As always, The Motley Fool cannot and does not provide personalized investing or financial advice. This information is for informational and educational purposes only and is not a substitute for professional financial advice. Always seek the guidance of a qualified financial advisor for any questions regarding your personal financial situation. If you'd like to submit your question for feedback, you can do so here.
What's the best way to learn? Start by asking questions.
If you've ever been on Reddit, you know the site is chock-full of questions. One Reddit user recently asked whether it was possible to earn $1,000 per month in dividends with an investment of $100,000. What's the answer to this question? Here's what I found.
$1000 a month on $100k dividend?
byu/beat_the_level in dividends
A tall hurdle
Making $1,000 per month in dividends from a $100,000 investment won't be easy. To achieve this goal, the average dividend yield of your investments would have to be 12%.
I'm assuming, by the way, that we don't have to limit the investment alternatives to only those that pay monthly dividends. Many stocks and funds pay quarterly dividends. Although some pay monthly, restricting our investments to only those alternatives would make the task much harder.
Another challenge is that a stock or fund that pays a 12% yield today might cut its dividend soon. You'll need to evaluate the sustainability of the dividends offered by the investment alternatives you consider.
There's also another risk: The stocks or funds bought could decline in value and completely wipe out the income generated from dividends. I won't let this possibility limit which investments we look at, but it's something to keep in mind.
Possible investments
I used Finviz's stock screener to identify stocks and funds with yields of 12% or more. Surprisingly, there were over 280. This shows that it's theoretically possible to make $1,000 in monthly dividend income with a $100,000 investment.
However, the dividends might be unsustainable for all of those stocks and funds. Let's look at three possibilities.
Annaly Capital Management (NLY 0.62%) offers a forward dividend yield of 14.5%. It's organized as a real estate investment trust (REIT), which means the company must return at least 90% of its profits to shareholders as dividends to be exempt from federal income taxes. Annaly invests primarily in mortgage-backed securities, residential credit, and mortgage servicing rights.
NYSE: NLY
Key Data Points
One concern with Annaly, though, is that the REIT has reduced its dividend in the past. However, at least for now, the company is generating sufficient earnings available for distribution to cover its dividend at current levels.
The Global X Nasdaq 100 Covered Call ETF (QYLD 0.06%) is an exchange-traded fund (ETF) with a current distribution rate of 12.09%. This ETF buys stocks in the Nasdaq 100 Index and sells covered call options on the index to boost its income.
A downside to this ETF's covered call strategy is that its distributions can fluctuate considerably. Over the last 12 months, though, the Global X Nasdaq 100 Covered Call ETF's distribution rate has been 14.15% -- well above our goal of 12%. The ETF also pays distributions monthly.
Closed-end funds (CEFs) offer another good way to generate high levels of income. The PIMCO Dynamic Income Fund (PDI 1.20%) could be a great CEF to consider. Its distribution yield is 13.91%.
NYSE: PDI
Key Data Points
The PIMCO Dynamic Income Fund invests in a wide range of income-producing securities, including mortgage-backed securities and corporate debt. This CEF turbocharges the income it generates by using leverage, primarily reverse repurchase agreements, where it sells securities with the agreement to buy them back at a higher price in the future.
Image source: Getty Images.
Another approach
There is another approach to making $1,000 in monthly dividend income from a $100,000 investment. And it could be safer than buying stocks and funds with yields of 12% or more.
With this strategy, you'll invest $100,000 in stocks and funds with yields well below 12% but that are growing their distributions quickly. Over time, the distribution increases could gradually boost your monthly income to the desired $1,000 level.
The main upside of this approach is that you'll have many more alternative investments from which to choose. The downsides of the approach, though, are that you'll have to wait, and there's no guarantee that the distributions will increase as much as you want.
The good news is that the answer to the Reddit user's question is a resounding "yes." The bad news is that the risks could be high.
