For some, making the transition from work with its regular, periodic, equal paycheck to retirement and an irregular payment stream is difficult and uncomfortable. Many retirees wish they could count on the same regularity and have a predictable stream of income just as they did when they worked.
Those who are living solely on Social Security payments already have this problem solved. Many of those who were fortunate enough to have put some money aside have a problem to deal with: how to turn a sum of money into a reliable, safe, dependable, essentially equal quarterly or monthly stream of income.
Dividend payers with long histories of payouts, and payouts that regularly increase, can be counted on to keep us ahead of inflation. Fixed income instruments such as bonds, CDs, annuities, or cash do not do the trick in this historically low interest rate environment. Inflation constantly eats away at our purchasing power, so we need a better alternative: Equal, reliable dividend payouts that increase over time.
In one of my earlier articles, Monetize Your Portfolio for Monthly Income, I discussed the general concept of converting your assets into high, dividend growing stocks to achieve monthly income. I promised to illustrate in my next installment how one could turn such an income stream into an essentially equal quarterly or monthly distribution in order to make regular bill paying a snap, and take away the anxiety of having lost the convenience of receiving a regular paycheck in your working life.
And away we go:
To derive equal quarterly payouts from a portfolio, with dollar amounts equally weighted in each stock, buy several different stocks that stagger their payouts over the year. To illustrate, I will use three companies:
American Capital Agency Corp. (NASDAQ:AGNC) is a mortgage real estate investment trust that pays a substantial 15.62% dividend that offers the possibility of a rising dividend if rate spreads continue to increase as they have in the last few weeks.
A master limited partnership, Calumet Specialty Products Partners LP (NASDAQ:CLMT) has been steadily increasing its dividend for the past 4 years. It currently yields 6.82% and looks to continue increasing the dividend as the market for its specialty oils, lubricants and various chemicals appears to be strengthening with the recovery.
Ares Capital Corporation (NASDAQ:ARCC) is a specialty finance, management investment company. It provides a fairly steady 8.45% yield. In the past 9 years, it has made 3 small cuts to its dividend among its many increases. Again, with the economy improving, and low interest rates being the fuel of its financing muscle, Ares should continue on its growth path.
Table 1, Portfolio #1
Quarterly payout months
Cost per share $
Annual Div. p/share
Total annual dividends on 3 shares
Average annual yield
Equal Quarterly Dividend Payments
Notice from the table above, you would receive a dividend from AGNC in January, a dividend from CLMT in February and a dividend from ARCC in March of every year. Starting in April, the dividend payments repeat from each of the 3 companies, and continue in this pattern throughout each year. In this way, the dividend payments have been spread out in a predictable way so that the income stream is knowable and equalized.
Assuming a total portfolio investment of $100,000, this sample portfolio, with equal dollar amounts of $33,333.00 invested in each name, will yield 10.3%, or $10,300.
$10,300/ 12 months= $857.00 per month on average.
At today's prices (March 18, 2013), you would have bought $33,333 of each stock:
1042 shares of AGNC@$31.99 yields $1302.50 in dividends each quarter
875 shares of CLMT@$38.10 yields $568.75 in dividends each quarter
1853 shares of ARCC@$17.99 yields $704.14 in dividends each quarter
= $2573.39 each quarter = $858.46 average per month in dividends.
Equal Monthly Dividend Payments
If equal monthly payouts are desired, simply divide the desired quarterly dividend amount of this portfolio, $858.46, by the quarterly payout of each company. This will indicate how many shares to buy of each name to always receive essentially the same dividend payout from the portfolio each month of $858.46.
Table 2, Portfolio #2
Total Monthly Dividends Desired
# of Shares
As can be seen from Table 2, the total monthly dividends desired, divided by the quarterly dividend payment gives us the amount of shares we need to buy of each name.
In this case, for the convenience of smoothing your monthly payments to equal payouts, there is a price to pay. Your total cost to buy this portfolio rises to $112,947.
Yearly dollar income will be the same $10,300, but since the cost of the second portfolio is higher, your current yield will be lower, at 9.11%.
Equal quarterly or equal monthly distributions; that is the question.
So, it comes down to a choice; invest less for a higher yield with equal quarterly payouts, or invest more for a lower yield, but receive equal monthly payments.
If you're comfortable budgeting your bills on a quarterly basis, go with the portfolio behind door #1 and be rewarded with a higher yield on your investment. If you place a higher value on receiving equal payouts on a monthly basis to ease the payment of your recurring monthly bills, go with the portfolio behind door #2.
The beauty is, you are basically buying an income stream and you have complete control and choice as to how to achieve the resulting payment.
The above samples included just 3 stocks to illustrate the strategy. Of course, to achieve best results, we would buy 30-40 names to diversify sectors and mitigate risks to capital gains and possible reductions in dividends inherent in any portfolio.
Start rebalancing today to obtain the kind of dividend income stream that makes it easy on your budget. Equal quarterly, or equal monthly distributions; the choice is yours!
Disclosure: I am long AGNC, CLMT, ARCC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.