- Dividends boost returns, paying investors a piece of a company’s net income.
- Dividends are usually paid out quarterly, though each company determines when and if they will distribute dividends to shareholders.
- It’s important to focus on high-quality, dividend-paying stocks that can maintain payments in a volatile economy.
- See list of securities below.
With the stock market suffering significant losses in 2022, many investors wonder where and how to invest in 2023. One option is to build a monthly dividend portfolio. By investing in dividend-paying stocks, you not only limit potential downside risk but also increase returns.
Here is how to build your portfolio to achieve monthly dividend income all year.
What are dividends?
A dividend is a stockholder’s portion of the profits generated by a company. Their distribution is approved by the company’s board of directors and is paid in cash or shares. The company exercises its right to retain net profits and put them towards its current and future business plans, then distributes the rest to the shareholders as a dividend.
Dividends are issued on a timeframe that is also set by the board of directors. They can be issued monthly, quarterly, or annually, with a quarterly payment being the most common. Sometimes, a company pays a one-time-only special dividend outside its usual schedule. Additionally, a company that might not pay an annual dividend can decide to pay a one-time dividend if they are flush with cash.
To receive a dividend, you must buy stock in a company that pays dividends. Owning a single share of stock in a company qualifies you to earn a dividend. The more stock you own, the more you can make from dividends.
For example, if you buy ten shares from a company that pays $0.50 in quarterly dividends per share of stock, you’ll earn $5 in dividends every quarter for a total of $20 in dividend earnings during one year. This is a simplified example, but you can earn money from investments outside of the appreciation in stock value with a dividend-paying stock.
Finally, it is essential to know that there are four important dates when it comes to dividends:
- Declaration date: This is the date the board of directors announces a dividend payment.
- Ex-Dividend date: This is the date when the stock begins to trade without the dividend, meaning anyone who purchases the stock on or after this date is not entitled to the dividend that was announced. If you owned the stock before this date and sold on or after it, you will still collect the dividend.
- Record date: This is when the company identifies all the shareholders entitled to the dividend on the company books. Stocks settle in what is known as “T+2”, meaning the buyer is not added to the company’s books for two days after purchase. You must own the stock two days before this date to receive the dividend.
- Payment date: This is the date the dividend is paid to shareholders.
Why build a monthly dividend portfolio?
Most companies pay out dividends quarterly, so you can collect dividends every four months. But not all companies pay their dividends in the same months. Payment dates vary from company to company. Because of this, with a bit of work, you can build a monthly dividend portfolio.
For example, you might identify three companies with different payment dates, allowing you to collect a dividend each month of the year.
- Company A: Dividend payments in January, April, July, and October
- Company B: Dividend payments in February, May, August, and November
- Company C: Dividend payments in March, June, September, and December
The more companies you find that meet this schedule, the higher the potential dividend you can collect.
Constructing your portfolio
When building your dividend portfolio, you want to ensure you invest in high-quality stocks. If you only focus on the dividend amount, you could lose a lot of money if the stock loses value.
While no stock is immune to losing value, odds are much better with a stable company like Procter & Gamble. If a company is paying a dividend but does not have a reliable income stream, there is the risk that the dividend will be cut or even canceled.
Equally important is to understand dividend yield. You calculate dividend yield by dividing the annual dividend amount by the stock’s share price. The yield is akin to the interest rate you earn on your savings account. So if you see a company paying a 3% dividend, you will earn a 3% return on your money from the dividend alone. This does not take into account share appreciation.
The tricky thing with dividend yield is that some investors chase this number. They want the highest yields so they can earn the most money. But sometimes, the yield is high because the company is in financial trouble. They might have had a strong business model and, as a result, paid out a healthy dividend. But business took a turn for the worse, and now the stock price is much lower since revenue is less.
Their dividend yield is high, but the odds are the company will cut it, costing you money. A classic example of this is General Electric. This company was an income-generating machine. But times changed, and after 119 years of paying a solid dividend, the company slashed the annual dividend to just $0.04.
When constructing your monthly dividend portfolio, you want to pick high-quality stocks with solid income streams. Additionally, they need to have strong financials so that the company can still pay out its dividend if bad times hit. An excellent reference to use for these companies is the Dividend Aristocrat list. These companies have paid and increased dividends yearly for at least 25 years straight.
The following is a look at companies with reliable performance in terms of profitability, stock prices, and dividends.
Kimberly-Clark is a consumer goods giant that focuses on personal health products. The company’s brand names include Cottonelle, Depends, Huggies, Kleenex, Poise, and Scott. The annual dividend is $4.64, with a yield of 3.39%.
Automatic Data Processing (ADP)
ADP provides payroll, tax, and human resources services to large corporations and publishes a well-regarded monthly jobs report. The company pays an annual dividend of $5, which is a yield of 2.02%.
Cardinal Health (CAH)
Cardinal Health provides various healthcare services, including laboratory services, hospital pharmacies, home care, community health centers, and more. Its annual dividend is $1.98 per share, which is a dividend yield of 2.97%.
Mainly known as a purveyor of soft drinks, Coca-Cola also has a broad product line of flavored beverages outside its core soda brand. The annual dividend payment is $1.76 for a yield of 2.77%.
Walmart is a global retail giant selling consumer goods and groceries. The company also owns and operates Sam’s Club warehouse stores. Walmart’s annual dividend is $2.24 per share, with a yield of 1.54%.
Illinois Tool Works (ITW)
Illinois Tool Works manufactures industrial products and equipment for construction, automotive, and other industries. The dividend yield is 2.36% for an annual dividend of $5.24.
Procter & Gamble (PG)
Procter & Gamble is a company that primarily produces personal care goods, including grooming items, laundry soap, paper products, and more. It pays an annual dividend of $3.65 for a yield of 2.88%.
Verizon is a communications company that provides consumers with cellular communications, internet, and cable services. Its annual dividend is $2.61, with a yield of 7.06%.
AbbVie is a pharmaceutical research and development company that creates medications for medical treatments. It pays an annual dividend of $5.64 with a yield of 3.95%.
3M, short for Minnesota Mining & Materials, focuses on the research and creation of materials used in various applications, including electrical, adhesives, building materials, office supplies, and more. The company has a dividend yield of 4.69% and an annual dividend of $5.96 per share.
General Dynamics (GD)
General Dynamics is a global aerospace and defense company working in the public and private sectors. Its annual dividend is $5.04 with a yield of 2.02%.
Hormel Foods (HRL)
Hormel Foods is a food production company that operates multiple brands, including Dinty Moore, Applegate, Planters, Skippy, and SPAM. It pays an annual dividend of $1.04 with a yield of 2.32%.
Johnson & Johnson (JNJ)
Johnson and Johnson produce products for the pharmaceutical field, medical devices, personal healthcare, and grooming brands. Its annual dividend is $4.52 with a yield of 2.57%.
Pfizer’s primary production focus is in the areas of vaccines; treatments for diabetes, heart disease, and cancer; and consumer healthcare products. The annual dividend for Pfizer is $1.60 for a yield of 3.44%.
Exxon Mobil (XOM)
Exxon Mobil is a petroleum and chemical company that engages in the extraction of oil and the creation of products using petroleum byproducts. It has an annual dividend of $3.64 and a yield of 3.21%.
Archer-Daniels-Midland is an agricultural company focused on researching and developing human and animal nutrition products, biosolutions for various industries, and farming-related services. It has an annual dividend of $1.60 and a yield of 1.69%.
Dover is a global manufacturer and solutions provider with heavy exposure to the oil and gas industry. It pays an annual dividend of $2.02 per share and a yield of 1.45%.
IBM is an information technology company that has been around since 1911 and has a solid income stream. The company’s annual dividend is $6.60 with a yield of 4.8%.
If you are investing in the stock market and want to increase your returns, a great option to consider is dividend-paying stocks. Not only do you benefit from any share appreciation, but you also earn a return based on the dividends you receive.
The income can be used to live off of or reinvest to purchase more shares, increasing your overall return. As a final bonus, dividend-paying stocks handle market volatility better than other stocks, limiting your downside risk.
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