Thursday, December 4, 2008

Dividend Portfolio Investing for monthly income

After you have selected the dividend growth stocks that fit your selection criteria, it is time to research their payment dates. Most dividend investors try to create a monthly dividend income stream when creating their dividend portfolios. The problem with this strategy is that most stocks send the checks to their stockholders quarterly as opposed to monthly. In order to create a monthly income stream an investor has to limit their portfolio only to stocks which pay a dividend every month, or try to include stocks which pay quarterly dividends whose payment schedules do not overlap.


Another issue that our investor could experience is properly weighting the stocks in his/her portfolio. I am a firm believer in starting out with an equal weighted portfolio, since this strategy doesn’t favor an individual stocks or group of stocks by initiating an above average sized position there. This would distort the levels of dividend income that the investor would receive every month, unless of course stocks that have similar yield and growth characteristics are selected, which is very unlikely.

The dividend investor could achieve a smooth initial monthly income stream by overweighting lower yielding stocks and underweighting higher yielding ones.

Add to this the fact that dividend growth investors need to create a portfolio with at least 30 stocks in order to reduce systemic risk and the things start looking even more complicated. Yet another issue is sector diversification – investors who were overexposed to financials in 2008 experienced a lot of dividend cuts, which set them several years back from reaching their dividend income goals.

Let’s apply the principles that we learned about in a sample portfolio consisting of 3 stocks, which have different payment schedules. The stocks are ADP, JNJ and PG. ADP pays dividends every January, April, July, and October. PG pays dividends in February, May, August and November, while JNJ pays dividends in March, June, September and December. You could check my analysis of ADP, JNJ, and PG here, here and here.

If we start out with $30,000 divided equally between the three stocks, and purchased everything at the closing prices for 2007 we would have:

224.57 Shares of ADP
136.20 Shares of PG
149.93 Shares of JNJ

Our Dividend Income by month in 2008 assuming an equal weighting would be:



The initial yield and the dividend income are not big initially. This sample dividend growth portfolio however could increase your dividend income over time.
Full Disclosure: I own shares of JNJ, PG and ADP
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11 comments:

  1. I don't like the idea of investing perhaps sub-optimally in order to smooth out your monthly income stream from dividends. It's better to dump all your dividends into a high-yield savings account, and withdraw from that. If the savings account starts with a balance equal to 3 months dividends, it doesn't matter how your payments are distributed within the quarter.

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  2. Jeff,

    Thanks for your input. The thing however is that most good quality dividend stocks do have different payment cycles so it is possible to smooth the monthly dividend income.
    Waiting to receive all your dividends in a quarter and then dividing the amount in three for each month is something that I would do too when I live off my dividends. Some investors however want to structure their portfolios in a way that they receive dividend income every month.

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  3. I've set up a portfolio based on the book "The Stockopoly Plan" by Charles M. O'Melia. His basic idea is that with 13 stocks paying every different week in a quarter you can have a weekly income for life. My portfolio is as follows:
    KFT, HNZ, 0 & GE
    T, UVV, O & C
    PNW, HON, O, BAC & PEP.
    I am looking to replace C, which will no longer pay a dividend. O pays a monthly dividend. A neat idea would be for readers to supply ideas for the best weekly income portfolio possible.

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  4. I've got to agree with Jeff that the best approach is to direct the dividends to a decent savings account (if such a thing is about in this new era of 0% interest) and then take out a monthly income from there.

    I'd start the savings account up six months ahead of requiring income, too.

    This will smooth your income, and also make you less vulnerable to a dividend cut.

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  5. Senior Investor,

    I would have to read the book that you are referencing. It seems however that you are overweighting Realty Income in your portfolio. Furthermore I doubt that 13 stocks provide enough diversification. If you had it equally weighted then the dividend cuts from BAC and C took a larger part of your retirement income than if they had a lower weighting.

    I am considering publishing a list of "The Best Dividend Stocks" and publishing my dividend portfolio holdings soon. I am also thinking about working on a list of dividend stocks with monthly payment ( excluding CEF's and other funds)

    Monevator,

    That's an interesting idea. I usually let my dividends accumulate in cash, and then I purchase new shares in any stock that I want. I only reinvest automatically any mutual funds that I have and O.
    I am not sure however whether a 6 month savings account should be part of your target fixed income allocaiton or not? If you have a 25-50% allocation to bonds ,then probably you don't need 6 months in savings, or do you?

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  6. I fully agree with Jeff. This type of stratgegy is not necessary.

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  7. I agree with Jeff and MG. Rather than focusing on monthly stream, it is important to focus on quality (even if different schedule).

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  8. I never said that one should sacrifice quality in order to create a monthly income stream.

    However if you want to receive monthly dividends, it's nice to know that you have options.

    Furthermore sometimes, if you haven't experienced something, it's tough to make a judgement. If none of the above people lives off of their dividend income stream, then we don't really know how they would personally feel about looking at their income on a quarterly basis as opposed to monthly.

    I personally don't mind getting dividends even on an annual rate, but I do realize some readers would like to be able to construct portfolios for monthly income.

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  9. "If we start out with $30,000 dividend equally..." Dividends on the brain? :p

    Cheers.

    Ethan

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  10. Ethan,

    Thanks for noticing that. I will fix it :-)

    DGI

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  11. I have a DRIP laddered portfolio,which i started over 30years ago. I am over 70 and started to take the dividends when i turned 70. Jan payments-USB-MO-KFT-PM-DOW-MON--Feb payments-GAS-GIS-PG-ABT--Mar payments-MMM-HSY-HD-IBM-JNJ-SO-SON-WFC-XOM. Plus 2ADR's SI-BHP. Once i got a 100 shares i moved on to the next stock and each remained in a DRIP account until i turned 70. Now i get more in a quarter than i get from SSA.
    If you start young and have a plan,this worked out great for me/

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