Luis Pazos 
There are countless articles online that praise passive income, but many of them aren’t truly passive. While they can generate consistent income even when you’re busy, you’ll still need to put in some work. Take blogging, for instance. Although it can generate a significant income once it’s up and running, it requires considerable effort to get to that point and continued management. At best, it’s a semi-passive income source.
That’s why I prefer dividend income. It’s a genuine source of passive income. Dividends – The Ultimate Source of Passive Income
Key Benefits of Dividend Investing
- Capital Appreciation
While we’ll focus on dividend income, dividend stocks also have the potential for capital appreciation. For example, Pepsi (PEP) currently pays a nearly 3% annual dividend. Ten years ago, its stock was priced under $65 per share, and now it’s around $173 per share. This means the stock’s value more than doubled in ten years while earning 3% per year in completely passive income. This dual advantage of steady income and capital appreciation makes dividend stocks a robust investment choice for any portfolio.
- Favorable Income Tax Treatment
Dividend-paying stocks not only offer higher yields than most interest-bearing securities but also provide certain tax advantages. Ordinary dividends are taxable as ordinary income, but qualified dividends benefit from the lower long-term capital gains tax rate. To qualify, the stock must be issued by a US corporation or a foreign corporation traded on a US exchange, and you must hold the stock for at least 60 days. The tax rates for qualified dividends in 2024 are:
0% if your taxable income is $47,025 or less.
15% if your taxable income is greater than $47,025 but less than $518,900 (single filers) or $583,750 (joint filers).
20% if your taxable income exceeds those thresholds.
These benefits are especially significant if the dividends are held in a taxable investment account rather than a tax-deferred retirement plan.
Where to Find Dividend Stocks
Dividend-paying stocks are usually issued by large, well-established companies with a solid financial history. Here are a few ways to invest in them:
Dividend Aristocrats
A good starting point is the Dividend Aristocrats list, which features companies that have increased their dividends for at least 25 consecutive years. These companies are generally large, well-established, and part of the S&P 500.
High Dividend ETFs
If you prefer not to hold individual stocks, you can invest in ETFs that focus on dividend stocks. Examples include:
Vanguard High-Dividend Yield ETF (VYM) – current yield of 3.20%.
SPDR S&P Dividend ETF (SDY) – current yield of 2.81%.
Schwab US Dividend Equity ETF (SCHD) – current yield of 3.52%.
These ETFs offer yields higher than most interest-bearing investments along with double-digit returns over the past decade.
Real Estate Investment Trusts (REITs)
REITs invest in commercial properties and are required to pay out at least 90% of their income as dividends. While REITs offer high dividends, their long-term price performance can be volatile. Examples include:
Brookfield Property REIT (BPY) – current yield of 8.32%.
Kimco Realty Corp (KIM) – current yield of 2.81%.
Brandywine Realty Trust (BDN) – current yield of 7.28%.
Building a Portfolio to Generate $1,000 Per Month in Dividends
To generate $1,000 per month in dividends, you’ll need a portfolio producing at least $12,000 annually. Assuming an average yield of 3%, this requires around $400,000 in invested capital. Here’s a sample portfolio using Dividend Aristocrats:
Archer Daniels Midland (ADM) – $40,000, 2.92% yield, $1,168 annual income.
AFLAC (AFL) – $40,000, 2.70% yield, $1,080 annual income.
3M Company (MMM) – $40,000, 3.60% yield, $1,440 annual income.
Cardinal Health (CAH) – $40,000, 3.51% yield, $1,404 annual income.
Cincinnati Financial (CINF) – $40,000, 2.80% yield, $1,120 annual income.
Consolidated Edison (ED) – $40,000, 3.86% yield, $1,544 annual income.
Essex Property Trust (ESS) – $40,000, 3.27% yield, $1,308 annual income.
General Dynamics (GD) – $40,000, 2.99% yield, $1,196 annual income.
Genuine Parts Co. (GPC) – $40,000, 3.21% yield, $1,284 annual income.
Coca-Cola (KO) – $40,000, 3.12% yield, $1,248 annual income.
Total: $400,000 with an average yield of 3.20% and $12,792 annual income.
How to Stagger Dividend Payouts for a Steady Monthly Income
To achieve a monthly income, build a portfolio with a mix of companies paying dividends in different months. For example:
Cardinal Health pays in January, April, July, October.
General Dynamics pays in February, May, August, November.
AFLAC pays in March, June, September, December.
Alternatively, you can pool quarterly dividends into a cash account and pay yourself a monthly average.
Where to Invest in Dividend Stocks
You can invest in dividend stocks or high-dividend ETFs through platforms like Webull, M1 Finance, or other commission-free trading apps. These platforms offer flexible options and even automated management features to help you grow your portfolio.
Building a $400,000 Portfolio
Start by regularly investing a set amount each month, like $500. Over time, increase your contributions as you can. Reinvest dividends using Dividend Reinvestment Plans (DRIPs) to buy more shares automatically. The combination of regular contributions, reinvested dividends, and capital appreciation will help you build a substantial portfolio.
Warning – Avoid Chasing High Dividend Yields
A high dividend yield can indicate a company is in trouble. Be cautious with companies that have payout ratios over 100% or excessively high yields. Master Limited Partnerships (MLPs) and closed-end funds might offer high dividends but come with significant risks.
The Bottom Line
Dividend stocks might not be as flashy as growth stocks, but they are excellent for building wealth and providing a steady income with minimal effort. They are particularly beneficial for retirement portfolios, offering consistent income while allowing stock values to rise over time. Whether you aim to earn $1,000 or more per month, dividend investing can be a reliable path to financial stability and passive income.
