Completing my most recent blog goal, I need to start on my next blog goal creating a monthly dividend ladder to increase my passive income stream.
What is a Dividend?
Per Investopedia, a dividend is the distribution of some of the company’s profits and earnings to a class of its shareholders, as determined by the company’s board of directors. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend. Dividends are payments made by publicly listed companies as a reward to investors for putting their money into the venture.
Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company’s stock price. Dividends may be paid out as cash or in the form of additional stock. Common shareholders of dividend-paying companies are typically eligible as long as they own the stock before the ex-dividend date. The annual dividend per share divided by the share price is the dividend yield. Not every company pays dividends, but those that do often have slow, reliable growth.
Key dividend dates to be aware of:
Dividends follow a set of dates that are important to determine the shareholders who qualify for receiving the dividend payment.
- Announcement Date: Dividends are announced by company management on the announcement date and must be approved by the shareholders before they can be paid.
- Ex-Dividend Date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to get the dividend as they are buying it on or after the dividend expiry date. Shareholders who own the stock one business day prior to the ex-date – that is on Friday, May 2, or earlier – will receive the dividend.
- Record Date: The record date is the cut-off date, established by the company in order to determine which shareholders are eligible to receive a dividend or distribution.
- Payment Date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to investors’ accounts
- Since dividends are irreversible, their payments typically lead to money going out of the company’s books and accounts of the business forever. Therefore, dividend payments impact share price – it may rise on the announcement approximately by the amount of the dividend declared and then decline by a similar amount at the opening session of the ex-dividend date.
- For example, a company that is trading at $50 per share declares a $1 dividend on the announcement date. As soon as the news becomes public, the share price shoots up by around $1 and hit $51. Say the stock trades at $53 one business day prior to the ex-dividend date. On the ex-dividend date, it comes down by a similar $1 and begins trading at $52 at the start of the trading session on the ex-dividend date, because anyone buying on the ex-dividend date will not receive the dividend.
What is a monthly dividend ladder?
A monthly dividend ladder is similar to the CD ladder I setup as one of my first goals for the blog. This is where I would get paid on a frequent basis to simulate a recurring and expected stream of income, in this case dividends. Since most stocks pay dividends on a quarterly basis, I have to find 3 stocks that have payments in each of the months that I am targeting to fill out my ladder.
The way I would group the months are as follows:
Investment 1 January, April, July, and August.
Investment 2 February, May, August, and November.
Investment 3 during March, June, September, and December.
Here is a picture to help illustrate:
How am I going to pick the stock and corresponding dividends?
With so many companies paying dividends, here are the criteria that I will be using to screen out potential investments:
- Dividends paid in the monthly/quarter that needs to be filled
- 4% or greater dividend yield
- Increasing dividend payments
- Not the same sector as the previous investments
- Approximately $100 investment, round to purchase full share of stock. Not interested in partial share purchases.
- For the initial investment, need to purchase before the ex-dividend date
- If the price falls by 5%, invest another round of ~ $100 to dollar cost average
Knowing I was going to aim and create the monthly dividend ladder as my next goal, I went ahead and recently completed my first investment with Pfizer (NYSE:PFE). On January 21st, 2021 I purchased three (3) shares at $36.27 per share for a $108.81 total investment. As noted, Ally Bank does not charge me commission or transaction fees on any trades, so that is a huge plus on minimizing my investment.
What are my investment goals?
Overall, my investment goals are very consistent which are:
- Increase the height of the money tree by earning, saving, and/or investments that I deploy.
- Increase the number of income streams, especially passive ones
- Accept the appropriate level of risk for the potential reward/yield that I am expecting
By setting up a monthly dividend ladder, it provides me the foundation to build a weekly dividend cadence. All have the same benefits just a more frequent stream of dividend payments, not sure who would argue that.
Here are some of my favorite dividend blogs that I like to read and get ideas from, keep up the great work:
I am a finance professional with over 20 years of experience and very passionate about all topics related to finance; enjoying the aspect of teaching and educating others along the way. All in all, I will show you how big this money tree can get over time as I get the branches (Earn, Save, Invest) as high as possible…Click here to see my financial progress to date: How high is the Money Tree?
