How much should you invest to rake in a monthly dividend of AU$1,000?

Summary

• Dividend stocks are always in demand among investors since they offer regular income to the shareholders.
• Investors use dividend yield as a metric to look for high dividend-paying stocks.
• Investors can build a portfolio of decent dividend-paying stocks to earn regular income each month.

Dividend stocks belong to the companies which offer regular dividends to their shareholders.  Since these are a source of regular income for investors, these stocks are in demand among investors.

Investors use dividend yield as a metric to look for high dividend-paying stocks. A dividend yield is a financial ratio that reveals how much dividend a firm pays annually relative to its stock price.

Now, coming to the question - how much amount should one invest to make AU$1,000 each month in dividends?

Source: ©Jirsak   | Megapixl.com

READ MORE: How much dividend does Rio Tinto pay to its shareholders?

Making AU$1,000 in dividend income each month means a dividend income of AU$12,000 each year. So, you must choose a dividend yield target to begin with. For a dividend income of AU$1,000 per month, experts advise an annual yield between 3% and 5%. A dividend yield target of up to 5% can be a good target.

Choose a desired dividend yield target

It is important to choose a desired dividend yield target to start with. Experts advise not to go for a stock with high dividend yields since it can bring a greater investment risk.

Suppose a company pays AU$5 per share annual dividend and its share price is $100.  Thus, the dividend yield comes out to be AU$5 divided by AU$100, or 5%.

Investors should always do their homework well before choosing a desired dividend yield target. There are companies paying high dividend yields as of now but with possibility of suspending the payout in future. Such a dividend stock could be unsafe for an investor. 

READ MORE: Which are the top 10 ASX-listed dividend stocks by dividend yield?

A high dividend can also mean a company with sluggish growth prospects. So, investors must know how to pick right options. Even a single wrong pick can negatively impact the overall income of the portfolio.

How much you need to invest?

A portfolio generally comprises a range of stocks with different yields.  These stocks combine to generate an overall yield for the portfolio.

You can calculate your portfolio’s yield by adding up the annual dividends paid by all stocks in your portfolio and dividing the aggregate number by the market value of the portfolio. This will give you the amount needed to make AU$1,000 in dividends each month.

Since your annual dividend income should be AU$12,000 and the target dividend yield taken is 5%, the investment amount required is AU$240,000 (annual dividend income divided by dividend yield).

Source: ©Webking   | Megapixl.com

So, for a portfolio with a dividend yield of 5%, you must invest AU$240,000 to make AU$1,000 in dividends each month.

READ MORE: Five dividend stocks with yields above 10%

Which stocks to select

You can search for fundamentally strong companies with a history of regular dividend payout. You can further select stocks that have increased their dividends in the last 10 years. Also, the stocks should have high liquidity.

You must ensure that each stock picked should have a dividend yield in the range discussed above. A dividend yield of around 5% is good for these stocks, as already discussed.

How many stocks are needed for portfolio diversification?

According to experts, a highly diversified portfolio may include between 10 and 30 stocks. You may start with 10 stocks and increase the number with time. Saying this, you must be clear about the period required for you to reach your target of making AU$1,000 in dividends each month.

The stocks should represent different companies, industries, and sectors.

Source: © Phillipminnis   | Megapixl.com

Dividend payment patterns

You must be clear about the dividend payment pattern of a stock or when each company pays the dividend in a year. The company may either pay a quarterly or bi-annual dividend.

Many ASX-listed companies pay dividends twice each year, usually as an 'interim' dividend and a 'final' dividend. Companies are not limited to paying twice a year and may pay more or less frequently. You must equally balance the number of stocks in each payment pattern category, so you get dividends every month.

READ MORE: Two lithium stocks under the spotlight: Magnis Energy and Argosy Minerals

The bottom line

Investors must always consider the volatile nature of dividend stocks while investing in them as a very high yield is not always a healthy aspect. So, you are advised to conduct a thorough research before going forward with the purchase of dividend stocks.

READ MORE: How much do you need to invest to make US$100K a year?