Investing in the stock market can help build long-term wealth, but investing in the right stocks can also boost your monthly income.
Dividend-paying stocks are investments that pay you to own them. When companies have leftover profits at the end of the quarter or year, they'll sometimes pay a portion of that money back to shareholders as a dividend.
Earning a substantial amount of money from dividend stocks takes time, and it's not a "get rich quick" tactic. But with the right strategy in place, you can accumulate enough of these stocks in your portfolio to earn hundreds of dollars per month (or more) in passive income.
Choosing the right stocks
First, it's crucial to make sure you're picking the right investments. Not all dividend stocks are created equal, and choosing the wrong stock could cause you to lose more money than you earn.
One important factor to look for is the dividend yield. This is the amount the company pays out in dividends in relation to its stock price -- a higher dividend yield is usually better. Be sure to look at the big picture, though, and consider the company's overall financial health. If the dividend yield is high, but the payout ratio has been consistently rising, for example, that's a red flag.
The average dividend yield is around 2% to 3%, although it depends on the individual stock and the industry. If a stock has an unusually high dividend yield, that's not always a bad thing. However, it's a good idea to do your research to make sure the company is on solid footing, because higher-than-average dividend yields are not always sustainable.
If you're unsure about where to start, consider investing in the Dividend Aristocrats. These are companies that have consistently increased their dividend payments for at least 25 consecutive years. Most of these stocks are household names, and they're some of the strongest, healthiest companies in the country. That makes them attractive investments overall, not just from a dividend standpoint.
How much should you invest?
How much you can earn in dividend payments depends on the individual stocks you invest in, as well as how many shares you own.
Say, for example, you're investing in a stock priced at $100 per share that has an annual dividend yield of 3%. In this scenario, you'll receive $3 in total dividend payments per share (though the timing of the payments will depend on whether the company pays them monthly, quarterly, or once a year).
Let's also say you want to earn $6,000 per year in passive income, or $500 per month. With a $3 annual dividend, you'd need to own 2,000 shares to reach that goal. And if you're paying $100 per share for the stock, you'd need to invest $200,000 total to own 2,000 shares.
Of course, $200,000 is a lot of money. But one of the perks of dividend stocks is that you're able to reinvest the dividends you receive to buy additional shares of the company. Given enough time, these reinvested dividends will add up: the more stock you own, the more you'll earn in dividends, and the more you earn in dividends, the more stock you'll own. This means you won't need to invest $200,000 out of pocket to own $200,000 worth of stock, given you have enough time to let the dividend reinvesting work for you.
In addition, you don't need to establish your position with this much stock all at once. Stock prices will also fluctuate, so you can take advantage of market downturns to buy shares, potentially decreasing your cost basis in the process.
Dividend stocks can be a great investment. Not only are they a smart addition to your investment portfolio, but they can also provide a source of passive income down the road. By planning your dividend strategy now, you'll eventually enjoy a generous income stream that can last a lifetime.