In an era when inflation is making it harder to make ends meet, many people are looking to tap dividends from their investments as a way to help cover their costs. That adds a different type of risk, as dividends are never guaranteed payments. Still, everyone has to balance the risks with potential rewards when it comes to their money.
With that in mind, three experienced investors share how they would consider building a portfolio to generate $10,000 of annual dividend income. One chose to be a yield monster by seeking out bargain-priced high yielders like Digital Realty Trust (DLR -2.31%). Another chose fast-food titan McDonald's (MCD 0.11%). The third suggested buying a basket of companies with decent histories of rising dividends through the Vanguard Dividend Appreciation Index Fund (VIG -0.19%). Read on to discover why and decide for yourself if any of them deserve a spot in your portfolio.
Be a yield monster
Eric Volkman (buy bargain high-yielders): Growth and tech stocks have really taken a beating lately. And although these sectors aren't packed with dividend-paying titles, there are enough to choose from if you know where to look.
So I'd suggest combing through these names to find the handful that both pay dividends reliably and have traded down in the current bearish environment. After all, when a dividend stock's price falls, its yield goes up.
A personal favorite I've had in my own portfolio for some time is Digital Realty Trust. This is a real estate investment trust (REIT) that operates an ever-widening network of data centers, i.e., facilities packed with the hardware needed to run sprawling IT server operations.
The company's tenant list reads like a who's who of modern American commerce: International Business Machines and AT&T are two of many renters. The digital world keeps relentlessly expanding, and the REIT is expanding right along with it. The company raises its dividend every year, to the point where -- combined with a weakened share price -- it now yields a healthy 3.7%.
Taiwanese specialty semiconductor services company ASE Technology Holding (ASX) is a similar way to invest in a good tech industry niche.
The company's bread and butter is semiconductor assembly and testing; with that expansion of the digital space, demand for such services should continue to be strong. Despite recent supply disruptions, ASE's top line has generally been growing robustly over the years, and it's reliably profitable. It also keeps its investors happy with an annual dividend that yields a very attractive 4.6% these days.
Another sold-off techie with a rising yield is monster telecom Verizon Communications (VZ 0.21%). Costs are high, but it's got a massive and "sticky" customer base, and is aggressively upgrading its network with 5G technology. Its yield is a powerful 5.2%. Meanwhile, networking equipment mainstay Cisco Systems and tech glass specialist Corning both offer yields around the 3% mark.
I could go on, but you get the idea. There are numerous bargains in this bin, and the better ones should keep putting money in shareholder pockets for years to come.
McDonald's is steadily increasing its dividend payment
Parkev Tatevosian (McDonald's): One strategy to build a robust income stream is to buy a stock that can increase the dividend payment over time. One of my favorite dividend stocks right now is McDonald's.
The golden arches bounced back incredibly well in 2021 after the pandemic devastated its business in 2020. Indeed, revenue expanded by 20% in 2021 after falling by 10% in 2020. Fueling McDonald's impressive rebound are investments in its digital channel.
Folks can now order from the McDonald's app and have their meals delivered to their homes or even to their cars in a McDonald's parking lot. The feature adds convenience to consumers and removes staffing pressure from McDonald's. It undoubtedly helped McDonald's report its highest earnings per share of the last decade in 2021 of $10.04.
Earnings are critical when considering investing in a dividend stock. Without sufficient earnings, a company will have to dip into savings or borrow funds to pay a dividend. Income investors can be comforted knowing that McDonald's dividend payout ratio (the percentage of earnings it pays in dividends) was 56% most recently. That leaves room for McDonald's to pay and grow its dividend payment. From 2012 to 2021, McDonald's has increased its dividend payment from $2.87 per share to $5.25.
Fortunately, the new digital capabilities could sustain McDonald's robust earnings for several years. Each McDonald's restaurant can now reach a broader audience on more occasions. Investors looking to build a large stream of recurring income can benefit from McDonald's growing earnings and dividend payments.
Consider a basket of companies with a history of rising dividends
Chuck Saletta (Vanguard Dividend Appreciation Index Fund): One of the biggest challenges when it comes to dividend-focused investing is the fact that dividends are never guaranteed payments. For those dividends to get paid, there generally needs to be earnings behind them. When even strong companies that focus on the essentials can see their earnings squeezed by the ravages of inflation, can dividend cuts be far behind?
In a world that is that much more uncertain than usual, it might make sense to consider a basket approach to dividend-focused investing. After all, if even the strongest businesses can stumble, then what chance do ordinary investors have of picking the right handful of companies whose payments will survive the tough times we may face?
That's where the Vanguard Dividend Appreciation Index Fund comes in. The fund follows the S&P U.S. Dividend Growers Index. That index focuses on companies with at least a 10-year history of increasing their dividends, but excludes the highest yielding stocks that would otherwise qualify. It's a great combination of factors that might provide the secret sauce to enable your portfolio to make it through the chaos.
By focusing on companies with at least a 10-year history of increasing their dividends, the fund only buys stocks with a proven track record of rewarding their owners. That's important, because supporting a rising dividend for the long haul takes a special level of structural and operating commitment. Companies with long track records on that front are likely to try to protect their dividends if it is possible to do so.
In addition, by excluding the highest-yielding stocks that would otherwise qualify, the fund has a measure of protection against yield traps. When a company's dividend is clearly at risk, its shares often drop as investors seek to get out before the cut is announced. That behavior tends to lead to higher reported yields of those stocks at risk of cuts. Excluding those higher-yield companies can reduce its exposure to that particular risk.
Put it all together, and the Vanguard Dividend Appreciation Index Fund is worth considering in your quest for $10,000 in annual dividend income.
Different paths to the same goal
Today's market and economy make investment income an incredibly important goal for many investors. Be wary of and balance the risks involved in investing for income, and you could find a great path to reach your target. Any one of these three approaches -- or a combination of them -- is worth looking at as you set out on your path to $10,000 in annual dividend income.