Are you interested in learning how your investment account can generate monthly income? You’re not alone. Many investors, both beginners and experienced traders alike, want to know how to turn their investments into monthly income.
At Addition Financial, our members often come to us with questions about their investments. One of the questions we’ve been hearing a lot lately is this:
“How much can you make from stocks in a month?”
As you might imagine, there’s no one-size-fits-all answer to that question. To understand your earning potential, you’ll need to understand how dividends work and how much you’ll need to invest to generate monthly income. Here’s what you need to know.
How Much Money Do You Need to Start Investing in Stocks?
Before we get into the issue of monthly income, let’s talk about what you will need to start investing in the stock market. While there’s a common perception that investing in the stock market and building an investment portfolio is only for the wealthy, that’s not the case. You can start investing with just a few dollars and build from there.
One thing that has helped to demystify the stock exchange is the rise of investment apps such as Robinhood, Public, Acorns and SoFi. Many of the best apps out there allow beginning investors to buy fractional shares of stock. That means if you don’t have enough money to buy a full share, you can still invest in a company you like.
Several of the investment apps we’ve reviewed offer a free stock to get started or a $5 advance. From there, you can set up regular transfers from your checking account and build a diversified portfolio.
Can You Make Monthly Income from Stocks?
Earning passive income from your investments is a goal for many people because it means that your money is working for you. Passive income doesn’t require you to work and it can be a good way to supplement your existing income and even, eventually, to replace it.
You can earn monthly income from stocks but it requires careful planning. The “buy and hold” method of buying stock and then allowing it to increase in value in the long term is not always something that will bring regular income to you. However, there are things that you can do to change that.
What Stock Buying Strategies Can Help You Earn Monthly Income?
We reached out to some of our financial experts to ask them how investors can earn monthly income by investing in the stock market. They all recommended the same thing, which is buying stocks that pay dividends to shareholders. Here are some highlights from what they told us.
Shannon Terrell is a Senior Investments Writer at Finder. She told us:
“Invest in stocks with a strong history of dividends. These stocks are typically classified as income stocks and tend to provide investors with steady, consistent income in the form of regular dividend payments.”
Dividends are typically based on a company’s profit. That is always the case with common stock. Preferred stock may come with the promise of a fixed dividend.
Jenna Lofton, a Certified Financial Advisor from StockHitter.com, also talked to us about dividends. She said this:
“One... strategy is buying shares in companies that pay out dividends (One of the most popular examples would be REITs) which means you will receive a check each month/quarter depending on how often these companies pay out their dividends.”
An REIT is a Real Estate Investment Trust. REITs invest in income-generating real estate, including things such as cell towers, data centers and apartment buildings. They pay out regular dividends and are more liquid than some other types of investments. They don’t offer a lot of growth opportunities, but they are a good source of regular income if that’s something you want.
Jenna Lofton mentioned another strategy as well. We’ll let her explain it:
“Another great way [to earn monthly income from investments] is through covered calls. Studying this method can give investors some great possibilities when it comes to getting extra money coming in each month. Covered calls are done by selling call options against your stock position and ending up with more money than you started out with if the stock stays flat or goes down slightly.”
Covered calls are a short-term strategy. They are considered to be low risk but they’re not as reliable as dividends.
We would be remiss if we didn’t mention another strategy that you may have heard about. While day trading is something you can do to earn money, it is risky and requires constant attention and monitoring. It’s not a source of passive income and it’s an easy way to lose money if you don’t know what you’re doing. It’s not something that we (or our experts) would recommend.
How Much Do Dividends Contribute to Stock Market Returns?
The question of how much dividends can contribute to your total stock market returns is one that’s open to debate. That can be frustrating if you’re someone who’s interested in figuring out how to earn monthly income from stocks.
The true answer to this question is that it varies from company to company. If you own common stock in a company that pays dividends and that company experiences exponential growth, the dividends are likely to make up a significant portion of your returns. There are some examples where experts say that 90% of a company’s returns have been in the form of dividends, and others where the number is less than 20%.
The picture of the overall market plays a role as well. During an economic downturn or following a stock market correction or crash, dividends are likely to be negatively impacted. The reverse is true during a bull market or boom. You may get larger dividends from mid cap stocks (companies with between $2 billion and $10 billion in market capitalization) and small cap stocks (companies with between $300,000 and $2 billion in market capitalization). These stocks tend to have more growth potential (and more dividend potential) than stocks from companies with higher market capitalization.
If you’re someone who prefers not to take big risks and wants predictable income, the best solution may be investing in preferred stocks that offer fixed dividends. That way, you’ll know how much to expect and when you’ll be receiving it. However, you’ll need to keep in mind that if there is a crash, fixed dividends may still be somewhat affected.
How Much Do You Need to Invest to Live off Dividends?
If you want to earn monthly income by investing in stocks, you now know that the best answer to how to do that is to buy stock in companies that pay dividends. The next question – and it’s an important one – is how much you’ll need to invest to see a significant amount of income from dividends.
Let’s talk about some basics of buying stocks with dividends first. Here are some things you should know.
- Most companies in the United States pay dividends on a quarterly basis.
- You’ll need to buy stocks by the ex dividend date to get dividends in the next quarter. If you own stocks and sell them after the ex dividend date, you will still receive dividends in the next quarter.
- If your goal is monthly income, you’ll need to divide your quarterly income by three to calculate your monthly income. While some dividends pay out monthly, those are rare.
- We recommend doing some research about a company’s historical dividend payments to get an idea of how much you’ll receive.
- Remember that preferred stock pays a fixed dividend while the dividends for common stock are usually predicated on the company’s performance in any given quarterly period.
In terms of a total dollar amount to invest, you should know that the average dividend paid by United States companies is between 2% and 5% of the stock’s value. Let’s look at an example using 2%.
If you owned $10,000 worth of stocks from a company that paid a 2% dividend, you would earn $200 each quarter or $66.67 per month. With the same amount of stock at 5%, you would earn $500 per quarter or $166.67 per month.
That means if you wanted to earn income of $1,000 per month, you would need to own about $150,000 of stock at a 2% dividend rate. The amount would drop to $120,000 with a dividend rate of 5%.
You may occasionally find a company that has paid dividends higher than 5%. When that happens, it’s a good idea to review their history and make sure you understand what’s going on with the company before you buy. We should also note that even fixed dividends aren’t guaranteed to be paid. In an economic downturn or a bear market, you cannot expect the same dividends you would see in a bull market.
Earning monthly income from stocks can be a good way to boost your income and pursue your financial goals in both the long and short term. The best way to reach your investment goal is to buy reliable stocks that pay quarterly dividends and, at the beginning, reinvest your dividend earnings to build your portfolio.
Do you need help choosing which dividend-paying stocks to buy? Click here to read about the MEMBERS Financial Services program and schedule an appointment with a CUNA advisor.
