Passive income: everybody wants it, but so few get it. The internet is full of articles in which authors promise people vast riches with only small amounts invested up front. But 99% of the time, these articles promise more than they deliver: you generally need to invest a lot of money up front to get a lot coming back to you each month in dividends.
That doesn’t mean that you can’t boost your yield to a level that’s a little higher than what the average investor gets. You can do so, by investing in high-yield stocks. A stock’s “dividend yield” is its dividend payment divided by the stock price. The higher the yield is, the less you have to invest to get a given amount of cash flow coming in.
It’s debatable whether high yield stocks deliver better long-term returns than low-yield stocks, but they do deliver more dividends in the near term. With that in mind, here’s how much money you’ll need to invest to get $1,000 per month in passive income.
You’ll need about $185,000 if you are willing to assume above-average risk
If you want to stick to sensible stock investments, you’ll need to spend about $185,000 on dividend stocks to get $12,000 in annual dividends, which works out to $1,000 per month. I base this on the fact that the highest yields I’m aware of among stable companies with strong competitive positions are 7% or lower. Pushing higher than that with yield gets you into speculative territory.
Let’s say that the average portfolio yield you’ll want to target is 6.5%. You could get that from a collection of stocks with yields ranging from 6% to 7%. If your portfolio yields 6.5%, you’ll need to invest $185,000 to get $1,000 a month. The math on that is 6.5% per year times $185,000 equals $12,000, or $1,000 a month.
A good example of a high-yield stock is Enbridge (TSX:ENB). It yields 7% at today’s prices. Its revenue has grown by 8% per year over the last 10 years, its earnings per share have grown by 5.2% per year in the same period.
As an oil pipeline company, it locks clients into extremely long agreements and then basically collects a kind of “rent” from them, which it passes to shareholders in the form of dividends. It’s one of the biggest such companies in North America, and it doesn’t have very many competitors. Basically, it looks like a good business. However, ENB is kind of pushing it with the dividends. It paid out more in dividends last year than it earned, either in net income or free cash flow. That’s risky. If you want extremely high yield, it’s unfortunately the kind of risk you often have to take.
How to lower your risk
If you find that trying to get to $1,000 per month in passive dividend income with high-yield stocks is risky, you’re not wrong. I’m personally inclined to agree: my portfolio only yields about 3%. One reason is that I invest in a mix of high yield, low yield, and no-dividend stocks.
Such a portfolio doesn’t give you that instant fix of seeing large cash payouts into your account. However, it often delivers better total returns than a high yield portfolio does. By the way, if you’re wondering … it takes $400,000 invested at a 3% yield to get to $1,000 a month. It’s quite a bit of money, but over the course of an investing lifetime, you could get there!
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See the 5 Stocks
* Returns as of 3/7/23
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Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy.