Dividend investing can be an effective way to build a steady income stream if done right. Data shows about 85% of the cumulative total return of the S&P 500 came from reinvested dividends since the 1960s. But which dividend stocks should you invest in to build a long-term income portfolio? Let's turn to a success story for ideas.
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In December last year, an investor shared her detailed income report and portfolio on r/Dividends, a discussion board for income investors on Reddit with 615,000 members. The investor, who said she is a 40-year-old mother of three young kids, stated her total portfolio worth was around $1.04 million.
The investor’s portfolio screenshots showed her earning $52,000 per year or $4,300 per month. About $7,000 of this was from interest, while the rest ($44,926 per year or $3,743 per month) came from dividend stocks.
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Answering a question about her goals and retirement plan, the investor said:
"I just turned 40 so my goal is next year. I have another million in other accounts like a robo-advising account which is mostly in U.S. market ETFs, a tiny bit of home equity and my spouse's retirement account. If I took the other million and just doubled all my positions in this account, I could technically get 100k per year in dividends and interest payments. I have 3 young kids so unfortunately I need a lot more income to retire so doing some trading and ramping up my income this year to meet some goals."
The investor was asked whether she only focuses on dividend stocks. Here is what she said:
"This is my income portfolio. I have some large U.S. ETFs in my other accounts that will give me some growth. This one is purely to replace my income in the next year or so. I focus any undervalued plays mostly."
During the discussion, the investor also shared how she accumulated wealth for investing. She sold design courses online.
"In my best year (2021) I made over $920,000 in profit selling courses in the design space. I became the number one design course on earth with over 500,000 students across some of the largest course platforms," she said.
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Let's look at some of the top stocks and ETFs in the portfolio which generated $3,700 per month in dividends.
Brookfield Property
With a dividend yield of about 8%, Brookfield Property Preferred Pref Class A BPYPM is a preferred stock issued by Brookfield Property Partners. The investor earning $3,700 per month in dividends said this was the biggest income generator in her portfolio, with an annual income of $12,761. Since there isn't much information about the company, the investor was asked more about BPYPM. Here is what she said:
"BAM is a solid large company and as a preferred instrument it gets preference in the debt payment stack if the company ever went bankrupt. I believe so much in this story that I put in 100,000+ into it. This is not investment advice so this is not type of recommendation just what I did. I am taking a risk here that (A) BAM will redeem the bond fund when it is able to, (B) They do not go bankrupt and (C) I have a long time horizon to collect dividends and not need to cash for anything."
The investor said her dad was an institutional money manager and gave her the idea about this stock.
JPMorgan Equity Premium Income ETF
The investor’s second-largest position was in the JPMorgan Equity Premium Income ETF JEPI, which earned $3,700 per month in dividends. She said the fund generated about $5,535 per year in income.
JEPI usually underperforms during bull markets but protects investors against huge losses during bear markets as most of its portfolio consists of large defensive equities like Trane Technologies PLC TT, Southern Co SO and Progressive Corp PGR among many others.
Realty Income
Realty Income Corp O brought in about $3,792 per year for the investor earning $3,700 per month in dividends. Investors were focusing on Realty Income Corp O recently after the company reported third-quarter results. The company raised the bottom end of its 2024 FFO guidance as the metric managed to edge past Wall Street’s estimate for the September quarter. The monthly dividend yield is 5% and the REIT has raised its dividends for 30 consecutive years.
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Starwood Property
Starwood Property Trust Inc. STWD is a Connecticut-based REIT that focuses on commercial mortgage loans and equity investments. It has a dividend yield of over 9%. Commercial and residential lending (69% of assets) as well as infrastructure lending and servicing make up a major chunk of the company's business.
Schwab U.S. Dividend Equity ETF
The investor earning $3,700 monthly in dividends had Schwab U.S. Dividend Equity ETF SCHD in her portfolio. The ETF tracks the Dow Jones U.S. Dividend 100 Index and provides exposure to some of the top dividend stocks trading in the U.S., including Home Depot, Coca-Cola, Verizon, Lockheed Martin, Pepsi and AbbVie, among others. Since SCHD's holdings are mostly conservative dividend payers, it's suitable for investors close to retirement looking for consistent dividend income.
Verizon Communications
With over a 6% yield and 18 consecutive years of dividend growth, Verizon Communications Inc. VZ is a popular dividend stock among income investors. The Redditor earning $3,700 in monthly dividends said VZ was part of her portfolio.
Pfizer
Pfizer Inc. PFE has a dividend yield of about 6% and has increased its payouts for 15 consecutive years. The pharma giant spends about $2.5 billion to $3 billion on research and development every quarter and has over 110 candidates in its pipeline.
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AT&T
AT&T Inc. T was another high-yield dividend stock in the investor’s portfolio, contributing to her monthly $3,700 income. AT&T offers a yield of over 5%. Over the past year, the stock has gained 40% in value. Last month, Citi analysts highlighted AT&T T as a positive catalyst ahead of the analyst meeting scheduled for Dec. 3, noting expectations for continued fiber expansion and a potential multiyear share repurchase program.
The iShares Preferred and Income Securities ETF
The iShares Preferred and Income Securities ETF PFF invests in preferred stocks and other income-generating securities. The fund pays monthly dividends and yields about 6%.
Dominion Energy
Virginia-based utilities company Dominion Energy Inc D was also part of the investor’s portfolio earning her $3,700 monthly. The stock has a dividend yield of about 4.5%. Shares of the natural gas and electricity company have gained about 28% over the past year.
Certificates of Deposit (CDs)
The investor earning a total of $4,300 per month from her $1.04 million portfolio said she held certificates of deposit (CDs) yielding an average interest rate of 5.4% per year, generating about $7,000 annually.
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