A good passive income is the first step towards financial independence. For many people, young people in particular, financial independence means having the means to support themselves, without anyone’s help. However, true financial independence means having several sources of income, so that if you lose one of them, you have several others to count on. Monthly dividend stocks are a good first step towards financial independence. They are also a great start for young investors who want to learn the basics of dividend investment. If this opportunity appeals to you, here’s the right way to approach these investments:
1. Who pays monthly dividends?
First of all, when it comes to investments, it is important to know the size of the pool in which you are swimming. There are thousands of companies in the stock market. However, most of them don’t pay dividends, as they choose to reinvest all their profits in growing and developing the company. Out of these thousands of companies, about 400 of them make regular dividend payments. Dividend payments can be made annually, biannually, quarterly or monthly. As you can suspect, monthly dividend stocks represent the smallest category, as there are only a little over 40 companies that make monthly payments. Given the small size of this investment pool, it can be very hard to build a versatile portfolio, so you need to pay a lot of attention when choosing your monthly dividends.
2. How do you recognize the best monthly dividend stocks?
The yield of a stock is the first indicator of its value. Obviously enough, you should focus on stocks with a high yield. This limits your pool of options, as 40% of the overall stocks have a yield smaller than a US Treasury bond. The stocks with a higher level of yield, also have a higher level of risks, so you need to balance the risk with the gain. Aside from the yield, you also need to consider the company’s payment history. We shouldn’t even have to say this, but if you didn’t already know, many companies promise a high return of investment, only to attract investors, or to cover up financial unbalances.
To find the best monthly dividend stocks, you should check out financial statements of all the companies that interest you and analyze their cash flows. As the name suggests, the cash flow is the free money that is left after all of the company’s needs are taken care of. Therefore it is essential to compare the amount of dividend to the free cash flow.
Last but not least, the payout ratio is one of the most important indicators for the quality of a monthly dividend stock. Simply put, this indicator refers to the ratio of dividends to earnings per share. A payout ratio that stays steady over a long period is a great indicator that you have found a good dividend company.