When you think of the stock market, the first thing that comes into mind is this complicated world of the stock market. With so many confusing charts, it’s easy to get lost.
But what everyone knows for sure is that you can buy stocks and sell them whenever they arise. But there is another way that professional investors use to make a fortune. In 2018, Warren Buffett received $3.8 billion in cash from his five major investments, don’t get me wrong, he didn’t sell his shares to earn that much.
But instead, these five companies earned a ton of money during the year. And since Warren Buffett is an investor in these companies, they had to share with him their profits. That’s called dividends.
Simply put it there are two types of companies in the stock market companies that have already matured and have profitable and sustainable business models. So whenever they make a profit, they don’t know what to do with that money. Therefore, they end up sending it to their shareholders. On the other side, you have companies who are still trying to turn a profit like Tesla, they might report a profit, but the company needs that money to grow farther. So here is a question we will try to answer in this blog post.
How many stocks you have to buy or how much you have to invest in the stock market so that you receive $1,000 from your investment every single month without selling your stocks at all. But before we do that, we have to understand a few key concepts, how dividends work, what are the best dividend stocks, and how to avoid that dividend trap that might lead you to lose your entire investment.
Since the.combubble the nature of investing has changed before that investor his main concern was to invest in companies that would turn a profit and share these profits with them since as shareholders they’re entitled to the company’s profits. But intrapreneurs that Jeff beezus stepped in and completely changed the game. The goal was no longer to maximize profits, but rather grow the company, even if that means not paying a dime in dividends to shareholders. A company that only burns cash and isn’t profitable looks like a bad business.
But the strategy is to keep operating at a loss until you dominate the entire industry, and then generate profits, since you will be the only player in the market. And that’s what Amazon did for the last 25 years. Despite its $1.6 trillion valuation, it never paid a dime in dividends to its shareholders. In fact, it avoided taxes for two decades since it was reporting a loss. In 2019, it turned $11.5 billion in net income, while its competitor Walmart generated $15.2 billion and paid $2.16 in dividends per share.
But at the end of the day, Walmart was valued at one third of an Amazon. Amazon might seem like a more promising stock in the future. But if you want passive income, Walmart looks like a better option. And the stock market is filled with such examples. There are just a handful of tech companies that pay dividends. The rest, especially the big ones, would rather reinvest what they have earned instead of paying you.
While stocks that pay high dividends are extremely seductive, they aren’t always the best option. In fact, dividends are sometimes used to mislead investors and rip them off. The stock might be on the verge of bankruptcy, or it might be barely surviving it stock price has been falling year after year. So one way to make it stock attractive to investors is by offering high dividends. Tech, universal corporation or UVB. For example, if you take a look at its dividend rate, you will see a ratio of 7.16%. That’s an imaginably high, you probably won’t find anything like that, in the entire market. Even the world’s largest company, Apple pays around 2% in dividends. But I personally would not invest in this company and wouldn’t advise anyone else to do that. The stock price was around $50, five years ago.
And you might imagine that it might have grown slightly since then, at least. But it did, the price fell to $43. And the company doesn’t seem to have any future. So it pays high dividends to keep its stock attractive to investors. Because who knows what else the stock price might be a few years from now.
Compare that to Apple that pays only 2% in dividends, but the stock price rose by 337% in the same period, cash flow is great, but losing your principal is bad. And the stock market is filled with such examples. So don’t choose to buy stocks solely because it has the highest dividend yield.
You might be wondering by now that are there any good companies that are both growing and paying high dividends? The answer is Yeah, there are take Coca Cola for example, the company has existed since 1886. And it began paying dividends before you probably were born. And it’s quite a good dividend rate of 3.2%.
Of course, the stock price hasn’t been growing as some of the tech companies because many believe that there isn’t much left for Coca Cola to grow, but it’s definitely not going to fall the next day. The Home Depot is another example. They’ve been paying a dividend yield of 2.5%. consistently, the stock price doubled in the last five years.
Johnson and Johnson has been around since 1886, and is regarded as the King of dividends. It is a big name in the pharmaceutical industry. It also plays a key role in developing the vaccine for the current pandemic, the stock price might just bloom once the vaccine is ready.
The companies that don’t usually pay dividends are usually tech companies, since the idea behind it is that the company would be far better if it reinvest that money back and grow faster.
Companies such as Google, Facebook and Tesla don’t pay a dime in dividends, which is why investors love apple. It’s a tech company that both excels in hardware and software. It has a built in ecosystem that provides it with a consistent cash flow stock price that rises as much as other tech companies buy. It also pays a dividend yield of around 2%. So let’s try to answer the question.
How much do you need to invest to make $1,000 a month?
Well, since dividend yields are different from one stock to another, and we don’t want to invest in companies that don’t seem to do great in the long run, will take into account companies that aren’t only paying great dividends, but also grow over time, such as Apple, Coca Cola, Johnson and Johnson, the Home Depot and so on, it’s difficult to find an exact dividend yield. Since stock prices change every year. So does dividend yields. It also depends on the portfolio you built.
But let’s assume that you’re going to get a 2.5% annually. To receive $1,000 of passive income, you need to invest around $500,000 that will provide you with $12,500 a year or slightly higher than $1,000 a month. And suppose you want to make enough from dividends to retire completely. In that case, you need to invest at least $2 million to make $50,000 a year.
I guess you aren’t impressed because investing half a million dollars in real estate, for example, would provide you a much higher passive income than 12,500. And that’s why investors are more concerned about the stock price than dividends. Amazon might not have paid a dime in dividends, but its stock price rose by 522%. In the last five years, Amazon investors have earned much more than any dividend investor could possibly imagine.
Does that mean investing in dividend stocks is nonsense? Not really. If you have a big enough portfolio that invests in a wide variety of stocks, making dividend stocks part of your portfolio is a good decision. But you also have to consider that these stocks are growing as well. So if you use these dividends to buy more stocks of the company, you will end up with a pretty good investment. The Home Depot stock price increased by 26% last year, and it paid around 2.5% in dividends, which makes it a pretty appealing investment.
On the other side, if you’re just starting out with a small amount such as a few $1,000 you can’t afford to buy a property to rent it out. So starting with dividend stocks might be an option to consider for some.