How to Get Monthly Income from Just 3 Stocks

06/24/2015 10:00 am EST


Charles Carlson

Editor, DRIP Investor

Dividend expert Chuck Carlson explains the benefits of dividend reinvestment plans and the importance of focusing on quality when selecting income stocks. The editor of DRIP Investor also explains how income investors can use dividend payment cycles to get monthly dividend checks from as few as three stocks.

Steve Halpern: Our special guest today is income investing expert Chuck Carlson, editor of DRIP Investor.  How are you doing, Chuck?

Chuck Carlson: I’m fine Steve, thank you.

Steve Halpern: For those not familiar with DRIPs, the name of your service refers to Dividend Reinvestment Plans.  Could you briefly explain this overall strategy?

Chuck Carlson: Sure. Dividend reinvestment plans are programs offered by roughly around 900 to 1000 publicly traded companies that allow investors to buy stock directly from the companies.  

You buy stock in two ways in these plans, the first—and hence the name dividend reinvestment—is that most of the companies will allow you take dividends and reinvest them back to buy additional shares of stock, so you are reinvesting those cash dividends and kind of building on that compounding effect to buy more shares.  

Also, in most dividend reinvestment plans, there is a second way you invest and that’s through what’s called optional cash investments where—at your option—you can send additional funds directly to the company to buy stock for you, and in many cases, the minimum investment amounts are usually only $25 to $100.

So, you can buy both full, and if your dollar amount isn’t enough, they will buy fractional shares of stock for you and that fractional share of stock is still entitled to a fractional part of the dividend, so it’s a very nice way, for example, for investors to buy stock almost on the installment plan, if you will.

Steve Halpern: Now, when selecting stocks for a DRIP portfolio out of this, perhaps, universe of 1000 stocks, you frequently recommend the very high quality companies that fall under the category of dividend aristocrats.  Can you explain what this means and perhaps touch on why quality is so important to your strategy?  

Chuck Carlson: Well, yes.  Dividend aristocrats are stocks that have typically raised their dividends on an annual basis for an extended period of time, often times for 25 years or more.  

I think in a program such as dividend reinvestment investing, which tends to have kind of an eye toward long-term accumulation of stock over time, you want companies that a) pay rising streams of dividends because that really impacts the compounding aspect of the portfolio and b) companies that typically raise their dividends on an extended basis. 

Often times, they are pretty good companies. They are companies where they are confident in their earnings growing in commensurate with the dividend increases, etc.  

I think when you are looking at owning stocks for the long-term, so to speak, quality tends to be a very important criterion because you want stocks that are going to a) stay in business you want stocks b) that are going to continue to pay higher dividends.

And so, I think it’s always good to include in a portfolio those types of companies that are paying good dividends, and more importantly, raising those dividends on a regular basis, and those are stocks we tend to focus on in our newsletter.  

Steve Halpern: One of the most interesting strategies that you teach your subscribers, and you cover several times a year, is how to create a portfolio that provides investors with dividend checks every month of the year and you can create a monthly income steam with as few as three stocks.  Can you explain how this is done?

Chuck Carlson: Sure.  As most people know, companies that do pay dividends typically pay dividends on a quarterly basis. That means, basically, every three months they are paying a dividend.  

But, not all companies are on the exact same payment schedule.  For example, there are companies that pay their dividends every January, April, July, and October.  


There are companies that will pay their dividends on a three month period cycle beginning with February, so they are paying every February, May, August, and November and then finally there are companies that pay every three months but on a different cycle, every March, June, September, and December.  

If someone wanted to receive dividend checks every month, what they could do is pair up companies that pay their dividends beginning in January with companies that begin paying their dividends in February with companies that begin paying their dividends in March.  

By owning one stock from each of those three payment schemes, you would receive a dividend check every month of the year.  

Steve Halpern: Let’s walk through the three different payment periods and the first as you mentioned are companies that begin on the cycle in January.  Are there any standouts in this group in your mind?

Chuck Carlson: Yeah, I think there are.  One that I like in particular is the large property and casualty insurance company Chubb (CB).  Chubb has carved out a very nice business serving affluent clientele.  They do a lot of art insurance and high-end property insurance. It’s a company that has had a very good track record in dividend growth.  

They have increased their dividends annually for 39 years. It pays a dividend yield of more than 2%, so you get a decent dividend yield along with what I think will be reasonable appreciation potential.  That is one stock that stands out in that January, April, July, and October payment period.  

Steve Halpern: The next payment period begins with February.  Would you like to highlight any stock within this cycle?

Chuck Carlson: Yes. There are actually a number of interesting stocks in this cycle. One that I have owned for some time that I like—especially from its dividend payment characteristics—is Proctor & Gamble (PG).  

Now it is a stock that has not always been the most dynamic capital gains stock, but certainly from a dividend perspective, you would be hard pressed to find companies that have a better track record.  

Proctor & Gamble has raised their dividend annually for 59 consecutive years. The current yield on the stock is over 3%, so you get a decent dividend yield and I think there is some reasonable appreciation potential as well.  

That is a stock again, for those looking for a long-term dividend payer, and one where they raise the dividends, Proctor and Gamble is an interesting stock.  

Steve Halpern: Finally, let’s turn to the third dividend cycle beginning in March. Do you have a favorite stock within this payment cycle?

Chuck Carlson: Yeah. There are a lot of actually good stocks within this payment cycle, primarily because this is probably the most common payment cycle—dividends being paid in March, June, September, and December—so you have a lot of choices.

Some that I own that have done well for me over the years include Exxon Mobil (XOM), PepsiCo (PEP), and the third stock which I have owned for a long time and probably is my favorite is in that payment schedule and that’s Walgreens Boots Alliance (WBA).  

Walgreens is the drugstore chain.  They recently combined with an international company—Boots—which has pharmacies internationally, so they have really broadened their international footprint.  

Walgreens has boosted its dividend every year for the last 39 years and they have done it at a pretty aggressive growth rate.

So, not only have they boosted the dividend, but when you look at the level and percentages of the dividend increases, they have been well above the industry averages, so that’s a stock I own. I continue to like it very much and I think that will do well for investors.

Steve Halpern: Again, our guest is dividend expert Chuck Carlson of DRIP Investor. Thank you so much for your time today.

Chuck Carlson: Thank you, Steve.  

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