How to Create Monthly Income With Dividend-Paying Stocks

Dividend-paying stocks can give you current cash flow.

If you need monthly income and a steady cash flow, building a portfolio consisting of dividend-paying stocks, certificates of deposit, bonds and other income-generating holdings may give you the money you need. Some companies pay cash dividends to their shareholders, allowing those stock owners to share in the success of the company. As an investor, you have a number of ways to get the dividend income you need, including both individual stocks and mutual funds.

Things You'll Need

• Financial publications
• Mutual fund prospectus
• Mutual fund application

Instructions

1. Decide whether you want to use individual stocks or mutual funds for your dividend income. Both approaches have their pros and cons, and it is important to evaluate both options carefully. With individual stocks you can pick and choose the investments with the best yield, but you also run the risk that the stock will decline in value or the dividend rate will be cut. With a mutual fund you can spread out your risk, but the dividend return will change as stocks are brought into and out of the fund's portfolio.

2. Check the dividend yield column in a quality financial publication. Not all stock tables include a table for dividend yield, so look at publications like The Wall Street Journal for that information. Note the stocks with the best dividend yields, and write their ticker symbols down for further research.

3. Log on to your brokerage account and use the stock-screening tools to search for companies with a high dividend yield. Many brokers provide stock-screening tools to their clients, and these tools include filters for criteria like dividend yield and price. Review the stocks you want to use for income, then go to the trading menu to make your purchases.

4. Contact several low-cost mutual fund companies and ask about their high-dividend-yield funds. Most mutual fund companies include at least a few funds devoted to dividend-paying stocks. The investment objective and risk profile of these funds varies quite a bit, so be sure to review the prospectus carefully. Some dividend stock funds limit their investments to well-established companies with a strong history of great earnings, thereby reducing the risks associated with stock market investment. Others invest in a wider basket of stocks, making the funds more sensitive to fluctuations in the stock market.

5. Review the prospectus for each dividend stock fund and find the current dividend yield. This figure gives you a good indication of how much you can expect to earn from the fund. For instance, if the fund has a dividend yield of 5 percent and you invest $100,000, you can expect to receive $5,000 in annual dividend income, or just over $416 per month.

6. Complete the application for the dividend mutual fund and make your initial deposit. When completing the application, indicate that you wish to receive the dividend payments in cash. The default option for dividends is to have them reinvested in more shares, so find that section and make the change before submitting your application.

Tips & Warnings

• Keep copies of your dividend payments with your tax records. Unless the dividend-paying stocks are held in a tax-deferred account, you will owe taxes on the dividend income you receive.

References

• CNN Money: Stocks: Best Moves to Make Now