How Much to Invest to Get $500 in Dividends Every Month

Investing in stocks for dividends may be relatively easier when compared to other passive income earning opportunities. However, it is no cake walk.

Look for business quality over big dividend yields

When investing for dividend income, you need to look beyond a high yield. In fact, high yielding dividend stocks (like those yielding over 7%) often have many inherent business or financial risks that could mean the dividend is actually not safe at all.

It is crucial for dividend investors to really understand the business, assets, management, and balance sheet of the stocks they are looking to buy. This is especially true in a time where interest rates are rapidly rising. Cheap debt is no longer available and rising rates can severely damage an overly leveraged dividend stock.

How much cash do you need to earn $500 per month?

After keeping these thoughts in mind, you might be wondering how much cash you would need to earn $500 of dividends every month. On an annual basis, you are looking to earn $6,000 per year.

The average dividend yield on the S&P/TSX Composite Index is 3.3%. If you wanted to earn $6,000 per year (or average $500 per month) at that rate, you would need to invest at least $181,818.

That is a good baseline for expectations. Fortunately, many dividend stocks have fallen this year. Several good stocks are yielding significantly higher than the average. If your portfolio averaged a 5% yield, you would only need to invest $120,000 of initial capital.

You could even look to average a 7% yield. You would only need $85,715 of initial capital. However, you would likely be taking on significantly higher risk with a portfolio like that.

Dividend stocks like Pembina Pipeline are good for income

Investors are better off hunting in the 4–6% dividend yield range. One solid stock to consider is Pembina Pipeline (TSX: PPL). Pembina operates a diverse mix of crucial energy assets (think pipelines, processing facilities, storage, and export facilities) for the Western Canadian energy industry.

Pembina stock yields 6.08% at today’s price of $43.94 per share. Its dividend is supported by generally long-term contracted cash flows. However, when energy prices rise, it also gets considerable upside from reselling its processed energy products. If you anticipate natural gas and oil prices rising in the next few years, there could be additional upside for the stock.

Pembina has been yielding excess cash after covering its capital expenditures and dividend. The energy company has one of the best balance sheets amongst its energy infrastructure peers. It is in a strong position to be able to invest in broader growth opportunities (like LNG or a larger egress pipeline project).

While this is not a growth stock, shareholders should expect their dividend to be safe and enjoy potential upside if it can execute profitably on its capital growth plan.

If you wanted to earn $500 on average per month, you would need to buy 2,250 shares. That would cost you $98,9865, but would yield $1,501.87 quarterly, or $500.62 averaged monthly.

The Foolish takeaway

Here at the Fool, we don’t recommend you sink that much cash into one stock (unless it is a part of a larger diversified portfolio). However, this is to demonstrate that you can find attractive dividend yield at today’s prices and valuations.

Look for a balance of attractive yield and dividend sustainability. Build a portfolio with at least 10–12 of these types of stocks, and you can yield an attractive dividend stream over time.