How Do I Make $500 a Month in Dividends?

Dividend have a certain allure. Buy shares of a publicly traded company that pays a quarterly dividend, sit back, and cash the checks. The attraction of passive income is obvious. But lurking beneath the enticing quarterly dividend payout are some “gotchas” – some companies will entice investors with seemingly very attractive payouts.

Why buy shares of a company that pays a 3% annual dividend yield when you can buy one that pays 10% for example? As it turns out there are one or two reasons why you should be skeptical.

What Is A Good Dividend Yield Percentage?

A higher dividend yield percentage makes for a better investment is the instinctive conclusion to draw for new investors.

The paltry 2-3% annually paid by top brass names is nothing to sneeze at compared to the interest rates paid out by banks, certainly, but it’s a fraction of what some other firms pay their shareholders. So why even consider the lower yield options?

As it turns out, some of the most reliable dividends are issued by companies who pay up to about 6% yield. Those are excellent rates that could help you to reach your $500 per month goal.

As you explore your investment options, you will find some companies that claim to offer considerably higher dividend yield percentages. Some will pay out as much as a 10% yield. Paying a very high percentage isn’t impossible. It’s extremely unlikely to last very long, though.

Before buying stock in a company that claims a dividend yield percentage north of 7%, take a close look at its financial history. Go back as far as you can to compare the actual rate to the claimed rate. It’s quite possible that something fundamentally flawed in the firm’s business has caused its price to shrink and its yield to rise.

The higher the percentage is – especially above 7-8% – the more likely it is that the company has a problem with its primary business model at least in the short-term.

At 5-6%, you can probably rest fairly easily but there’s no substitute for good research to identify why a company is paying a yield as high as 6% when another is issuing dividends that equate to half that amount or less.

A company that claims to offer 10% may end up issuing you that amount in dividends but costing you more in share price returns.

Find Stocks That Pay a Good Dividend Yield

Making $500 per month in dividends relies on buying shares with good dividend yields that are likely to sustain over time. Some examples to consider include:

• Chevron (CVX): 4.37% average yield
• Hanesbrands (HBI): 3.33% average yield
• Huntington Bancshares (HBAN): 3.66% average yield
• LyondellBasell Industries (LYB): 4.47% average yield
• Verizon (VZ): 4.43% average yield
• Welltower (WELL): 4.92% average yield 

Calculate How Much You Need to Invest to Earn $500

Choosing stocks that pay high, reliable dividends plays a critical role in reaching your $500 monthly goal. The value of the shares you own, however, matters just as much.

Over the last five years, Verizon (VZ) has paid an average of 4.43%. To make this example simple, let’s assume that you only own Verizon stock. You would need to own about $135,500 of Verizon shares to get paid an average of $500 per month, or $6,000 per year.

How do you reach that conclusion so you can buy the number of shares you need to make enough money? It’s a pretty simple equation when you already know the amount of money you want to earn ($6,000 annually) and the average dividend yield (4.43% in this case). The only number you do not know is the amount you must own.

The generalizes equation is (value of stock owned) * (average dividend yield) = (amount earned).

For Verizon, you have (value) * 4.43% = $6,000

You can find the value by dividing $6,000 by 4.43%. Here you get 6000/.0443 = 135,440.18. (You might as well round up to $135,500 to keep your numbers simple and protect yourself from fluctuating stock values.)

This equation works for any stock.

Consider Hanesbrands. The equation becomes (value) * 3.33% = $6,000.

You would get the amount of stock to buy with 6000/.0333 = 180,180.18. You need to own a little more than $180,180 of HBAN to get dividends equal to $600 per month.

It Gets More Complicated When You Own Stock in Several Companies

As you can probably imagine, determining how much stock to buy becomes much more complicated when you own shares in several companies. The math is complex enough that the average person probably cannot do it without help from a spreadsheet.

You can get a rough estimate, though, by determining how much money you have to invest and picking some companies that appeal to you.

The amount of money that you have will play a critical role in the stocks you choose. If you have $100,000, you could focus on stocks with higher dividend yields, all the while understanding that the risks are higher of a poorer performing share price. If you have $200,000, you can probably select a more tried and trusted company, like Apple (AAPL).

Why wouldn’t you always choose the highest-yielding stocks? Because you want a diverse portfolio that protects you from changes in the market. Verizon looks like a very reliable investment. A critical mistake from the company, though, could lower its share price considerably. Over the last five years, Verizon’s stock price has stayed around $55 per share. 

At that price, you need to buy around 2,465 shares to meet your $500 per month goal. What would happen if the company made such a blunder that its share value fell to $30? Suddenly, you only have a portfolio worth $73,950. There is a good chance that your dividend yield would also fall. That’s the problem of chasing yield.

You assume you will keeping getting paid the same amount but when market conditions change, managements often reduce dividend payments accordingly.

By diversifying, you lessen the likeliness that one company’s failure will put you under your monthly goal.

How Often Will My Dividends Be Paid?

Dividends are paid quarterly, so you shouldn’t expect to receive a check every month. Given this payout schedule, it makes sense to divide your annual dividends by 12 to see whether you reach your $500 goal. That means you need to get paid at least $6,000 per year to make $500 per month.

Various companies will pay out at different schedules so you could stagger the payments received over different calendar months to effectively enjoy a monthly yield if needed to fund your lifestyle.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.