$1000 per month from DIVIDEND stocks? (Passive income from investing)

1,000 of dividend income per month? That sounds like the absolute dream! How nice would that be? Every month, just for being an investor in a couple of companies, you're getting paid a thousand dollars. You didn't even have to do anything for that money. You didn't have to go out and work; the companies just sent it to you. That sounds like a pretty good deal if you ask me.

So in this video, we are going to look at the different ways that we can get ourselves up to achieving—actually achieving—a thousand dollars of dividend income every month. We're also going to talk about the three ways that people like to go about dividend investing. So with that said, let's get started! If you like the video, leave a like on it, subscribe to the channel if you haven't done so already. But for now, let's get started.

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So, very quickly, firstly, what is a dividend? Simply, a dividend is a per-share payment that a shareholder receives from the company itself. It can kind of be viewed as the company recognizing that the shareholders are, in fact, owners of that business and therefore they should probably get a slice of some of the company's profits. So it is the company, usually either annually, semi-annually, or quarterly, sending some money to their investors out of the profits of the business.

Now, it's no secret, obviously, that investors love dividends. At the end of the day, it's just the company handing you cash. That sounds pretty good! But sometimes, people can get a little bit overly reliant on dividends or a little bit too focused on them. What I mean by this is, remember, at the end of the day, the way that investors can make money in the stock market, there are two different ways that you can make money in the stock market. Number one: The company you're invested in can just give you money, and that's the dividend.

Alternatively, you can also make money, obviously, through your shares appreciating over time, so the shares becoming more and more valuable. So instead, potentially, in a lot of cases, a lot of these companies don't pay a dividend. That means they're not handing out their profits to their shareholders; they keep their profits. If that company can then reinvest that money back into their own business and generate, you know, 10, 20, 30 percent annual returns with that money—so we look at something like the return on invested capital—well then, that's going to lead to, hopefully, the business becoming more and more valuable as it grows. That will lead to your share price going up, which means one day, you can sell the shares for more than you bought them for.

Yes, obviously, investors love dividends! It's just free money at the end of the day. But it's important to remember that sometimes it's actually not a big stress if the company doesn't pay a dividend, if they're plowing that money straight back into their own business and they're growing it very quickly. However, if you're an investor that is looking to generate passive income from your investments, then you probably don't want that scenario where the company holds onto all its profits, puts it back into the business, and just improves the business value over time. That doesn't really work with your specific strategy; you'd much rather them actually pay a dividend so that you can receive quarterly or annually; you know, you can receive that dividend.

Dividends certainly have a place, and usually, it's very much for those people—those investors—that are looking to create a passive income from their investments. Now, moving on, I wanted to talk about the three main ways that people tend to go about dividend investing. I'm going to start from most risky and work down to the least risky.

So number one is, quite simply, picking a portfolio yourself of individual companies that pay big, fat dividends. Now, there are plenty of companies out there that are huge, that are very cash flow positive, but aren't really great at growing anymore. For those companies, usually, they offer their investors really good dividends. So they give their investors their return in that aspect as opposed to continually growing over time.

A lot of these companies, for instance, like banks, telecommunications companies here in Australia, and mining companies, they can all pay some really big dividends. So just by handpicking a couple of, you know, big blue-chip dividend-paying companies, you can start to construct a very healthy dividend portfolio. However, the one thing you can't do is simply just leave it there, you know, bugger off to some island in the middle of nowhere, never look at your portfolio again, and hope that you're just going to retire comfortably for the rest of your days.

One of the reasons that this process is the most risky out of the three I'm going to talk about is quite simply because you have to make sure that you aren't falling into any dividend traps. Now, a dividend trap is essentially when a company has been paying a dividend for so long that investors are invested in that company because it pays the dividend. They want to keep all their investors, so the company feels pressure to keep paying a dividend.

A dividend trap is where the company is actually not in a great financial position and really shouldn't pay the dividend. In fact, by paying the dividend to keep their investors happy, they're actually hurting their company in some aspect. If this gets left unchecked, then that can be very damaging to your portfolio. Because while they're still paying the dividend, it might be a six percent dividend that year. You don't want that to come at the expense of the company's stock price falling by, like, 20 or 30 percent. That just doesn't work at all.

Sometimes companies will keep doing this. They will actually take on quite drastic measures to try and keep paying their dividend that they've always paid, so that all their investors stay happy and stay invested, which is a little bit backwards. But that's what you've got to watch out for. The way you actually do watch out for dividend traps is by making sure, first—well, how do you make sure your company isn't a dividend trap? Well, the first thing is, obviously, you've got to make sure that your company has really low debt, so they don't really have to pay too much back to anyone else. Most of the money they make is literally just theirs to do what they want with. That's really important.

Then the other thing is that you want to see companies that are very cash flow positive consistently. Look back over year after year after year for like the last 10, 15, 20 years. You want to see that the company that's been paying a dividend that whole time has remained consistently cash flow positive. Look at something like the operating cash flow on the cash flow statement and make sure that the business operations are always making money.

Then, moving on, another very common way that investors like to go about dividend investing is simply investing into listed investment companies. This is where, you know, the listed investment company will pull up all the money from its investors and, with that money, they will construct a big blue-chip safe portfolio. Usually, a lot of those companies in the listed investment companies pay very fat dividends as well.

They pick big companies that have been around for a very long time, that are well trusted, well respected, and then the listed investment company itself decides to pay investors a consistent dividend year after year, quarter after quarter, whatever it might be. This is a little bit less risky than just picking a couple of dividend stocks because, obviously, you're getting very wide diversification by investing in a listed investment company. You'll have many stocks in that portfolio and they won't be risky bets, they won't be speculative positions; they'll all be blue-chip established companies.

Then, all you have to do is stay in that one investment that is, in itself, diversified, and you can just continue to receive the dividends from that listed investment company year after year. So in Australia, one of the prime examples, the most common, the favorite, I would say, the favorite listed investment company in Australia is called the Australian Foundation Investment Company. If you look at their top holdings, here you can see all of the big Aussie blue chips in there, and a lot of the companies in that list actually pay dividends themselves.

But if you actually were to invest in this listed investment company right now, then you would be receiving from the listed investment company around about a four percent annual dividend.

Then moving on, the third very common way that investors like to go about dividend investing is simply by buying into dividend-paying ETFs. This is very similar to listed investment companies. ETFs differ, however, in that they are purely passive in nature. So all ETFs have an investment objective; they try and follow a particular index and they will always invest based on that investment objective. So you always know what that ETF is doing, whereas the listed investment company has asset managers who are actually maintaining, picking, and choosing that stock portfolio.

So when we're talking about dividend-paying ETFs, we can think about here in Australia the iShares ASX High Dividend Yield ETF or the biggest one, which is the Vanguard Australian Shares High Yield ETF. Now, interestingly, you probably won't get huge share price gains over time with these sorts of ETFs because that's not what they're designed to do. Remember, at the end of the day, they're designed to pay you fat dividends. So the vast majority of the return that you get from these investments isn't from the share price going up; it's from them giving you a nice attractive dividend yield.

So, for example, have a look at this chart. You can see here the IHD and VHY—they were the ones we were just talking about before. The iShares ETF got an annual return of 1.27 percent for the past few years, but it paid out a 6.19 percent dividend yield. The Vanguard ETF, the VHY, managed 2.34 percent per year in capital growth but paid out, on average, 5.7 percent in dividends each year.

So as you can see, these ETFs aren't really focused on trying to grow the share price, but they will always give you a big dividend. So overall, they're the three main ways that investors go about dividend investing. But now we need to talk about, okay, how do we work our way up to a position where we're achieving a thousand dollars a month just in dividend income?

Well, from what we've seen from a lot of these funds, these ETFs, these listed investment companies, generally we can expect from these investments a dividend yield of somewhere between four and six percent per year. Now making a thousand dollars per month in dividends is obviously twelve thousand dollars a year. So if we're earning four to six percent and we need to make twelve thousand dollars per year, then ultimately that is going to mean we're going to have to have between 200 and 300 thousand dollars sunk into the market to be able to achieve a thousand dollars a month of pure dividend income.

So, obviously, the first way to achieve a thousand dollars of dividend income per month is simply to have 200 to 300 thousand dollars sunk into the market—just save it up over time and then just sink it into the market and start, you know, start raking in between four and six percent, which gives you your twelve thousand dollars a year— which gives you one thousand dollars a month.

However, that's not really achievable for most people, obviously. I mean, I don't have a spare 300 thousand dollars just sitting in my bank account that I can just plonk into the stock market. However, one thing that's worth noting is that for most people, we are out there working—actually going and making income ourselves through our work. While it would be nice if we could generate a thousand dollars of dividend income right here, right now, we don't necessarily need to for a very long time because our expenses are covered by the active work we're doing.

So in that case, what we can do is we can start to say, okay, we know the end goal is going to be two hundred, three hundred thousand dollars what we're going to need in the market to generate the four to six percent and get us a thousand dollars a month. Okay, so what we can do is we can actually start to set out goals. It's like, okay, do you want to achieve this in 10 years? Do you want to have a thousand dollars of dividend income coming in each month in 10 years' time, or do you want to make it a 20-year goal or a 30-year goal?

So that when our working careers start winding down, and we start thinking about retirement, then we have worked up to achieving that thousand dollars a month in dividend income. Maybe that's more of a realistic way to go about it because that's obviously when you really need passive income is when you flick the switch, and you stop working.

So let's have a look over 10, 20, and 30 years. Instead of just saving up the full amount yourself, let's switch over to instead of having the dividends hit our bank account, let's switch over to dividends being reinvested. So over time, we get to experience that compounding effect where our money turns into more money, which gives us more dividends, which turns into more money, and so on and so forth. We push that snowball down the hill, and it gathers snow over 10, 20, 30 years.

So we're going to say that, first of all, we've sunk 5,000 dollars into the stock market, and now we're going to come back and just add to it every year. Over let's start with 10 years. So if we're going to, in 10 years, achieve a thousand dollars of dividend income every single month, then we're going to have to add 1,850 dollars per month if we're achieving a six percent return every year, or 2,041 dollars per month if we're achieving a four percent return every year.

However, if you stretch it out and you make it a twenty-year goal, then you're going to have to save 417 dollars per month at six percent and 808 dollars per month at four percent. But then if you make it a retirement goal, a truly long-term goal, you make it a 30-year goal, then at six percent returns every year, you're only going to have to save 183 dollars per month, or 425 dollars per month at four percent.

The reason that this deal keeps getting easier and easier for us is, obviously, because we're just stretching it out over a longer and longer time period. But it is also that fact that what we were talking about before—the longer we leave it, the more the compounding effect can start to take over and generate that money for us.

For example, if we get six percent per year and we are trying to snowball our way up to the two hundred thousand dollars we need to achieve one thousand dollars of dividend income every month from our six percent return, if we work for that goal over 30 years, then we've only put in 34 percent of that portfolio value by ourselves. Only 34 percent is actually our money that we've put into that portfolio; the rest is just the compounding effect, right? The compounding effect has essentially just snowballed our money for us and that's made that goal much more achievable for us.

However, if we then look at the flip side of the equation, where we're trying to achieve a thousand dollars per month of dividend income, but we want to get that done in 10 years from now, then the story is much different. Then we've had to do much of the heavy lifting just by ourselves. In fact, you've had to sink 75 percent of that 200,000-dollar amount in by yourself; only 25 percent has come from the compounding effect. You've basically had to do the rest yourself.

So there are definitely different ways to go about achieving this goal—this magical goal of a thousand dollars a month from dividends alone. You can straight up save your 200 to 300 thousand dollars, plonk it into the stock market, into one of those investments that's going to get you a pretty safe four to six percent dividend yield, and then you've got your thousand dollars a month.

However, obviously, that's a very hard task to actually achieve. For most of us, we don't actually need the thousand dollars a month right now. Although that would be fantastic, we can spread it out over multiple years, over multiple decades, so that we can break it down into a very achievable task where we only have to save, say, 200 bucks a month or something to add to our portfolios, and that compounding effect can help snowball our portfolio value to a point where eventually, once it does hit between, you know, two hundred to three hundred thousand dollars, then you can just flick the switch back!

So you're reinvesting your dividends; you can just flick the switch straight back and now all of a sudden, instead of those dividends being reinvested, they just flow into your bank account, and then you've achieved your goals!

So there are definitely different ways of going about this and definitely the most achievable is making this a long-term goal, working hard, and covering your expenses with your active income in the meantime while still contributing to that portfolio, letting it compound, so the heavy lifting is done by the stock market; it's not done by you personally. Then come back when you're ready to retire, when you feel as though when you've got your 200, 300 thousand dollars, flick that switch, and then you've got the thousand dollars—whatever it ends up being—of dividend income coming into your bank account every single month.

So anyway, guys, that's where I'll leave the video. Leave a like on the video if you did enjoy it; it really helps me out. I put a ton of effort into these videos, so I really appreciate it if you want to support the channel. It's the easiest way to do so. Leave a like and make sure you subscribe!

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And if you're interested in learning about how I go about my investing—my two investing strategies, passive investing and active investing—then check out Profitful, links down in the description. As I always say, you can check out those courses; they are full in-depth courses about my investing strategy. But that'll do me for today, guys. Thanks very much for watching, and I'll see you guys in the next video.

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