, growing the dividend by 4.6% a year on average. Funds from operations have grown at a 5% annual pace with only one quarter of falling FFO, which is pretty amazing when you consider what the rest of the REITs did during the three years through 2010.
There are a few keys to the company’s outperformance and some things I’m watching for that to continue. The company runs on a sale-leaseback strategy, so it will buy commercial properties owned by companies and then rent the property back to them. So we’re talking huge retail companies like Walgreens and Walmart. The company also runs a triple-net model where the tenant pays all property expenses so Realty Income basically just collects rent checks and passes profits on to investors.
The company has almost zero exposure outside the U.S. but it’s making a move on the European commercial property market. Whereas real estate firms own much of the market here in the U.S., in Europe most of the market is still privately owned so there’s a big opportunity here for a management firm to consolidate. Realty Income signed a $557 million deal recently to buy 12 properties from Sainsbury in the U.K. and lease the property back on 15-year terms.
Rent growth jumped 1.5% in the first quarter versus an average of about 1% a year so I think there’s a good chance cash flow surprises on the upside this year.
The company put this graph out in its first quarter presentation to show how the shares have done on a total return and volatility basis and I think it’s a great chart with a lot to say. First is that you see Realty Income has produced a very strong annual return, over 15% a year for those 23 years, but that it’s also done it with less violent ups and downs in the price. The graph is also an interesting look at how sectors and other stocks have performed over the period.
So we see that some other solid dividend names like Johnson & Johnson, Verizon and Proctor & Gamble have produced decent annual returns with that low volatility. These are your traditional safety stocks in consumer staples and telecom. On the other side here, you see some of the popular tech names have been riskier, so more volatility, but have produced higher returns.
It would be hard to make a dividend portfolio that didn’t include Coca-Cola, ticker KO, with its 3.2% dividend yield and 55 years of dividend increases.
Coca-Cola pays it’s dividend in March, June, September and December and has made that payment every quarter since 1920. Besides the dividend payment, Coke also has a share buyback program that returns a net $1.5 billion to investors for another 0.7% cash yield.
Coca-Cola is #1 in 32 of the top 40 markets in over 75 beverage categories. It’s diversified across juice, dairy, water, tea and coffee besides soft drinks. The company sells over 1.9 billion drinks a day in 200-plus countries.
So scale and distribution is really the story and the advantage here. The company has the brand and reach to create efficiencies that other company’s just can’t touch. Coca-Cola has been transitioning to an asset-light model over the last three years, selling off its bottling factories through franchise agreements. This has really driven flexibility with new products accounting for 17% of volume last year versus just 9% in 2015, so that product pipeline is extremely healthy.
As a result of the cost cutting, operating profitability jumped to 30.8% last year from 26.9% in 2017 and management’s expecting a further $600 million in savings this year. Earnings are only expected 1.4% higher over the next year to $2.13 a share but management has a history of beating expectations so odds are this number will be higher.
This next dividend stock in our portfolio is actually a fund, the Vanguard Dividend Appreciation ETF, ticker VIG, with a 1.9% yield.
Now that yield isn’t much but I love adding this one for its total return. You can see it follows the market pretty closely but it’s outperformed by 5% over the last year and has produced a 14.4% annual return over the last decade. That price return is going to help grow your portfolio even as you’re taking the dividends out.
The fund pays in March, June, September and December and is a great addition to the portfolio for diversification. If you just had 7 stocks, that’s 14% of your money in each. Trouble at one company could destroy your portfolio. The Vanguard fund holds shares of 183 companies, diversified across all nine sectors of the economy. That goes a long way to spread your risk around and you’ve still got that growth upside.
We’ve got three more to put in our dividend stock portfolio but I want to get your opinion on this. What’s your favorite dividend stock and why do you think it should be part of the portfolio? Scroll down and let us know in the comments below.
Verizon, ticker VZ, is the country’s largest wireless carrier with 40% of the U.S. market and pays a 4.4% dividend yield.
The telecom giant pays dividends in January, April, July and October with 12 consecutive years of increasing payments. The payout ratio is 61% of earnings but that’s typical for the industry.
Earnings are expected just 0.6% higher over the next year to $4.74 per share, which sets it around 12-times on a price-to-earnings ratio. There are a lot of reasons to like this company though and I don’t think the market has priced in some upside.
Verizon is leading in 5G tech developments with the world’s first 5G ultra-wide network and two smartphones capable on the network. 5G is going to revolutionize mobile over the next few years and Verizon will be there to take advantage of it. The company also has a lot of value in it’s new media group with the acquisition of AOL and Yahoo. Now it’s inked a partnership with Google to distribute YouTube TV which could be huge.
Verizon has bucked the race to the bottom price war among wireless carriers lately which has hurt subscriber growth but I like management’s decision on this one. They might lose a few subscribers on the lower end but I think they’ll make up for it in profitability and the share price will be rewarded by investors.
Johnson & Johnson only pays a 2.7% dividend yield but returned more than $5.8 billion to investors through the share buyback last year for a total 4.3% cash yield.
That conservatism, committing to a little lower dividend but offering a buyback, has helped the company increase the dividend for 57 consecutive years. JNJ pays its dividend in February, May, August and November with about 62% of profits going to cover the cash payment.
The company is a runaway leader in healthcare, booking $82 billion in annual sales across pharmaceuticals, medical devices and consumer products. Income from the pharmaceuticals segment has taken a hit lately but strength in consumer sales has filled the gap.
JNJ has faced some uncertainty lately on the string of lawsuits around opiods and they’ll likely have to pay out a settlement. This is mostly factored into the stock though at this point and large settlements typically are paid out over years or decades so I don’t think the financial burden is quite as bad as the market sees right now. Earnings are expected 6.4% higher over the next year, which is extremely strong given overall economic growth. That puts the shares right around 15-times earnings so not particularly expensive and some upside potential for higher return.
Apple is our closet dividend stock with only a 1.76% yield but a GINORMOUS cash yield through the buyback program.
To give you an idea, Apple paid out $13.7 billion in dividends last year, a healthy increase of 7.4% over it’s 2017 dividend but still a fairly low yield. The company paid out another $72 billion, almost 9% of the market cap, to buyback its own shares and it still has over $66 billion in cash sitting on the balance sheet.
Generating $64 billion in free cash each year, this is a company that has plenty to keep returning to shareholders. Apple makes its dividend payment in February, May, August and November and has increased the dividend every year since it started paying again in 2012.
The company is slowly moving to a services-centered business model where hardware sales are less important and that recurring services revenue becomes a bigger share. The entire ecosystem of Apple products from the phone, the tablet and mac to all the services makes it a consumer giant with an advantage over any other competitor. It basically means Apple only has to get you to buy one product or sign up anywhere in its services and it’s a good bet you’ll be picking up its other products and services.
That’s exactly the kind of thing you want to see in a company and it makes for extremely stable cash flows. Earnings are expected higher by only 1.1% over the next year but no company beats earnings like Apple. A beat of about 5% would put earnings at $12.62 a share and a price to earnings of 14-times.
How Much Do You Need to Invest for Monthly Dividends?
So here you see the entire portfolio, all seven dividend stocks, their dividend yield and the months you’ll receive the payment. Notice we’ve got at least three payments coming every month and the portfolio yield of 3.3% is about twice the average dividend yield on the stock market.
I know a lot of you are asking, why not just invest in the highest yielding stocks. There are stocks that pay 12% and 15% yields. Why not just invest in those?
What I wanted to do here though is create a portfolio for maximum stability and total returns. These might not be the highest yields but each stock offers a double-digit upside beyond the dividend yield. These are stocks you can count on to provide the cash every month when you need it AS WELL AS growing your portfolio.
To give you an example of how well this portfolio works at producing monthly income, I’ve made this table showing the monthly payment you’d receive on a $100,000 portfolio of the seven stocks. You’re collecting from $300 to almost $500 every month but what’s even better is you’ll see your portfolio value grow and your dividends grow over time. So that almost $4,500 in dividends you collect will keep growing every year.
You can create a stable monthly cash check from just a few dividend stocks. Learn how to find stocks that will continue to pay out regularly and how to combine them for a dividend stock portfolio that pays your bills.
Read the Entire Passive Income Series
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- Passive Income Myth: Passive Income Dividend Investing
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.