How to Earn $500 Every Year with This Monthly Dividend Stock | The Motley Fool (2024)

Investing doesn't come down to one decision, but a series of moves that add up over time. You can build a diversified portfolio catered to your investing goals. Are you looking for growth? No problem. Want to cover your living expenses with passive income? Dividend stocks are the way to go.

Realty Income (O 1.28%) might be near the top of the list of recommendations for any long-term dividend investor, especially as part of a diversified portfolio that includes at least 25 fantastic businesses.

With some consistency and patience, you can buy enough shares to earn at least $500 annually. Here is how and, most importantly, why.

Why Realty Income?

Of course, you should learn about any business before you buy its stock. After all, stocks aren't just symbols on your trading app; they are actual pieces of real companies. Your portfolio isn't a collection of stocks -- it's a collection of businesses.

Realty Income is a special type of business called a real estate investment trust (REIT), which specializes in acquiring and renting out real estate. The tax structure of a REIT requires that it pay out at least 90% of its taxable earnings as dividends. This often makes REITs a great choice for income-focused investors.

Most REITs focus on a specific niche within real estate, and Realty Income isn't any different. The company owns 12,237 commercial properties, primarily in the retail sector. Realty Income's tenants are generally recession-resistant businesses like grocery stores, dollar stores, pharmacies, home improvement centers, movie theaters, and medical services.

O Funds from Operations (TTM) data by YCharts

Realty Income's profits, shown as funds from operations (FFO) for REITs, have steadily increased over time, and so has the company's dividend. Management has paid and raised the dividend for 28 consecutive years, so there's a track record of stability. Additionally, the payout ratio is manageable at 70% today.

The math is simple

So, how much would it take to build a cash machine that paid you $500 every year? Well, Realty Income pays a monthly dividend that adds up to $2.97 over the past year. Remember that dividend increases aren't guaranteed, but Realty Income's strong track record of business fundamentals points to future dividend growth.

Given its dividend, investors would need 169 shares to hit $500 in annual dividend income. At Realty Income's current share price, that's a total investment of $10,350. It's straightforward if you make that a lump-sum investment. But it is a lot of money, and position size is personal, so don't fret if that's out of your budget. You can build it share by share, and the dividends you earn along the way can be reinvested to buy more shares, which pay dividends, too.

Once you reach your annual $500 dividend goal, you can either take that dividend income and invest it elsewhere or let it keep reinvesting into itself, compounding for as long as you want. Do this until you have a couple of dozen businesses spitting out cash, and you're well on your way to a comfortable financial future.

Is now a good time to buy Realty Income?

If you're looking solely at the dividends your investment will generate, now seems like a solid buying opportunity for Realty Income. The stock's dividend yield is approaching 5% today, above its average over the past decade.

O Dividend Yield data by YCharts

The stock trades at roughly 15 times its FFO, which you could compare to a price-to-earnings ratio (P/E) for a non-REIT. The S&P 500 trades at a P/E of 18, so you're getting an excellent dividend stock with a history of steady growth at a discount to the broader stock market.

Realty Income can help you add real estate to your portfolio without setting foot in a building. The 5% dividend yield is attractive, even in a market where rates have risen and investors have a good shot at continued dividend growth. Add Realty Income to your collection of quality businesses, and you'll be on your way.