How to Build a Portfolio with Monthly Dividend Stocks

Creating a portfolio with monthly dividend stocks can be an excellent strategy for generating a steady income stream.

This approach involves selecting stocks that distribute dividends monthly, providing regular cash flow throughout the year.

a person holding up a cell phone with a stock chart on it
Photo by PiggyBank on Unsplash

Diversifying across different sectors and choosing companies with a solid track record of dividend payments can mitigate risks and enhance the stability of your income.

We will outline the steps to build a well developed monthly dividend portfolio, focusing on selecting affordable dividend stocks, diversification strategies, and continuous portfolio management.

Building Your Portfolio

When constructing your portfolio, it’s vital to consider the selection of monthly dividend stocks, diversification across sectors, and ongoing portfolio adjustments to maximize returns and minimize risks.

Selecting Cheap Monthly Dividend Stocks

Finding affordable monthly dividend stocks is the first step in building your portfolio.

Some reliable options include AGNC Investment Corp (AGNC), which offers a high dividend yield of around 14.8%, and Realty Income Corporation (O), known for its consistent dividend payments and yield of approximately 5.9%.

These stocks are attractive due to their high yields and consistent payment history. Consider Main Street Capital (MAIN) and Stag Industrial (STAG), both of which are known for their reliable monthly dividends and strong performance in their respective sectors.

Diversifying Your Portfolio

Diversification is key to reducing risk and ensuring steady returns. While focusing on monthly dividend stocks, it's paramount to diversify across various sectors.

Including stocks from different industries, such as real estate, financial services, and energy, can help balance your portfolio.

EPR Properties (EPR) and Apple Hospitality REIT (APLE) are excellent additions from the real estate sector, while Diversified Energy Company (DEC) from the energy sector provides further diversification.

Incorporating ETFs like the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) can offer immediate diversification while providing monthly dividends.

Screenshot from Invesco's website
Screenshot from Invesco's website

Monitoring and Adjusting Your Investments

Continuous monitoring and adjustments are the cornerstone for maintaining a healthy portfolio. Regularly review the performance of your stocks, dividend payouts, and overall market conditions.

Reinvesting dividends can help grow your portfolio over time. Stay informed about any changes in the companies you’ve invested in, such as mergers or shifts in financial health. Utilizing platforms like Simply Safe Dividends can help track the safety and reliability of your dividend stocks.

Reinvesting Dividends

Reinvesting dividends is a powerful strategy that can significantly enhance your portfolio's growth over time.

By automatically reinvesting dividends, you can leverage the benefits of compounding, reduce investment costs, and build a more diversified portfolio.

Let’s have a look at how you can effectively use dividend reinvestment to maximize your returns.

The Power of Compounding

Reinvesting dividends allows you to take full advantage of the power of compounding. When you reinvest your dividends, you buy additional shares of the same stock, which in turn generate more dividends.

This creates a snowball effect where your investment grows exponentially over time.

If you own shares in a company that pays dividends quarterly, reinvesting those dividends can lead to a significant increase in the number of shares you own.

Over several years, this can result in substantial growth in both your dividend income and the overall value of your investment​​.

Tax Efficiency

In some regions, reinvesting dividends can offer tax advantages.

By reinvesting rather than taking the dividends as cash, you may defer taxes on the income until you sell the shares.

This can be particularly beneficial if you are in a high tax bracket. However, it’s important to note that reinvested dividends are still considered taxable income in many cases, so it’s very important to understand the specific tax implications based on your location​​.

Dollar-Cost Averaging

Dividend reinvestment plans (DRIPs) facilitate dollar-cost averaging, which can help smooth out the volatility of the stock market.

By reinvesting dividends regularly, you purchase more shares when prices are low and fewer shares when prices are high.

This consistent buying strategy can lower your average cost per share over time, enhancing your long-term returns.

If you receive a $50 dividend when the share price is $25, you purchase two shares. If the share price drops to $20 and you receive another $50 dividend, you can purchase 2.5 shares.

Over time, this strategy can significantly boost your investment returns.

Benefits of Investing in Cheap Monthly Dividend Stocks

Investing in cheap monthly dividend stocks can be a strategic move for many investors.

These stocks offer frequent payouts, potential for high yields, and affordability, making them accessible to a wide range of investors.

You’ll find some key benefits of incorporating cheap monthly dividend stocks into your portfolio.

Frequent Income Stream

One of the most significant advantages of cheap monthly dividend stocks is the regular income they provide.

Unlike quarterly or annual dividend stocks, monthly dividend stocks distribute payments every month, which can be particularly beneficial for those who rely on their investments for living expenses.

This steady stream of income helps with budgeting and provides financial stability. Stocks like AGNC Investment Corp. and Realty Income Corporation are examples of monthly dividend payers that offer consistent returns, making them attractive options for income-focused investors​​.

High Dividend Yields

Cheap monthly dividend stocks often come with higher dividend yields compared to their pricier counterparts.

Higher yields mean a greater return on your investment relative to the stock's price. For instance, Ellington Financial and EPR Properties are known for their substantial dividend yields, which can significantly enhance your overall returns.

These high yields are particularly appealing in a low-interest-rate environment, where traditional savings accounts and bonds offer minimal returns​​.

Affordability and Accessibility

The lower price point of cheap monthly dividend stocks makes them accessible to a broader range of investors, including those who are just starting.

This affordability allows investors to purchase more shares, increasing their potential dividend income.

investing in a diversified portfolio of cheap monthly dividend stocks can reduce risk while maximizing income.

Companies like Stag Industrial and Apple Hospitality REIT offer lower-priced shares with solid dividend payments, making them excellent choices for building a diversified income portfolio​.

Screenshot from Stag's website
Screenshot from Stag's website

Potential for Growth

Cheap monthly dividend stocks also offer the potential for capital appreciation.

While the primary focus is often on the dividends, many of these stocks can also increase in value over time, providing an additional source of returns.

Investing in companies with strong fundamentals and growth potential can lead to both steady income and long-term capital gains.

This dual benefit makes cheap monthly dividend stocks a compelling investment choice for those looking to grow their wealth while enjoying regular income.

Key Takeaway

Building a portfolio with monthly dividend stocks not only provides a steady income stream but also enhances portfolio growth through reinvestment and diversification.

Leveraging resources like financial newsletters and investment tools can keep you updated on market trends and stock performance.

By strategically selecting stocks and continuously monitoring your investments, you can achieve both short-term income stability and long-term capital appreciation.

Remember to consider the tax implications and consult with a financial advisor to optimize your investment strategy.