It’s true that most dividend shares pay out income once or twice a year. This usually coincides with the period after the release of half-year or full-year results. However, when I’m trying to generate a steady second income, I’d like to ideally get paid every month. Here’s a couple of ways I can make this actually happen.
An uncommon option
One way’s purchasing shares of firms that do pay monthly income. This is rare, but some cases do exist. For example, let’s consider the TwentyFour Select Monthly Income Fund (LSE:SMIF). It’s a stock I like and would consider adding it to my portfolio.
The fund invests in fixed income products such as bonds and other loans, which pay out cash to the fund. As a result, the fund’s always receiving cash proceeds from these investments. It can then use this money to pay out as a dividend to shareholders.
It can afford to do this on a monthly basis because it has a large enough portfolio with a spread of different assets. The portfolio managers aim to select the bonds that have the most attractive valuation, thus allowing the highest potential dividend yield for investors. At the moment, the dividend yield’s 8.77%. This is even more impressive when I note that the stock’s risen by 14% over the past year.
One concern is that some of the debt it purchases is quite risky. In order to get paid such a high interest rate versus the current base rate, the managers have to accept some risk that the borrower might default. Should a default occur, it would negatively impact the share price.
A well-rounded portfolio
Another way I can get paid monthly is by holding a diversified portfolio of dividend stocks. For example, let’s say I bought a dozen shares for my pot. In theory, if they all had different reporting periods and different dividend payment dates, I could easily bank one dividend a month.
Holding a multitude of stocks helps me not just in the frequency of getting paid, it also reduces my risk. If I just invested all my money in the TwentyFour Select Monthly Income Fund and it cut the dividend, my entire cash flow would be disrupted. Yet if I hold a dozen or more stocks from a range of different sectors, things change. If one of the dozen cut its dividend, my overall income will still be negatively impacted, but not as much.
Of course, there’s some hassle involved in researching and buying a host of different stocks. But I’ll be building a pot for the long term. So once things are up and running, the portfolio’s overall maintenance should be quite passive in nature.
Potential numbers
As an indication of how I could build things, let’s assume I manage to invest a lump sum of £500 in 12 stocks to begin with. From there, I top up £100 in four of the stocks each month. I’m going to assume I have an average dividend yield of 6.5%.
After doing this and reinvesting the proceeds for a decade, in the following year I could stand to make £452 a month from the dividends.
This post was originally published on Motley Fool
