Generating passive income through dividends is particularly important these days, as the stock market has been in negative returns for most of the year. But it’s perhaps even more important in retirement, since that extra income can come in handy. Sure, it can give you some spending money to supplement your retirement accounts or Social Security checks.
Here are three steps to earning around $300 a quarter, or $100 a month, in dividend income.
Step 1 – Look for High Yield Dividend Stocks with Consistent Earnings
The dividend yield is the percentage of the stock price that the company pays in dividends. The average dividend yield on the S&P 500 is about 1.7% right now. Performance above that is generally considered pretty good. To determine if the dividend is sustainable, the payout rate (the percentage of earnings used to pay the dividend) should ideally be below 50% in most cases.
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Often the best dividend stocks they are from large, established, blue chip companies that are among the leaders in their industries. Many of these companies have consistent earnings and a commitment to maintain or increase their dividends. A good place to look for these stocks is on the Dividend Aristocrats list, which are companies that have increased their annual dividend payments for at least 25 years in a row. It’s not the only source, but it’s certainly a good place to start.
Step 2: Build Your Dividend Stock Portfolio
So with these metrics in mind, the next step is to develop a portfolio of stocks that are poised to generate consistent, high-yield passive income in retirement. For the purposes of this hypothesis, let us extract from the list of Dividend Aristocrats and identify some solid dividend stocks.
One is asset manager T. Rowe Price Group (NASDAQ:TROW), which has a yield of 3.99% and a quarterly dividend payment of $1.20, with a payout rate of 36%. It has increased its dividend for 36 consecutive years. Another is the pharmaceutical company. AbbVie (New York Stock Exchange: ABBV), which has a yield of 3.75% and a quarterly dividend payment of $1.41, with a payout rate of 42%. AbbVie has increased its dividend for 50 consecutive years.
Both stocks have above-average returns, manageable payout rates, and long histories of supporting their dividends, in addition to being established leaders in their industries. It is also worth noting that AbbVie is up 12% YTD and has posted an average annual return of 16% over the last 10 years. T. Rowe Price is down 40% YTD, but all asset managers are struggling in this bear market. However, T. Rowe Price has averaged a 7% annual return for the past 10 years and has virtually no debt, making it a reliable dividend payer.
Step 3: Develop a plan
If your idea is to generate passive income In retirement, it’s important to devise a strategy to get there. How much would you need to invest in these stocks to get a good chunk of the income? Let’s say you invested $15,000 in both stocks. T. Rowe Price is trading at around $117 a share, so you could buy roughly 130 shares for just over $15,000. AbbVie is trading at around $153 a share, so you could pick up 98 shares for just under $15,000.
For T. Rowe Price, 130 shares at $1.20 per share would bring in about $156 per quarter, while for AbbVie, 98 shares at $1.41 per share would bring in about $138 per quarter. That works out to around $294 per quarter and $98 per month.
Keep in mind that these shares will also generate capital appreciation, not just dividend income, so the investment will grow over time. T. Rowe Price has posted an annualized return of 7% over the past 10 years, while AbbVie has posted an average annualized return of 16%. Therefore, you not only earn passive income, but also solid returns that you can take advantage of when you need them.
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David Kovaleski has no position in any of the mentioned stocks. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.