A Portfolio that Provides Monthly Dividends

12/31/2018 5:00 am EST


Richard Moroney

Editor, Dow Theory Forecasts

Sometimes the most straightforward advice isn’t the best advice. Take the issue of monthly dividends, cautions Richard Moroney, blue chip investing expert and editor of Dow Theory Forecasts.

Search the internet for monthly dividends, and eventually you’ll find a list of stocks that pay out every month. Don’t fall into that trap. We know of 30 U.S. stocks that pay dividends every month. All but two are either energy companies, asset managers, or real estate investment trusts (REITs).

All but five have stock-market values below $5 billion. None of them offers the mix of fundamental strength, attractive valuation, and dividend-growth potential that warrants inclusion on one of our recommended lists.

Investors who build portfolios from those 30 every-month payers would be taking on more risk than they want in exchange for subpar total-return potential — all to accomplish a goal they could reach using a diversified basket of higher-quality stocks. Here are three ways investors can generate solid monthly income from an investment portfolio:

1) Step up exposure to fixed-income securities, such as bonds. Over time, bonds tend to underperform stocks, but their returns are less volatile, and their income streams easier to predict, in terms of both absolute dollars and payout dates.

2) Sell stocks periodically to generate cash fl ow. This strategy makes the most sense for investors who require more income than their stocks provide. If you instead seek out higher and higher yields, you’ll probably end up with an increasingly concentrated portfolio, exactly the opposite risk profile desirable for retirement years.

The sell-every-month strategy tends to grate on equity investors used to holding for the long term, but both history and logic suggest that regardless of your income needs, maximizing total returns (capital gains plus dividends) is the best way to ensure that your portfolio lasts as long as you do.

3) Build a portfolio of quarterly dividend payers that provides income every month. The table above provides an example of such a portfolio, comprised of high-quality stocks from all over the market.

Unfortunately, the vast majority of investors will never build enough wealth to support themselves entirely from stock dividends. A $1 million portfolio yielding 5% will provide $50,000 a year in dividends, which is about what the average baby boomer claims to need for retirement.

Sounds pretty good, right? In theory yes. But the Federal Reserve estimates that only about one in evert 25 households has a net worth of more than $1 million.

And in order to generate a yield of 5% from a stock portfolio, you’d have to take a massive amount of risk. A more sensible portfolio might provide a yield of 2% to 3%, which means you’d need a lot more money to cover your costs.

And even if you can live on your dividends, what about five years from now? Portfolios too heavy on fixed income and high-yield/low-growth stocks may not provide the dividend increases you require to keep up with inflation.

Consider the dividends every-month portfolio presented below as an effort to tap the best of all worlds — safety (diversification), income (only dividend-paying stocks), and longterm growth (stocks capable of posting operating growth, which in turn can fuel dividend growth as well as capital gains).

Dividend paid January, April, July, and October

Comcast (CMCSA) — yielding 2.0%
Comerica (CMA) — yielding 3.1%
FedEx (FDX) — yielding 1.2%
Hewlett-Packard Enterprises (HPE) — yielding 3.0%
J.P. Morgan Chase (JPM) — yielding 3.0%
National Fuel Gas (NFG) — yielding 3.1%
U.S. Bancorp (USB) — yielding 2.8%
UGI (UGI) — yielding 1.8%

Dividend paid February, May, August, and November

AbbVie (ABBV) — yielding  4.7%
Apple (AAPL) — yielding  1.7%
AT&T (T) — yielding 6.5%
Caterpillar (CAT) — yielding 2.7%
Citizens Financial (CFG) — yielding 3.1%
CVS Health (CVS) — yielding 2.5%
Nucor (NUE) — yielding 2.5%
Verizon Communications (VZ) — yielding 4.1%

Dividend paid March, June, September, and December

Ameren (AEE) — yielding 2.7%
Chevron (CVX) — yielding 3.8%
Discover Financial (DFS) — yielding 2.4%
Intel (INTC) — yielding 2.5%
Lam Research (LRCX) — yielding 2.9%
Marathon Petroleum (MPC) — yielding 2.9%
Phillips 66 (PSX) — yielding 3.5%
Target (TGT) — yielding 3.7%

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