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.

Month 1:

  • 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

Month 2

  • AT&T – T
  • Clorox Co. – CLX
  • Colgate Palmolive – CL
  • Deere & Company – DE
  • General Dynamics – GD
  • General Mills – GIS
  • Hasbro – HAS
  • Procter & Gamble – PG

Month 3

  • 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.

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23 Responses to Creating a Steady Monthly Income from Dividend Growth Stocks

  1. DGSI,

    Interesting article. I try to focus on finding quality stocks first, and then arranging my affairs accordingly. I would hate to buy a stock simply because i needed a payer in February, May, August and November, and not because the company is amazing ( price, prospects, business model).

    If you simply accumulate dividends for 3 months, and then spend them 1/3 at a time every month over the next 3 months, you should be good to go. Of course, there is more than one way to skin a cat, which is why your article could be very helpful to investors, as it would make them think about something they might not have thought about before.

    • Dan Mac says:

      Thanks for the comments Dividend Growth Investor. Like you I also try to focus on purchasing the best companies at the best prices first. I like your idea of accumulating 3 months worth of dividends and then spending them the next quarter 1/3 at a time.

      I’m not anywhere near financial independence yet so I haven’t really had to worry about this. But I think if I were at retirement, I would do like you say and I would just make up quarterly budgets. If you have a good idea of your quarterly income, you should be able to make this work without too much of a problem.

  2. It’s funny because I regularly visit dividendladder.com but I never really knew that was an actual term for building a balanced monthly dividend portfolio like that. That’s exactly how I wanted to structure my portfolio from the beginning too. I really like to see my payments growing each month or at least each quarter even though I’m just in the accumulation phase. If I had a month that was really low I would be disappointed so I try even out all of my purchases over the calendar year.

    • Dan Mac says:

      Hey Captain Dividend, I actually stole the term from Dividend Ladder and it seems to fit in my opinion. I like the idea of structuring your portfolio to recieve fairly even monthly income amounts. However, I think it more important to invest in the best companies at the best valuations regardless of when they pay out their dividend distributions. Looking through my watchlist, it is evident that when I have my portfolio complete with all the companies I want to own I will be receiving a decent amount of dividend income each and every month. However, they most likely won’t be equal amounts and I will just be sure to budget quarterly to make it work.

  3. ZaVodou says:

    Hi Dan,
    I think like DGI. I don’t want to buy a company because it pays dividends in a special month. That makes things to comlicated.
    I am a german dividendinvestor and I get much dividends from german companies. German companies pay their dividends only yearly. They pay dividends typically in the month of april, may or june. So I have a big incomestream in these months.
    I manage it like this: E.g. I needed 1,000 USD per month. I would hold 3,500 USD on a checking account. The first 3,5 month I can pay my bills from that money. In April, May, June comes the big money, so I can live until the rest of the year and have 3,000 USD for the next year.
    Beside this I have a money at call account. Financial planners say on this account you must have money for at least six month. In my example it would be 6.000 USD. Six month is the time you have now to find a new job if everthings goes wrong. So all in all I would need 3.500 USD + 6.000 USD = 9.500 USD and I don’t have to look when a company pays it dividends.
    And you always have to have a money cushion, because you can never be shure if there is a cut in dividends or elimination.


    • Dan Mac says:

      Thanks for your thoughts ZaVodou! It appears most of the foreign companies (European especially) pay annually. It would be much harder to structure a dividend ladder if this were the case for the companies you invest in. I think how you manage your budget is a good way to do it. The main thing is to know is our expense amount. Once we have a good idea of our monthly expenses, we can build in a little cushion, and then just budget our income to last multiple months until we get our dividend checks.

      On a side note, I like to receive quarterly dividend checks. However, I won’t hesitate to pick up a company that pays semi annual or annually if it is a great value and company. I’m of the belief we should invest in great companies first and worry about the budgeting and cashflow later.

    • Martin says:

      ZaVodou, the thing you are describing is a good strategy for everybody if you do not have an equal income stream. In that case I would do the exact same thing and keep enough cash for the entire year so the next dividend payout would replenish it for the next year. I want to do that anyway even though my cash income may be equal.
      Fortunately the US market offers enough opportunities to really create a ladder without getting into too complicated effort.

      • Dan Mac says:

        One thing I do with my current budget, is always spend last months income. So for example, to cover my expenses this month I will be using the money I earned last month. This works well while I have a monthly paycheck coming in.

        Once I reach financial independence and retire, I will probably switch this approach towards quarterly. So effectively each quarter I will be spending my income from the previous quarter. I will then be saving that quarters income up to cover expenses next quarter. Hope this makes sense!

  4. Martin says:

    I already was thinking about this strategy and I will definitely steer my portfolio towards this distribution so I have my dividend income equally spread among all months. Right now my portfolio is still too small to do that. But as it will grow I will be definitely doing it.

    • Dan Mac says:

      Hi Martin, while I don’t think this strategy is absolutely necessary and I myself won’t really be paying attention to when my dividend income is being paid to me (as long as it is sometime in a quarter), I do think some people will like the idea of recieving roughly equal amounts of monthly income when they are retired. If you find comfort with this approach then it is a good one for you.

      • Martin says:

        Dan I agree, I will move towards this goal, but only if it will be within my desired stock allocation. That said I will not be buying stocks just because of the ladder.

  5. I call this a dividend calendar, but same idea :)


    • Dan Mac says:

      Thanks Mark! Yeah I’m not really sure if there is an agreed upon term for this idea. I think the idea is a good one and some investors will find that they like the idea of a steady monthly income.

      However, I personally feel investors will be best buying the best companies at the best prices regardless of when they pay their dividends (as long as they pay and they are growing). We can worry about the budgeting later!

      Really though, for each individual investor it may be different. Investors are best looking at their own circumstances and personal feelings and doing what they think will work out in best for them in the long run.

  6. Still being a ways from FI and living off the dividends I’m not too worried about it. I do try and look for companies that have different payout schedules but it’s not a must. In the long run the quality of the company is going to do much more for you than the payout timeline. I think most people that are striving to live off their dividends, especially if you’re looking to hit FI/ER, are going to have a good grasp on their finances so budgeting for 3 months rather than monthly won’t be a big deal. I think having a solid emergency fund of 6 months to 1 year is going to be key to even out the months if you want to still budget on a monthly basis. Then just use the dividends each month to replenish you EF.

    • Dan Mac says:

      I agree about the emergency fund being a good tool to use once you reach financial independence. If you have a strong emergency fund you can dip into it if need be in the months where your dividend income is a little short. Then in the months when you recieve more dividend income you can top up the emergency fund again. Good idea JC!

  7. It looks like I’m a little late to the game but thanks for referencing my page on ladders. There are a lot of great comments already about buying the best stocks first which I agree is the most important thing.

    In my experience there are just plenty of people out there living off dividends that want to have monthly income vs quarterly. For those types there is at least the option of laddering dividend payout. But buying the best first should be emphasized.

    • Dan Mac says:

      Hey Zach! I was wondering if you were going to stop by and what your thoughts were. Yes I agree that buying the best companies is first of all the most important thing.

      Not everyone is going to have the need to create a monthly dividend ladder. But for those that prefer having a steady stream of monthly income, it certainly is a good idea in my opinion. Just depends what your own individual preferences are.

  8. That’s an interesting way of building a portfolio but I’m not too sure I would follow it. It’s great if you can find stocks you like for each month of the quarter but I would not restrain myself from buying a great stock paying dividend in month #1 even if I have 10 stocks in the same month already. I rather pick the right companies than the right distribution time.

    An easy solution for that would be to take a part of your investment in a ETF or fund where you can withdraw money from each month through selling a part of shares. You can then use your dividend to reinvest in this fund or simply take the cash when it’s a “good month”.

    Another flaw of this technique is that not all dividend payouts are equal. If you happen to have a month with an average payout of 2.75% and another one at 4%, your monthly income will greatly vary.

    • Dan Mac says:

      Hey Dividend Guy thanks for the comments! I agree that it is always best to buy the best companies at the best prices regardless of when they are paying.

      The different dividend yields from the different companies is what makes this method a challenge. It would be hard to allocate capital to get a proper balance so that you are getting equal monthly payments. Also, as the dividends grow this will need more adjusting.

      Like I’ve said, it’s not my preferred strategy but for those looking for consistent monthly income it can be tried and achieved. My belief is that if you have a well diversified portfolio with many different companies you will be recieving a good amount of income each month anyways. It won’t always be even but if you can budget properly you can make it work without much of a problem.

    • Dave says:

      You have to factor in dividend growth also. Some of those 4% dividend stocks – stay 4% for quarters on end.

      • Dan Mac says:

        Dave, dividend growth can also make this idea tricky to implement. As the different companies raise their dividend payments at different growth rates it will throw the total monthly dividend income out of whack and rebalancing will be needed. If I were doing this strategy I would probably rebalance every couple years or so.

        Also, if any of these companies fail to grow their dividend, they will be cut from the portfolio and replaced by a company with a commitment to dividend growth.

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