Dividend growth stocks are a great way to put together a passive income stream in order to cover all of your living expenses. In fact, my main goal is to put together a dividend growth portfolio where eventually the passive income stream from dividends will cover all of my financial needs. I’ll be able to pay all of my living expenses and have a little fun using just the dividend income I receive.
Sporadic Month to Month Income
One struggle many investors may have with this idea is the fact that dividends are paid quarterly. While we are still working for a living, the income from our paychecks is steady and reliable. It is easy to budget because I have a paycheck coming in every month or bi monthly. Budgeting can become a bit trickier when living off of your dividend income because the income will come at different times. Most of the companies pay quarterly rather than monthly. This can cause some budgeting challenges.
For example, in my own portfolio, most of my dividend income seems to come in the months of March, June, September and December. I own some companies that pay in the other months but the majority of my income comes in one month each quarter. Currently this isn’t a problem because I am simply reinvesting my dividends when I get the chance. However, if I was living off of my dividend income this would be a bit more difficult. It would require some careful planning to make sure I don’t spend too much in my good months and don’t run a little light on money in the months where I’m not bringing in as much income.
One idea to avoid this challenge is by creating what is called a dividend ladder. The idea behind a dividend ladder is to create a portfolio that will pay out fairly equal amounts of dividend income to the owner each and every month. So you will want to own some companies that pay out the first month of each quarter, some that pay out the second month of each quarter and others that pay out the last month of each quarter.
Putting Together a Dividend Ladder
For example, lets say I want to put together a portfolio of 24 stocks paying me a roughly even amount of income each month of the year. I would look for 8 companies that pay in the first month of each quarter, 8 in the second month and 8 in the third. Since I am a dividend growth investor and I want my income stream to grow at a rate at least equal to inflation, I will want to make sure to use companies with a strong history of dividend growth.
There are a couple resources that I know of that can be used to try to figure out which companies I may want to invest in. The first is this dividend growth pay date list from Dividend Ladder.com. This is a list put together of companies with at least 20 years of dividend growth and the months that they typically pay dividends. This is a sortable table in which you can sort by pay date. Another resource I would use is the Dividend Champions list mainted here at dripinvesting.org. You can open the Dividends Champions list in an Excel spreadsheet and then sort by pay date to figure out which months of the quarter the companies pay in.
Of course we don’t just want to choose 8 random companies based on the month of the quarter they pay in. It is important to do the proper stock analysis and research to make sure we are choosing solid companies that we are comfortable investing in.
My Hypothetical Dividend Ladder
Here is my hypothetical dividend ladder of 24 dividend growth companies.
- Altria – MO
- Automatic Data Processing – ADP
- Cincinnati Financial – CINF
- Coca-Cola Co. – KO
- Genuine Parts Company – GPC
- Kimberly-Clark – KMB
- PepsiCo – PEP
- Philip Morris International – PM
- AT&T – T
- Clorox Co. – CLX
- Colgate Palmolive – CL
- Deere & Company – DE
- General Dynamics – GD
- General Mills – GIS
- Hasbro – HAS
- Procter & Gamble – PG
- Aflac – AFL
- Chevron – CVX
- Emerson Electric – EMR
- Exxon Mobil – XOM
- Johnson & Johnson – JNJ
- McDonalds – MCD
- Norfolk Southern – NSC
- Walgreens – WAG
I believe this mix of companies would give me decent diversification, exposure to quite a few different industries, and a fairly steady growing income stream.
The trick would be allocating capital amongst the different companies. Each company has a different dividend yield. What I would do is divide my total capital by 3. This would give me the amount I would invest in each group of stocks. Then I would take that amount and divide it up between the eight companies so that I am able to earn roughly equal incomes from month to month.
As the companies increase their dividend payments, it will be important to reallocate capital in order to keep the dividend income streams fairly equal from month to month. I would probably only do a reallocation every couple years.
What Do You Think About Dividend Ladders?
Do you think creating a dividend ladder is a good idea? Do you focus on trying to keep a fairly even monthly income or are you mainly focused on investing in the best companies available and then worry about budgeting later?
Like I said earlier, I’m still in the accumulation phase so I am reinvesting all of my dividends. The fact that I receive more income in the third month of each quarter does not bother me. Also, I am big on budgeting. I think when I near financial independence and reach retirement, I will switch from a monthly budget to a quarterly budget. This will help me not worry about which months my income is coming in the door.