We would all like to make a dollar a day from any sources of passive income. I, myself, have several sources of passive income. Some make me cents a month and others pay a lot more. However, the largest payer in passive income for me is my Dividends.
Dividends are paid out to shareholders of a company. Say for example, you own a supermarket share of their stock (Supermarket A). Supermarket A had a good year this year and have decided to reward their shareholders and employees (who hold the stock in their portfolio) with a dividend. Say Supermarket A made $5.00 per share and have decided to payout $2.50 per share in a dividend over the year, this would mean the dividend payout ratio is 50%. Lucky you, you own shares in Supermarket A and will receive a payment in the form of a dividend.
Now to actually receive a dividend every day would be pretty hard, the payments would have to line up to fall one day after the other which is impossible, due to weekends and public holidays. However, what we are looking at for this example is $1.00 a day on average. As we know, there are 365 days in a year so we will focus on producing $365 a year to average out to $1.00.
What we are going to take a look at is how much has to be invested to produce $365 a year in dividend income. As yield increases, the less that is required to invest to get to that amount. But it could be argued that the higher the yield the less stable that dividend is. This is a pretty good thing to remember. While there are stocks that pay 10% in dividends, this is a less than likely yield that will be maintained, makes the risk to share price and dividend income unstable.
As you can see from the table above the higher the yield the less that is needed to invest to get to your $1.00 a day target. My portfolio currently runs about 4.5% which is higher than usual, but I don’t mind the risk. My actual cost on yield is closer to 5% which means that I have made money on the investment, the dividends have increased and I have participated in DRP (more on that later).
Let’s say for example you are looking at company A and company B. Between the two they average a yield of 3%. You would like to just invest in them only for now. You would need a little over $12,000 to reach that $365 a year in dividend income. This also doesn’t allow for special dividends, dividend reinvestment and increasing dividends.
Let’s say for the next example that you are more inclined to risk, and don’t mind the volatility. You purchase shares of company C and company D. Between them they average a yield of 6.5%. You would need to invest a little over $5.5k to achieve that dollar a day mark. With this comes greater risk that the company can’t maintain that dividend, but on the other hand you can also achieve that $1.00 a day mark earlier with less capital required.
What is needed is some happy medium in between. There are plenty of companies with a nice yield (4%+) that can maintain that dividend and hopefully in time the dividend will also increase. Be on the lookout for dividend payers that pay well over 10%. In most cases (but not all) the yield is too high and unsustainable.
Disclaimer: This is not financial advice, please take into consideration your own personal risk tolerances before investing.