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Earn $500 in Monthly Retirement Dividends in 6 Easy Steps

By Chuck Saletta - Mar 21, 2021 at 1:00PM

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You can boost your chances of success by paying attention to the businesses behind those payements.

In today's low-interest-rate environment, retirees are increasingly looking for stock dividends as a source of income to cover their costs. With stock yields often sitting higher than the interest payments on investment grade bonds, such a move can be tempting. Dividend investing comes with a risk, though: Companies can cut their dividends when the going gets tough, and when a company cuts its dividend, its stock often falls as well.

To improve your chances of having that income come in consistently, you need to look beyond the headline yield numbers when building your portfolio. The good news, though, is that you can still follow a fairly straightforward process to get there. If you want to earn $500 in monthly retirement dividends, these six easy steps can get you well on your way down that path.

Man with cash and a piggy bank.

Image source: Getty Images.

1. Annualize that monthly income and plan around that

A monthly figure of $500 works out to $6,000 a year. That annual income level should be what you aim toward, rather than the monthly target. Many companies pay their dividends only four times per year. Because you need to focus on dividend quality, not just quantity, it's hard enough to find companies that look worthy of owning. You don't really want to sacrifice a good investment and force yourself to buy a less strong business just because it has a more convenient dividend timing.

If you're investing in a standard brokerage account, you can ask your broker to pay your dividends as cash into that account. Many brokers will also allow you to set up an automated withdrawal schedule so that you can have that $500 a month sent to your checking account. As long as you start with enough of a cash buffer and your stocks really do pay out that $6,000 a year in dividends, you can turn that otherwise lumpy dividend stream into $500 a month of cash flow.

2. Decide on your minimum yield

If you're looking for income from your investments, you can choose between stocks and bonds to provide that income. The advantage of stocks is that their dividends and share prices have the potential to grow over time, which could translate into increasing income levels. The advantage of bonds is that they're higher priority, which means they're more likely to get paid when things start to go sideways.

Since the goal of this exercise is $500 per month of straight income, you might want to look at stocks that yield more than long-term Treasury bonds as a starting point. Thirty-year Treasuries recently clocked in at 2.45% yield, so it might make sense to screen on companies whose stock yields are 2.5% or higher. After all, Treasuries are just about the lowest-risk investment out there. If you're investing for a steady income stream, then you can get at least that Treasury rate by buying the Treasuries themselves.

The benefit of setting your minimum yield is that it gives you a high side for the size of the portfolio you'll need to meet your target. With a 2.5% minimum yield, that high-side portfolio size is $240,000. 

3. Look for a "Goldilocks" payout ratio

Goldilocks eating porridge while a bear watches her.

Image source: Getty Images.

From the company's perspective, dividends consume cash that could otherwise be used to maintain or grow the business. A dividend that requires too much of the company's cash hampers the company when times get tough, which could lead to a dividend cut. On the flip side, if a dividend doesn't consume all that much cash, it could be a sign that management is worried it can't really sustain a higher payment. That, too, can indicate a risk of cuts as the business environment changes.

A payout ratio in the Goldilocks zone between around one-third and two-thirds of cash flows shows a balance of commitment, confidence, and flexibility. While it's not a guarantee that a dividend will be maintained when things get tough, it's a sign that the company takes its dividend seriously while leaving itself room to maneuver through the unexpected.

4. Insist on a solid balance sheet

During healthy times, a dividend will be paid from the company's cash flows. During rough times, a company may need every dime it can generate, and then some, just to stay afloat. For its dividend to be sustained, then, it needs a healthy enough balance sheet that it can cover its costs and continue to reward its investors even as its cash flow is temporarily diminished.

That's a tall order. Still, with enough cash on hand and other current assets to cover the bills coming due, it can make it through a short-term rough patch. With enough long-term assets compared to its long-term debt load so that lenders are willing to roll over maturing debts, it can also improve its changes of making it through extended challenges.

Either way, since dividends are never guaranteed payments, a healthy balance sheet improves the changes that a dividend will get paid when things turn sour.

5. Seek out companies with decent dividend track records

Except for certain businesses that are forced to pay out dividends because of the way they're structured, dividends are voluntary payments. Companies that regularly commit to paying a dividend tend to prioritize that dividend and plan around it, because it tends to consume a lot of cash. Once that cash is committed to its dividend, the company can no longer use it to invest in its expansion, pay off its debt, or otherwise run its business.

Company leaders recognize that fact, and they also know that investors who get used to a dividend tend to like seeing those dividends continue. As a result, businesses that establish themselves with a good track record will tend to want to keep that track record going. They'll structure their plans and cash flows to improve their chances of delivering that payment and do what they can to protect it. It's still no guarantee, but it does provide good reason to believe a company will support the dividend if it can.

6. Invest with an eye toward diversification

With those first five steps, you will probably winnow down the universe of qualifying companies to a fairly small and manageable number. With this step, you'll actually build the portfolio that will give you the chance to earn that income. Look at the industries and business lines of the companies that pass your tests, and select ones that don't operate in the same spaces.

Try to find somewhere in the neighborhood of 20 companies in different industries that all independently look like they're worth owning based on your other criteria. Buy them in approximately equal proportions until you have enough shares to deliver the $6,000 per year of income that you're looking to receive.

Diversification won't keep bad things from happening to your portfolio, but it will minimize the impact any industry- or company-specific challenges will have. That way, when things go wrong, you will improve your chances of being able to make it through with your overall plan intact.

Keep an eye on your investments over time

Once you've built a portfolio based on these six steps, your job isn't over. Companies don't all grow at the same rate, and once-stellar businesses can often stumble. To maintain, or potentially even grow, your dividend income over time, you have to keep vigilant about the companies you own.

With a continued focus on asset allocation and on keeping an overall healthy portfolio, you can better catch and adapt to small problems before they become big ones. That can improve your chances of seeing your portfolio perform well enough to continue delivering what you expect of it as long as you need it to, even if the companies within it change.

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