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Building an income stream with dividend stocks

In my last post here: (Medium, Stillztech:Finance), I briefly covered two types of income streams to help boost your monthly income. These two types of streams were dividend investing and P2P Lending. In this post, we cover how to develop a second income stream using dividend based stocks. While this strategy is not new, it’s a great topic to explore and I thought it might be useful to share what works for me.

So, why dividend based stocks? I’ve listed a few key points below:
  • Dividends: Price per share payout for each share you own (or fraction of a share)
  • Appreciation: While dividends are great, you get the added bonus of the stock growth (or sometimes loss) over the life of the stock.
  • Compounding: With fractional shares, your dividends can buy “fractions” of a share. As your holding grow, your dividend payments increase.
  • Consistency: Even if the price of the stock drops, a good company will continue to pay its shareholders dividends.
  • Emergency Income: Depending on your brokerage, you can tap into these dividends at any time by turning off “dividend reinvestment” if you’re expecting a difficult financial month. The cash from these dividends eventually creates a cushion in your account you can use.
For our portfolio, we first want to explore what companies we want to invest in. Since our high level filter is focused on “companies that pay dividends every quarter AND increase their dividend every year”, a great place to start is with “Dividend Champions”. This category contains a list of companies that have 25+ straight years of increased dividends. This list can change over time as companies are added/removed. The list can be found here: While we don’t have to use this list of companies, I personally like knowing that these companies have been consistent dividend payers and increase their dividend each year. 

Tip: Be cautious about selecting random companies for your portfolio just because they have a high dividend yield. In some cases, these companies may choose to not pay their dividends. This could also be a sign of an unhealthy company. Like all investments, you should perform research into each company before investing in them.

Now that we have a solid list of companies we can choose from, we group them into four categories:
  • Industry
  • Sector
  • Dividend payment frequency
  • Dividend payment months

The first two bullet points are straight forward, we don’t want to place all our funds in a single industry or sector. As we select companies, we track how heavy our portfolio is in a given industry and sector to ensure we’re diversified. Next is the “frequency” of dividend payments. Most companies pay dividends quarterly, however some companies pay semi-annually or even once a year. Since we’re building an income stream, we’re going to stick to companies that pay out every quarter. Lastly, we need to know the month in each quarter the companies pay their dividends. This part is key, as not all companies land on the same fiscal year, so their payment months will vary. For example, “Company X” pays dividends quarterly, and normally pays dividends on the months of:
  • March, June, September and December
If we look at another dividend champion that pays dividends quarterly, say “Company Z”, they pay out dividends on the months of:
  • February, May, August and November
We can confirm pay dates by inspecting the companies historical dividends found at the link below. Just search for your ticker symbol and review the dividend history:
Now that we’ve covered our four main bullet points, let’s take a look at what the dividend distribution could look like with staggered dividend payout dates for a handful of dividend champions:
Furthermore, we can breakdown companies by industry and sector to ensure our portfolio is diversified:
The dividend payment amount you receive is dependent on the number of shares you own and the companies dividend yield. To see larger dividend payouts, you’ll need to have a decent amount of shares for each company. This isn’t a “get rich quick” strategy, as most income streams take time to build. For example, company A costs $110 per share with a quarterly dividend amount of $1.19 per share. How much would it cost to get $500 a month in dividends from company A? It would take ~$46k to get a quarterly dividend of $500. While that is a lot of money, let’s look at this from a different angle. Because you’re reinvesting your dividends buying fractional shares (and not paying trading fees), each time you get a dividend payout, your next quarter’s dividend payment will increase due to owning more shares. The cycle continues each time you get a dividend payout for each company. This concept of compounding dividends works well, thanks to fractional shares.

To make this reinvestment strategy even better, we can turn our portfolio into a portfolio pie, where you specify (out of 100%) how many percent points a given company should have within your portfolio. A platform that does this well is M1 Invest, where you can either build your own pie of companies or use some prebuilt pies. For example, company A is assigned 40%, company B is assigned 40% and company C is assigned 20%. This means that if company A’s portfolio value drops to 30% for some reason, your dividends would be auto-invested into company A to bring its value back up to %40, or close to it. In some cases, you can get into a situation where a company's value has grown rapidly, thus its value may exceed the assigned percent value in your pie. In this case, you can do a “rebalance”, where you sell off the excess value and reallocate the excess funds into the other companies, leveling out your portfolio. This is optional and depending on your diversification, you may not need to do this. The pie should, in theory rebalance itself over time. In summary, using a pie, your dividends get reinvested into companies based on their assigned percent within your pie. The portfolio pie grows as a single entity, reallocating funds to various slices based on the portfolio configuration, attempting to keep your holdings set to their assigned percent points per slice.

In the real world

This all sounds great but what does this look on a real brokerage platform? For my brokerage platform, I chose M1 Finance's investing platform (M1 Invest), as they support all of the features outlined above. To begin, you need to setup a pie. You can create a pie of pies, however having pies within pies means you could over diversify. While having 500+ companies in your pie sounds like a great idea, this also means your funds would spread out over 500+ companies. Rather than create a pie within a pie, I decided to select only companies with a proven history of paying and increasing their dividends over many years (aka dividend champions/contenders/aristocrats). Due to this, I was able to keep all of my company selections within a single pie, with less than 50 companies total. I’ve included my pie below, along with some of its targets.
From the pie chart above, you can see a gray dotted line around the outside edges of the pie. This dotted gray line shows the “target” I set for each slice (company), while the solid slice shows what a given company is actually at with respect to its assigned percent, thus giving us “actual vs target”, shown above. In some cases, each slice is at, below or above it set values. 

In summary, we built a portfolio comprised of only companies with a proven history of paying dividends and increasing those dividends each year. After reviewing each company’s balance sheet, historical data, and other data points, we broke down each company by dividend frequency, payment month, industry, and sector. This breakdown enabled us to receive a flow of dividends at least 3 times a month up to 16 times, depending on the month. M1 Finance's investing platform does have an auto-invest feature, where M1 will automatically invest any cash in your account over a set amount (M1 uses a $10 minimum). Once you have a steady stream of dividends flowing, you can reinvest those dividends to buy fractional shares or place them in a cash reserve to build an emergency fund, say 10% of your portfolio. The downside of having cash sit in a non-interest bearing account is it loses value over time, due to inflation. However, M1 Finance recently added M1 Spend, which is a checking account tied to your investment account. This is great because if you ever want to tap into your dividends, you can simply turn off the auto-investment feature and move cash received from dividends in your M1 Invest account over to your M1 Spend account as needed. M1 Spend also offers 1.5% interest on cash in the account with 1% cash back on any purchases.

That’s all for now. I hope this post was informative for you and look forward to hearing how you build multiple income streams. 

Disclaimer: I am not a finance professional or licensed financial advisor. The contents above are derived from personal experience and research, and should be considered as such.


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