Wednesday, February 8, 2012

Dividend investing for monthly income

Investors spend a large portion of their working lives accumulating wealth. When a person is in the workforce, they tend to get accustomed to generating income on a consistent basis either every two weeks or once a month. The only investment vehicles which could provide investment income on a consistent basis without too much maintenance include dividend stocks and bonds.

By focusing on dividend growth stocks, investors could not only generate a consistent stream of income, but also effectively hedge their income against inflation. This is because many dividend growth stocks tend to regularly increase distributions every year.

Most dividend stocks like Coca Cola (KO) pay distributions quarterly. Some foreign stocks like Diageo (DEO) pay distributions semi-annually, while others like Nestle (NSRGY) pay distributions once per year. This makes budgeting for investors living off dividends somewhat difficult. As a result, some investors try to include monthly dividend stocks in their portfolios. However, the universe of monthly dividend payers which pay stable and rising distributions is very limited. Most monthly dividend payers tend to pay a fluctuating dividend, which makes it impossible to budget for recurring expenses.

One strategy that investors could implement is to find quality dividend stocks which pay dividends at different months. Thus, by laddering dividend stocks with differing payout dates, it is possible to generate a portfolio which pays a consistent monthly distribution without limiting one’s investment options strictly to monthly dividend stocks.

For example the following three companies pay dividends in January, April, July and October.

Kimberly-Clark (KMB) engages in the manufacture and marketing of health care products worldwide. Yield: 3.90% (analysis)

Automatic Data Processing (ADP) provides business outsourcing solutions. Yield: 2.90% (analysis)

Sysco (SYY) engages in the marketing and distribution of a range of food and related products primarily to the foodservice or food-away-from-home industry. Yield: 3.50% (analysis)

The following three companies pay distributions in February, May, August and November.

Abbott Labs (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. Yield: 3.50% (analysis)

Clorox (CLX) manufactures and markets consumer and institutional products worldwide. Yield: 3.50% (analysis)

Procter & Gamble (PG) provides consumer packaged goods in the United States and internationally. Yield: 3.30% (analysis)

These three corporations below pay dividends in March, June, September and December.

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Yield: 3.50% (analysis)

McDonald's (MCD) franchises and operates McDonald’s restaurants that offer various food items, soft drinks, coffee, desserts, snacks, and other beverages, as well as full or limited breakfast menu. Yield: 2.80% (analysis)

Chevron (CVX) engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Yield: 3.10% (analysis)

Investors could allocate funds in this sample list of stocks in different ways. They could either allocate the same amount to each of the nine companies. They could also allocate their funds based off the current yield at the time of purchase, in order to generate an income stream that is consistent from month to month at least in the first year.

The goal of the above list of stocks was simply to illustrate how laddering income stocks with different dividend payout dates can create a monthly income stream. Income investors should still focus on quality, diversification and valuation when constructing their dividend portfolios.

Full Disclosure: Long all companies listed in this article

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