I collect $500 a month in dividend income, and here’s how you can, too

Many people dream of being able to sit back and get paid each month without lifting a finger. And there are different ways you can do that.

You could buy a rental property, hire a property manager to oversee it, and collect rent from a tenant each month. Or, you could create an online course that people sign up for and pay to access. Once you’ve done the initial work, there’s nothing to do but sit back and wait for the money to roll in.

Another popular passive income strategy is investing in dividend stocks. It’s something this Reddit poster did with an initial $10,000 investment. Now, their portfolio brings in $500 per month of dividend income.

If that sounds like something you’d like to do, here’s how to go about it.

Step one: Have the capital

To earn $6,000 a year in dividends, you’re going to have to fund a brokerage account with a decent chunk of money. The exact amount will depend on the dividends your stocks yield.

As a basic example, if you invest $120,000 into a portfolio of stocks with a 5% dividend yield, you should be able to collect $500 a month, or $6,000 a year. If you’re only looking at a 4% dividend yield, you’ll need $150,000. (And do keep in mind that these figures are considerably higher than the stock market’s average dividend yield.)

Don’t be discouraged if you don’t have enough money to support $500 monthly dividend payments. What the poster did was start off with $10,000 and work their way up.

If you don’t have six figures to invest, invest as much as you can. That may be $800 to start out with, or $1,500, or $5,000. Then, take advantage of your brokerage account’s DRIP, or dividend reinvestment plan, so your dividends are automatically reinvested in shares of the stocks that paid them every time they come in. This could help your portfolio grow over time.

Of course, it’s also a good idea to add money to your portfolio as you can. However, a DRIP is a good way to stay on track for those times when you can’t come up with more money to invest.

Step two: Choose the right companies

When companies issue bonds, they’re contractually obligated to make interest payments. When companies issue dividend payments, they’re sharing the wealth with stockholders. But there’s no obligation to keep paying, and a given company can cut or halt its dividend at its discretion.

If your goal is to generate steady passive income through dividends, aim to invest in companies with a strong history of paying dividends. You may also want to specifically target companies that have raised their dividends consistently year after year.

Step three: Keep diversifying

It’s important to maintain a diversified portfolio when you’re putting your money into dividend stocks. Although dividends can serve as a hedge against market declines, diversifying gives you an added layer of protection on top of that.

If you find the idea of putting together a portfolio of dividend stocks overwhelming, you could fall back on dividend ETFs instead. This is also a good option for people who prefer a more hands-off approach to investing.