Many investors think that they only way to make money out of stocks is to "buy low and sell high," as the old investing mantra states. And between the point of purchase and the point of selling, investors typically receive dividend payments, which are generally paid on a quarterly or annual basis. Investors may also receive long-term benefits from capital appreciation if they hold securities over an extended time frame. But if you do your homework, you can find stocks that generate monthly income and potentially provide an income stream that rises over time.
Monthly dividend payments give investors the options of using the funds to supplement their income, pay monthly bills or reinvest the dividends to purchase additional shares.
Income Through Dividends
A dividend is a distribution of company profits to shareholders. Not all stocks pay dividends, but the ones that do usually pay cash to investors every quarter. Some even make payments every month. If you assemble a collection of stocks that pay in overlapping quarters, you can construct a portfolio that generates monthly income.
For example, if you own one stock that pays in January, April, July and October, you can buy one that pays in February, May, August and November and another that pays in March, June, September and December. Then, you'll receive a dividend payout every single month.
Some stocks, known as dividend aristocrats, are the elites of the dividend-paying stock world. To qualify as a dividend aristocrat, a company must be a member of the Standard & Poor's 500 Index, meet certain size and liquidity requirements and have at least 25 years of consecutive dividend increases.
If you invest in companies that continually raise their dividends, your income portfolio can likely keep up with the pace of inflation. This gives a stock-based income portfolio an edge over traditional fixed-income investments, such as bonds, as their static income payouts are eroded over time by inflation.
Although past performance doesn't guarantee future results, companies with the level of size and dependability as the dividend aristocrats can form the bedrock of an income investing plan that uses stocks.
Income Through Capital Appreciation
The stock market can be a volatile place. Stocks that pay dividends are still stocks, and even dividend aristocrats can fluctuate wildly in value. Insurance company Aflac, for example, dropped more than 83 percent during the 2007-09 financial collapse. However, the company went on to reach new highs just a few years later. With the long-term average stock market return approaching 10 percent, if you're a long-term investor, you can expect some capital appreciation on top of your quarterly dividends.
If your stock portfolio gains in value, you can sell the profits and use that capital to generate additional income. For example, if your portfolio rises 5 percent per year, you can sell those gains and add that 5 percent to your income. If that portfolio also generates a 4 percent income yield, your total income for the year would be 9 percent.
- Comstock Images/Comstock/Getty Images