The monthly dividend strategy is among the more popular investment strategies. In comparison with the growth strategy, which focuses mostly on dividend-free growth stocks, the dividend strategy will help you to generate a passive income flow through dividends. Thus, the dividend strategy is income-oriented. Both strategies have their pros and cons. In this article, you will learn 3 ways on how to built up a monthly dividend portfolio.
About dividend stocks
Dividends are that part of the profit that companies pay out to their shareholders. For instance, US companies are known to pay out dividends at several payment dates during the year (e.g. quarterly or some even monthly). This is not the case in all regions of the world. German companies, for example, generally pay out dividends once per year. While investors can expect a high dividend payment in this case, they have to wait for another year in order to receive the next payment. The dividend strategy should be psychologically adapted to the investor.
One important KPI for dividend stocks is the annual dividend yield – expressed as a percentage. This is the ratio of the most recent annual dividend payment in relation to the stock price. Quarterly dividends are divided by four. For easy comparison, you should use the annual dividend yield to compare with other companies. However, the fact that a dividend has been paid out for the last fiscal year does not necessarily mean that this amount will also be paid out for the new fiscal year. The travel industry, with sharp dividend cuts amidst the pandemic, is a prime example of this fact.
You should also be aware that a massive drop in the stock price can lead to a high dividend yield. Investors should carefully consider whether to invest in high-yield stocks. Exceptionally high dividend yields often indicate serious industry and/or company risks. To show up the full downside of the dividend strategy, we would therefore like to mention that dividend payments lead to a (negative) stock price correction in the same amount. Furthermore, dividends are income-taxable for investors exceeding a specific tax bracket in the USA.
Monthly dividend strategy #1: Zero diversification
The level of diversification depends on the number of different shares in your portfolio and their industry and region affiliation. The more individual stocks are included in your portfolio, the more diversified it is. A high level of diversification will spread your risk as losses from a single stock can be compensated through gains from other stocks. The key message is: “Don’t put all eggs in one basket”. It is a strategy – probably not the best one, but we’ll go into it.
Realty Income is one well-known US company paying monthly dividends. The company has the appropriate slogan “The Monthly Dividend Company” with the status of a registered trademark. Realty Income belongs to the so-called REIT companies (REIT = Real Estate Investment Trust). Another US-REIT company paying monthly dividends is Gladstone Commercial. It has an even higher dividend yield, but unlike Realty Income, Gladstone Commercial does not increase their dividends on a regular basis.
Low diversification leads to a high level of risk. Once the company out of your single-stock portfolio cuts its future dividend payments, the complete flow of passive income is cut. On the other hand, limiting the portfolio to only one dividend stock will reduce the order and commission fees to be paid to the broker. With this strategy, investors can build up a monthly dividend portfolio without having to deal with numerous companies beforehand. Yet, risk-averse investors will aim to spread their risk across more stocks.
Monthly dividend strategy #2: Medium diversification
One way to increase your level of diversification is to pick some stocks paying out quarterly dividends. Following this strategy, a minimum of three stocks is required to generate dividends on a monthly basis. You are free to choose your own stock mix in order to build up your own medium diversified portfolio, whereby you should pay attention to region, industry and company diversification. This will help you to reduce your exposure to different types of risk.
This portfolio will lower your risk vs. strategy #1, but will also increase your order fees. Following our notes on diversification before, you may see that our sample stock mix for medium diversification can even be further optimized. Two out of three stocks are tech stocks (CISCO and Apple) which leads to a high industry risk. For a further risk reduction, for example, you can replace Apple with Procter & Gamble (equal dividend payment months) in your portfolio. Many S&P 500 companies pay out dividends on a quarterly basis, allowing different compositions for a medium diversified monthly dividend portfolio.
Monthly dividend strategy #3: High diversification
By now you understand that it is essential to diversify your portfolio across different regions, industries and companies. Therefore, we will provide you with one example for a highly diversified monthly dividend portfolio, below.
This portfolio consists of 13 stocks from 11 industries (technology, tobacco, wholesale, entertainment, consumer goods, pharmaceuticals, oil and gas, food, financial services, chemicals, automotive) and 5 countries (USA, Germany, UK, France, Switzerland, Japan). This is one of many possible compositions for a highly diversified monthly dividend portfolio. You can create your own monthly dividend portfilio with the help of an online dividend payout calendar.
At the time of publication of this article, the authors of this website hold one or more of the stocks mentioned in this article in their personal portfolio. This article is for informational purposes only and should not be construed as a recommendation to buy or sell any of the stocks listed herein. Nevertheless, we are compelled to mention that this may be a conflict of interest. Please view our official homepage disclaimer for more information.