Receiving passive income every month can help you pay your bills, achieve larger financial goals, or be used as extra spending money. Here are the strategies and steps on how to set up a passive income portfolio so you can earn $5000 a month in dividends.
Instead of being overwhelmed by trying to find time in your busy schedule to earn extra money, you can set up a dividend income portfolio to grow and pay you passive income in the future. Investing is one option you can try to help you earn money while you sleep.
$5000 a month in dividends is an impressively large goal, especially when you’re starting from scratch. With time, patience, consistency, and persistence you can get there.
And if you reinvest the dividends for now, your portfolio earnings will compound in the long term. By investing new money in addition to using your dividends to buy additional shares, you’ll snowball to the goal you’re aiming for.
Here’s a look at how you can plan your stock purchases so you receive $5000 in monthly income or in any amount you target.
Table of Contents
Jump to the sections of this article using the links below.
- How much money do you need to invest to make $5000 a month in dividends?
- 5 steps to make $5000 a month in dividends with a stock portfolio
- How to choose dividend stocks to receive dividend payouts each month
- 7 things in mind on your dividend income portfolio journey
One quick note I should mention. I’m not a licensed financial planner or financial advisor. The content on this website should be considered for information purposes and should not be considered investment advice. Always do your own research before making financial decisions. Or check with your favorite financial professional for additional information on what’s best to do for your situation.
How much money do you need to invest to make $5000 a month in dividends?
To make $5000 a month in dividends you need to invest between $1,714,286 and $2,400,000 with an average portfolio of $2,000,000. The exact amount of money you will need to invest to create a $5000 per month dividend income depends on the dividend yield of the stocks.
Dividend yield is the return on investment for the stocks you buy in terms of dividends. Calculate the dividend yield by dividing the annual dividend paid per share by the current share price. You receive X% in dividends back for the money you invest.
You may be starting to think a shortcut to your reaching dividend goal is to build a portfolio with stocks focusing on high dividend yields. The general recommendation for “regular” dividend stocks is to target dividend yields in 2.5% to 3.5% range.
To keep this example simple, all the math below will be done using a 3% dividend yield and focus on quarterly stock payments.
Most dividend stocks pay dividends 4 times a year. To cover each month of the year, you need to buy at least 3 different stocks.
If each payment is $5000, you’ll need to invest in enough shares to earn $20,000 per year from each company.
To estimate how you’ll need to invest per stock, divide $20,000 by 3%, which means a holding value of $666,667. Multiply that holding value by 3, resulting in a potential total portfolio value of around $2,000,000. It’s an impressive amount of money, and potentially impossible when you’re starting from zero.
From a risk perspective, you’ll likely invest in multiple stocks rather than putting all your financial eggs in three stocks. Don’t forget, investing in the stock market involves a degree of risk.
Another reminder before you try to shortcut the process by chasing dividend yield…
Basic math based on the above will show you that purchasing stocks with higher dividend yields will allow you to reduce your investment costs. And while this, in theory, could work, regular dividend stocks with yields above 3.5% are typically considered risky.
In “normal” stock market years, “regular stocks” with high dividend yields may indicate a problem with the company. Investors feel there’s some sort of concern with the company, which reduces the price per share of the stock. The lower price compared to the dividend means a higher dividend yield.
Make sure you do your research on all companies you decide to invest in. Sites such as SeekingAlpha and other news sources can give you insight into what is going on with the company, based on publically available information. Is there a lot of discussion about a potential dividend cut coming on the horizon?
And if the company does cut its dividend, the stock price make go down even further. Your portfolio value will fall in addition to the reduction in dividend income.
It’s not 100% guaranteed either way what will happen. You can only make your decisions based on publically available information. And there are a few interesting research companies out there that can help you become a more informed investor. It’s up to you to decide what level of risk you’re comfortable with.
5 steps to make $5000 a month in dividends with a stock portfolio
Here is a 5 step plan to help you get started on your journey to creating a monthly dividend portfolio. Unless you happen to have a large amount of cash ready to be invested, you may need to break your plan down across multiple years. With time, determination, and consistency you’ll get there.
1) Open a brokerage account for your dividend portfolio, if you don’t have one already
If you don’t already have a brokerage account, the first step will be to open one. Or even if you already have a brokerage account, you may want to open another one specifically for this portfolio.
You’ll need to consider if you want to open a taxable account so that you can use the dividend income prior to retirement or open a separate tax-deferred account that focuses on putting away money for the future. Consider having a conversation with your favorite tax professional to understand what’s makes the most sense for your specific situation.
Tip: When you’re looking at brokerage companies, confirm if there are any trade commission fees and minimum account balances to avoid fees. In 2019 most of the large brokerage houses reduced their trade commissions to $0 per trade. This is great for you because you can build your dividend portfolio with smaller purchases without fees eating into your plan.
And one final thing to check before opening an account is to confirm how to direct deposit money into your new account as well as how to set up a transfer from your regular checking account.
Consistency is central to building an investment portfolio of any size, and especially when your goal is $5000 per month. Automation makes it easier to reach your goals by taking a step out of the process.
If you don’t have a direct deposit option through your employer, being able to transfer money from your checking account is an alternative. Put a recurring reminder on your calendar for payday so that you transfer the money when it’s available.
With the money you have available to start your portfolio, start the transfer to your new account as soon as it’s open. Next, take a look at your budget to figure out how much you can invest each month.
2) Determine how much you can save and invest each month
In order to make $5000 a month in dividends, you’ll need to invest approximately $2,000,000 in dividend stocks. The exact amount will depend on the dividend yields for the stocks you buy for your portfolio.
Take a closer look at your budget and decide how much money you can set aside each month to grow your portfolio. Given the sizable amount of money, you’ll need to reach your $5000 a month dividend goal, adding regularly to your portfolio will help.
The amount of money you can invest each month will partially determine how long it will take you to reach your goal.
If your budget is currently tight, set aside what you can. Start with even a small amount so that it’s something.
Next, take a closer look at your budget for opportunities to reduce your expenses so you can use that money to invest instead.
And you will probably need to plan to work on this goal year over year, focusing on a target increase in your monthly dividend income each year. For example, consider setting an annual goal of growing your monthly dividend income by $50 or $100 a month in dividends. It’s a great stepping stone that allows you to make progress without feeling discouraged.
Tip: At an annual target of increasing your monthly dividend income by $50 or $100 a month, it may feel like it’s going to take more than your lifetime to reach your goal. One other thing to consider is that the dividend snowball will start to speed up as each stock compounds annually with additional reinvestment in addition to new investment. You may also consider selling stock that has overperformed in value growth but is underperforming in dividend yield. You’ll make portfolio adjustments as you go.
3) Set up direct deposit to your dividend portfolio account
Get the direct deposit information for your brokerage account so that you can update your paycheck instructions. Hopefully, your employer allows you to split your paycheck a few different ways because you still need to receive money in your regular checking account. Make sure you pay your bills in addition to investing in future income!
If you’ve run out of paycheck instructions or your brokerage company doesn’t have clear direct deposit instructions, you should be able to set up free account transfers to your brokerage account. Put a reminder on your calendar for each payday to manually transfer the money you want to invest. Typically there’s always a backup plan if the original option isn’t available.
4) Choose stocks that fit your dividend strategy
Stock selection is a relatively personal decision and requires research into each company you decide to invest in. When it comes to creating a dividend portfolio, you’ll want to consider a few things for each company:
- The company’s health
- How long they’ve been paying a dividend along with their payment increase history
- How well their earnings are covering their dividend payments
- The company’s industry
The company’s health and earnings will help you understand how safe future dividend payments likely are. Researching the company and reading commentary is important to making decisions about which stocks to buy.
The dividend history and payment increase trends give you an idea of when the company will likely pay out in the future. Stocks with increasing dividends also help you snowball your way to your dividend goals.
And finally knowing the industries of the companies you decide to invest in allows you to create a balanced and diverse portfolio. Managing risk involves not putting all your eggs in one basket. Diversifying the companies you buy stock in along with the industries represented in your portfolio helps spread the risk of your future dividend earnings.
The other aspect to consider is when the company pays its dividends. If you’re looking to earn dividends monthly, you might want to focus on companies that if certain payout schedules. That’s not to say a historical payout schedule should 100% guide you to buy a stock or skip one. It just adds to your decision process.
Create a watchlist of the companies you think you’ll want to invest in so that when you have the cash available you can start buying shares to grow your dividend income.
Related: Monthly and quarterly dividend calendars for Dividend Aristocrats
5) Buy shares of dividend stocks
And finally to reach your monthly dividend goal, start buying shares of stock in the companies you want to focus on. With the direct deposit from each paycheck, you’ll have cash ready and waiting when it’s time to make a purchase.
When you buy shares, double-check your watchlist to see which stock is the best value for the moment. It’s not so much about “timing the market”, which typically doesn’t work out in your favor but making sure you’re being efficient with your purchases.
Fortunately, as most large brokerage companies have reduced their trade commissions to $0, you’re able to buy stock in smaller numbers of shares without fees eating into your investment value.
Checking your watchlist helps you avoid research overwhelm and decision fatigue. If you’re buying shares in bluechip stocks, then it’s about looking at the calendar to see if you’ll qualify for the next dividend payment, or potentially if the price is down you might be able to buy additional shares for your money.
You’ll repeat this step until you reach your goal. With each purchase, you’ll be taking another step towards earning $5000 per month in dividends.
How to choose dividend stocks to receive dividend payouts each month
Quarterly dividend payments are the most common payout structure you’ll find. There are also dividend stocks that pay monthly, once a year, twice a year, and a few if you look that are less frequent.
To keep this example simple by using quarterly paying stocks, you need to buy stock in at least 3 different companies to cover each month of the year, assuming each one follows a specific payment pattern.
And given a $5000 a month goal, you’d probably build a portfolio that includes more than 3 companies.
Fortunately, there are 3 common dividend payment patterns that many quarterly stocks follow. And even if they don’t follow the patterns exactly, they’re pretty close.
The three dividend payment patterns align are as follows and actually map to the “month” in each quarter:
- First month of the quarter: January, April, July, October
- Second month of the quarter: February, May, August, November
- Third month of the quarter: March, June, September, December
These patterns are just a place to start looking. You don’t have to have a portfolio of only these stocks. But if you buy one stock for each of the patterns, your dividend portfolio will likely pay you each month of the year.
Because nothing is 100% guaranteed, likely is the keyword.
The dividend payment may shift between months, especially if it usually pays at the very end or beginning of a month. Or in other cases, the company may change its future payment schedule. And one lesson from 2020 is that companies may also need to pause their dividend payments until better economic conditions return.
Always research all companies you plan to invest in, and continue to keep an eye on them once you make a purchase. Don’t buy or skip a stock simply because it doesn’t pay in the months you need to fit the calendar. Buy the best stocks for your portfolio and it’s ultimately a bonus if the combination of investments pays you dividend income each month.
Related: Monthly and quarterly dividend calendars for Dividend Aristocrats
7 things in mind on your dividend income portfolio journey
When you’re ready to start building your dividend income portfolio, here are seven lessons to keep in mind for your monthly dividend portfolio.
Start small and create an incremental plan to reach your goal
Based on the math above, you’ll need to invest about $2,000,000 to earn $5000. It’s a large amount of money, especially if you’re starting from a new bank account.
Start setting smaller monthly income goals such as $100 a month or $200 a month. Invest enough money to reach the smaller goals, reinvest your earnings, and invest new money to level up to your larger goal.
And it will probably take you years to reach the larger goal. That’s ok. The good news is that many large brokerage companies reduced their trade commissions to $0. You can now buy shares in smaller blocks without losing money to the fees.
Incremental goals also give you space to decide if you want to continue to invest in the same stock or start working on another company. With a large goal of $5000 a month, you’ll likely want to buy stock in more than just three companies.
Spread the risk by investing in different stocks
To cover all 12 months of the year you’ll likely need to invest in at least three different companies. In reality, putting approximately $2,000,000 into just 3 companies creates a fair amount of risk. think about what would happen to your portfolio if one of the companies has a problem.
Three stocks mean a lot of eggs in one basket. If something happens to one of those companies, a huge percentage of your portfolio is negatively impacted.
Spread the risk by not only investing in multiple companies but across industries. Try to buy shares in companies that are a good value at the time. As you continue to review your portfolio over time, you may want to sell stock that’s gone up in value and the dividend yield has decreased. Or you can continue to buy and hold as well.
One strategy to consider is making sure that no single stock accounts for more than a certain percentage or amount of your monthly dividend income. You can start at aiming for $50 or $100 per month and as your portfolio grows in value, maybe that cap goes up to $250 or even $500 per payment.
Double check the next ex-dividend date of your target stock
The ex-dividend or “excluding dividend” date means the shares purchased on that date or after won’t receive the next paid dividend. To qualify for the payment you need to own your shares prior to the date.
On your watchlist make a note of the next ex-dividend date if it’s been announced or take a hint from the payment history. Give or take a day, stocks typically follow a similar schedule. Just make sure to double-check it again before you make any purchases, especially if you want to make sure you qualify for the next payment.
You may still want to buy the shares even if you have to wait longer for your first payment because the ex-dividend date has already passed. Or you may want to buy something else from your watch list because it’s both a good value for the moment and you’ll get the next dividend payment.
Research stocks with consistent dividend histories
The stock market will go up and down, which you can bank on. And the only guaranteed dividend is the one that has been paid. 2020 was a reminder of this lesson.
Companies that pay consistent dividends, especially if they have a long history of doing so, have a better chance of continuing to do the same in the future. Of course, it could change based on market conditions or a change in the company such as a merger.
For the most part, companies will say their dividend plans in advance to keep from spooking the market, which would likely result in a price drop.
Your research will help you figure out if those consistent payment histories have a better chance or not at continuing.
Avoid chasing dividend yield rates
High dividend yield rates may seem like a great shortcut to reaching your goal, but it could signal a problem with a “regular” stock company. The stock price is going down for a reason.
It can’t be said enough to make sure you do your research into all companies you plan to invest in. Be an informed consumer so you reduce the risk of losing your income and portfolio value.
You’ll need to decide what level of risk you’re willing to take, especially when buying a “regular” dividend stock with a higher-than-usual dividend yield. Everyone has their own risk tolerance levels.
On a side note, real estate investment trusts or REITs are different types of stock investments. It’s taxed differently so their dividend yields are usually higher than the “regular” or qualified dividend stock.
Check what income taxes you may owe on the dividend income
Depending on the type of account you’re building your dividend portfolio in or possibly your financial situation, you may owe income taxes now or in the future. There’s also likely extra paperwork involved.
If you’re creating your dividend portfolio in a regular brokerage account, and not a tax-deferred retirement account, you’ll likely have additional taxes to pay (or a reduced refund). Contact your tax professional or the IRS to confirm your specific situation, and to see if they have any additional advice on how to proceed.
And one thing to keep in mind for the future is how much money you want to receive each month. Once takes come into play, if you want to receive $5000 per month, you may need to build a portfolio that pays more so you have extra money to cover the taxes owed.
Buy stocks in multiple companies and industries to reduce the risk
As mentioned a few times, having all your eggs in one basket is risky. Compared to smaller dividend goals, a $5000 per month target requires a large investment portfolio, especially in terms of individual companies.
Future dividend payments aren’t guaranteed, even with the longest of long-paying stocks. Dividend payments can come to an end or something to happen to the company.
If you’re aiming to cover all 12 months of the year to receive dividend payments, buy multiple companies for each payment pattern.
You can create a simple spreadsheet in Google Sheets to help you organize your purchase plan, show your progress toward your goal, and track your earnings.
When it comes to investing in the stock market, you’ll do the best you can with the information you have at the time. Keep an eye on your purchases, and make changes in the future if you need to.
By spreading your portfolio across multiple stocks and companies you may find better deals for your money at that moment. There’s an interesting balance between a plan and being flexible you’ll strike on your investing journey.
Are you planning to invest for $5000 a month in dividends?
Earning $5000 a month in dividends as passive income can potentially cover your bills and expenses or a large portfolio of them. It can also help you grow your portfolio to even higher levels.
You can potentially select stocks for your portfolio so it pays you consistently month over month.
Make research a key part of your strategy. Research as you build your watchlist. Research before you make a purchase to ensure the company is still a good fit for your portfolio.
Remember to spread the risk across multiple companies and industries, especially when you have a $5000 monthly goal. Don’t put all of your eggs into one or two “baskets”.
Build your plan using incremental goals so you don’t get discouraged. $2,000,000 is a lot of money so having annual investment targets will help you get there with enough time and persistence.
What additional questions do you have or strategies do you plan on using while creating your dividend income portfolio?
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