To get $500 in dividend income every month, investors need to think about the average dividend yield they’re getting from their dividend portfolio, which would lead to how much they need to invest. Typically, the higher the yield you target, the slower the growth of the dividend might be.
In the worst-case scenario, dividends could get cut. So, when a stock offers a much higher dividend yield than its peers, you got to ask if the dividend or even the investment is safe.
For example, let’s say you’re able to put together a dividend portfolio to generate an average yield of 5% across your holdings, you would need to invest $120,000 today, which is calculated by the annual income divided by the yield (i.e., $500 x 12 months ÷ 5%).
Honestly, it’s very hard to build a diversified dividend portfolio by only buying TSX stocks that pay out monthly because most income stocks that pay monthly are real estate investment trusts (REITs), which actually pay out cash distributions that are taxed differently from dividend income depending on their sources.
How Canadian REIT cash distributions are taxed for Canadians
In non-registered accounts, the return of capital portion of the distribution reduces the cost base. The return of capital is tax deferred until unitholders sell or their adjusted cost base turns negative.
REIT distributions can also contain other income, capital gains, and foreign non-business income. Other income and foreign non-business income are taxed at your marginal tax rate, as are 50% of the distributions that are marked as capital gains.
That said, it’s absolutely acceptable if you want to build a diversified Canadian REIT portfolio for monthly income as a part of your “dividend” portfolio. From publicly traded Canadian REITs, investors can consider residential REITs, industrial REITs, retail REITs, office REITs, and diversified REITs.
Here’s an industrial REIT idea for monthly income.
Dream Industrial REIT
Dream Industrial REIT (TSX:DIR.UN) owns an $8 billion portfolio of industrial real estate with a recent occupancy of over 96% and a reasonable net debt-to-asset ratio of about 36%. Its recent market versus in-place rent was 32% higher, primarily from the Canadian markets it operates in. Dream’s Canadian assets make up about two-thirds of its portfolio. Its portfolio in Europe could also generate higher rental income because market rent is higher than its in-place rent. To be sure, the market versus in-place rent is so much higher for its Canadian portfolio (44% higher) whereas for its European portfolio, it’s 8% higher.
At $12.51 per unit at writing, it offers a distribution yield of almost 5.6%, paid out in monthly cash distributions. At this price, analysts also believe the stock trades at a good discount of over 20%.
Investor takeaway
Since it’s a real challenge for investors to build a sufficiently diversified monthly income portfolio from Canadian dividend stocks, investors can look to the United States for more diversification. It’s better for investors to focus on the business quality and seek companies with durable profits.
Target to have sufficient cash in your savings or chequing account to provide for your everyday needs so you can invest in the best dividend-paying businesses to help generate the annual income you need.
