Generating passive income through dividends is particularly important these days, as the stock market has had negative returns for the better part of a year now. But it is perhaps even more important in retirement, as that added income can come in handy. It can certainly give you some spending money to supplement your retirement accounts or Social Security checks.
Here are three steps to earn about $300 per quarter, or $100 per month, in dividend income.
Step 1: Look for high-yielding dividend stocks with consistent earnings
A dividend yield is the percentage of the share price that the company pays out in dividends. The average dividend yield on the S&P 500 is about 1.7% right now. Generally, a yield that is over that is considered pretty good. To determine if the dividend is sustainable, the payout ratio — the percentage of earnings used to pay the dividend — should ideally be below 50% in most cases.
Often, the best dividend stocks are those of large, established, blue-chip companies that are among the leaders in their industries. Many of these companies have consistent earnings and a commitment to maintaining or increasing their dividends. A good place to look for these stocks is on the list of Dividend Aristocrats, which are companies that have increased their annual dividend payouts at least 25 years straight. It is not the only source, but certainly a good place to start.
Step 2: Build your portfolio of dividend stocks
So, with these metrics in mind, the next step is to develop a portfolio of stocks that are poised to generate consistent, high-yielding passive income in retirement. For the purpose of this hypothetical, let’s draw from the list of Dividend Aristocrats and identify some solid dividend stocks.
One is asset manager T. Rowe Price Group (NASDAQ: TROW), which has a yield of 3.99% and a quarterly dividend payout of $1.20, with a payout ratio of 36%. It has increased its dividend for 36 consecutive years. Another is pharmaceutical company AbbVie (NYSE: ABBV), which has a yield of 3.75% and a quarterly dividend payout of $1.41, with a payout ratio of 42%. AbbVie has increased its dividend for 50 straight years.
Both of these stocks have above average yields, manageable payout ratios, and a long history of supporting their dividends, as well as being established leaders in their industries. It is also worth noting that AbbVie is up 12% year to date (YTD) and has posted an average annual return of 16% over the past 10 years. T. Rowe Price is down 40% YTD, but all asset managers are struggling in this bear market. However, T. Rowe Price has averaged a 7% annual return over the past 10 years and has virtually no debt, making it a reliable dividend payer.
Step 3: Develop a plan
If your idea is to generate passive income in retirement, it is important to come up with a strategy to get there. How much would you need to invest in these stocks to make a decent chunk of income? Let’s say you invested $15,000 in both of these stocks. T. Rowe Price trades for about $117 per share, so you could buy roughly 130 shares for just over $15,000. AbbVie trades for about $153 per share, so you could acquire 98 shares for just under $15,000.
For T. Rowe Price, 130 shares at $1.20 per share would generate about $156 per quarter, while for AbbVie, 98 shares at $1.41 per share would earn about $138 per quarter. That calculates out to about $294 per quarter, and $98 per month.
Keep in mind that these stocks will also generate capital appreciation, not just dividend income, so that investment will grow over time. T. Rowe Price has posted an annualized return of 7% over the past 10 years, while AbbVie has posted a 16% average annual return. So, you’re not only getting passive income but also solid returns that you can tap into when you need it.
10 stocks we like better than T. Rowe Price Group
When our award-winning analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and T. Rowe Price Group wasn’t one of them! That’s right — they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2022