All You Need to Know to Make $1,500 in Dividends Each Month
Hello, my name is Marcus and I paid a twelve-month journey around the world to a decent part with profits I made by trading stocks.
Yesterday I had a philosophical conversation with my colleague Natalie about life, work, and freedom. She just turned 30, earns a decent salary but has hardly any time for herself in daily life.
I think a lot of employees feel that way nowadays.
Someone once told me the “dice of life” works like this:
- When you are a child you’ve got time and health, but no money.
- When you are an employee, you’ve got money and health, but no time.
- When you are old, you’ve got time and money, but no health.
That’s life, right?
Well, not quite. Wouldn’t it be great to let your capital do the work for you? You are welcome to walk through our conservation and judge for yourself.
“The only real prison is fear, and the only real freedom is freedom from fear.” — Aung San Suu Kyi
How to generate a second income from stocks
Natalie has already heard people talking about a passive income through stocks. In fact, it turns out she is actually interested in the financial market but doesn’t know where to start looking.
She knows when a public traded company like Coca-Cola makes a profit, it can decide to either keep the cash or return a certain part of the profit to its shareholders.
But how does it help her? Here are some questions she had to think about:
- What is my motivation to generate a passive income?
- How much income do I want to make each month without working?
- How much capital do I need to invest to achieve my goal?
- When do I want to achieve my goal?
These four basic questions lead to three important concepts: income, capital, and time. Let’s start with the first one.
How much income do I want to generate through a dividend income stream?
Make no mistake, to generate a passive income isn’t easy and probably at least in the beginning inconvenient.
Saving money means to renounce consumption!
One has to dive deep into his personal motivation and earn financial knowledge through reading and practice.
The more you learn, the more you earn!
Warren Buffett
I would like to introduce a model that has helped me in the past to meet my goals, the SMART-approach.
SMART is an acronym and stands for Specific, Measurable, Achievable, Realistic, and Timely. It basically offers a technique by setting personal objectives.
Here is what Natalie had in mind:
Specific
Just like most of us, Natalie works most of her time for her basic needs. She was wondering why she actually works most of the time each day to pay the rent for a flat she only uses a few hours every day.
She wrote down the following goal:
I want to generate a passive income of $1,500 each month.
Let me add, the goal needs to be clear and unambiguous.
I can’t stress this point enough, get clear on what it is that you want!
Her motivation is to dedicate her precious life to things that matter to her. She wants to do more voluntarily work like supporting animals and humans in need and spend less time in office.
She said in office she is paid for her presence rather than her accomplishments.
Measurable
To make her goals measurable, she had to quantify her goals.
- I want my passive income to pay for my rent = $700
- I want my passive income to pay for my groceries= $400
- I want my passive income to pay for my insurances = $400
In total, $1,500.
Attractive
The attitude towards the goal must be positive. Natalie wants to achieve her goal not to avoid something unpleasant. Keep in mind, positive goals are much more powerful than negative goals.
Realistic
At first glance, the goal didn’t seem realistic at all to her. How would it be possible to not work for the rent, food, and insure anymore? After all, everyone does it that way, right?
“Whatever the mind can conceive and believe, it can achieve.”
― Napoleon Hill,
You have to aim high! If you pursue an ambitious goal and only achieve 50%, it’s still more than 80 % of a humble goal!
The goal should be challenging but achievable at the same time. Natalie wants to archive her goals in 10 years.
5 years from today would be probably an unrealistic endeavor, whereby 20 years on the other hand would give her too much comfort.
Timely
To create a feeling of urgency, the goal must be bound to a deadline. I recommend to write down your deadline and place it somewhere visible in your home. Natalie wrote down the following:
14.10.2030
You have to create a definite plan and start immediately. Don’t wait, do it!
“Do not wait: the time will never be ‘just right’. Start where you stand, and work whatever tools you may have at your command and better tools will be found as you go along.”
― Napoleon Hill
How much capital do I need to invest?
After we defined Natalie’s personal goal, it was time to see how much capital is needed to earn $ 1,500 each month from dividends or $18,000 respectively each year.
Here is a brief introduction to dividends:
Every company has a position called “equity” in its balance sheet. A balance sheet is basically a table that shows two important sections:
- Where does the capital come from?
- Where did the capital go?
By definition, Shareholders own a fraction of a company’s equity through shares. Let’s assume Company “Amazing Inc” has $1,000 equity in the balance sheet.
Let’s now try to answer the first question:
Where does the capital come from?
Let’s say “Amazing Inc” has received $ 1,000 from investors in exchange for 100 shares, effectively making them shareholders of the company.
Natalie is one of them and owns 10 shares, each worth $10.
If we do the math and multiply her 10 shares times the value of each share ($10), we end up with $100, which makes her own 10% of Amazing Inc, isn’t it amazing?
Let’s now try to answer the second question:
Where did the capital go?
Amazing Inc deals with amazing flowers and hence invested the capital into shop equipment and advertisement. After one year, a lot of flowers are sold to amazing’s customers.
The company made a profit of $200 and has decided to gratefully return $100 to its investors who believed in the business story.
The last question to think of is the following:
How much would Natalie earn in dividends?
Well, since she owns 10 % of the company, she gets 10 % of the dividend payment straight to her bank account.
When Natalie wakes up the next morning, she will receive a notification from her bank. The bank will inform her that $10 worth of Amazing dividends have just been added to her balance.
She now achieved a rock-solid dividend yield of 10%! ($10 dividend / $100 stocks x 100)
I admit, it’s still a long way to go from $10 each year to $18,000, but it’s a start and $10 is $10 more than the day before.
Truth— more precisely, an accurate understanding of reality — is the essential foundation for producing good outcomes.
―Ray Dalio
It’s important to also keep taxes in mind. Our government wants to have a portion of the precious dividends earned.
In the case of Natalie, her personal tax rate on capital gains is 30 %. This means, off every dollar earned in dividends, only $0.70 arrives on her bank account.
To earn $18,000 net dividends each year, she needs to earn $25,700 gross dividend income. ($18,000 dividend income / 0.7 (1 — personal tax rate)).
If Natalie decides to earn all of her dividends from the Amazing Inc, she would need to invest a whopping $257,000 today to archive her goal of earning $25,700 dividend income. ($ 25,700 / 0.1 dividend yield). To be honest, I don’t expect anyone to be as lucky as Natalie and archive a sustainable 10 % dividend yield with her imaginary Amazing Inc.
If the dividend yield decreases from 10 % to 5%, the capital needed to archive the same dividend income doubles from $257,000 to $ 514,000.
When do you want to archive your passive income?
Just like humans, capital needs time to go to work and earn money.
The sooner Natalie starts investing in stocks, the less capital she will need for a particular goal given a certain amount of time.
Of course, Natalie simply doesn’t own $514,000 in cash she can put to work right now.
It is important to understand the concept of time.
Let’s think one more time about Amazing Inc who transferred $10 to Natalie through dividends. Wouldn’t it be nice if the company grows and sells even more flowers to its happy customers?
What if next year’s profit would be 50 % higher than the previous year? This would increase Natalie’s dividend from $10 to $15 without any effort.
Remember this important concept:
With stocks, you only do your homework once.
It’s essential to do your research as carefully as possible.
Only put off until tomorrow what you are willing to die having left undone. -Pablo Picasso
Define a target, say 10 hours of research on the particular company, and the associated stock valuation. Once the stock is bought, walk away.
Don’t work for your capital, let your capital work for you.
Here is an impressive example to think about when it comes to time and interest rates:
If Natalie finds a stock that increases 10 % in value each consecutive year, she only needs to invest $ 198,000 today, rather than $ 514,000 in 10 years from now on to achieve the same passive income. ($514,000 required capital / 1.1 to the power of 10. )
You are probably wondering where to look for growth companies like our Amazing Inc.
Well, start by thinking about the future. What kind of products and services will be in high demand in ten years from now on?
Here are some thoughts:
- What do you think about autonomous cars? Do you think cars will maybe have through Artificial Intelligence (AI) the ability to drive more efficiently than humans? Who are the leaders in this sector? (Hint: Tesla’s Autopilot aims to drive ten times safer than humans)
- What do you think about vegan food? Have you noticed more and more vegan dishes are served in the restaurants and sold in the supermarkets? Who are the leaders in this sector? (Hint: Think about beyond meat, they are the fastest-growing company in the sector)
- Have you heard of blockchain? Right now, only a few people realize the potential the technology might have to disrupt every industry that currently runs a centralized business. Who is working on this key technology? (Hint: Maybe do some research on IBM)
Congratulations, you have made it really far! You now have a solid tool-box to learn more about this exciting topic.
I would like to share my very personal journey about the mistakes I made in the last ten years with stocks. After the article, you will understand why it’s important to be a professional mistake-maker when it comes to the financial market.
Before you go ahead and invest in stocks, you need to understand how the economy works. I highly recommend to take 30 minutes and watch this video from Ray Dalio, one of the most successful investors ever.
I hope to see you again in the future.
Disclaimer: This article is not investment advice, but for analysis and informational purposes only. It should not be considered Financial Advice. Consult a financial professional before making any significant financial decisions.
