How To Get Monthly Dividends From Blue Chips And Retire Abroad

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 |  Includes: ADP, AT, BND, CL, ERF, KO, MCD, MMM, O, PCY, PGH, SJR, T
by: Uncle Scrooge

Many investors, especially retirees, rely on dividends to supplement their monthly salary or their social security pension; investing for income is a sound strategy as long as you buy shares in companies that pay dependable dividends that increase over time. Most dividends stocks pay you only once every three months and some, usually ADRs, pay you only once or twice a year, but it would be great if your dividends helped you pay your rent, your mortgage or your bills at the end of each month; that is why some investors choose to buy stocks of companies that pay dividends monthly. Unfortunately there are very few of them and you won't find any in the S&P 500 index because all of them are mid caps or small caps. While small caps fit perfectly in the portfolio of a young, risk-prone growth investor, they may be too volatile for someone looking for a safe and stable dividend flow. The only U.S. listed companies I could find that pay monthly dividends with yields higher than 4% and a market cap of at least $1 Bil. are:

Realty Income (NYSE:O) - This REIT is the only public firm whose mission in the past 42 years has been paying dependable monthly dividends to investors; the market cap is $4.9 Bil. and the yield is 4.75%.

Shaw Communications Inc. (NYSE:SJR) - A diversified Canadian communications company engaged in the business of providing broadband cable television and telecommunications services.
The market cap is $8.8 Bil and the yield is 4.7%. It has paid dividends uninterruptedly since it went public in 1998.

Pengrowth Energy Corp (NYSE:PGH) - This Canadian energy company has a market cap of $3.64 Bil and the dividend yield is 8.2% - it has been paying dividends since 2003.

Atlantic Power Corporation (NYSE:AT) - This firm operates as a power generation and infrastructure company with a diversified portfolio of assets in the United States and Canada. The market cap is $1.67 Bil and the dividend yield is 8%. It pays dividends since December 2009, increasing it twice.

Enerplus Corp (NYSE:ERF) - Another Canadian energy exploration company - it has a market cap of $4.38 Bil and the yield is 9%.

It is evident that an investor seeking monthly dividends cannot build a portfolio with only these five stocks because it would go against the sound principle of diversification that states that a portfolio containing many different assets carries lower risk than a portfolio with only a few. There are probably other royalty trusts and pipeline companies that send you monthly checks, but this won't help you diversify a portfolio that is already overexposed to the energy sector.

A good idea would be adding to the mix a monthly dividend CEF or ETF such as the PowerShares Emerging Markets Sovereign Debt Fund (NYSEARCA:PCY) that invests in emerging markets' U.S. dollar-denominated government bonds. The problem with these funds is that you have no say over the fund's holdings, dividend increases are not guaranteed (actually, sometimes the dividend decreases - PCY for example paid 14c as at October 2009, 12c as at October 2010 and 11c as at October 2011) and the yield you get is in fact lower because commissions to the fund manager must be subtracted.

If you are a little creative, though, you can build a nice portfolio that gets you monthly dividends paid by staid large cap companies and you can even expect these dividends to grow over time. How? Simple. Just keep at hand the list of the components of the S&P 500 Dividend Aristocrats Index; it measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years. From this list then carefully select a few stocks that offer good diversification among sectors, with a current satisfactory yield, and that pay dividends at different intervals, so that you have all twelve months covered.

For example, say you want to invest $100,000 adopting this strategy. A good example portfolio is the following:

Ticker Description Investment Sector Yield Dividend Frequency
BND Total Bond ETF $ 20,000 Financials 3.00% Every
Month
O Realty Income $ 10,000 Reits 4.75% Every
Month
ERF Enerplus Corp. $ 10,000 Energy 9.00% Every
Month
T AT & T $ 10,000 Telecoms 5.80% Jan - Apr -
Jul -Oct
CL Colgate Palmolive $ 10,000 Cons.
Goods
2.50% Jan - Apr -
Jul -Oct
MMM 3M Company $ 10,000 Conglomerate 2.70% Feb- May -
Aug - Nov
MCD McDonald's Corp. $ 10,000 Restaurants 2.80% Feb- May -
Aug - Nov
KO The Coca Cola Company $ 10,000 Beverages 2.70% Mar - Jun -
Sep - Dec
ADP Automatic Data Proc. $ 10,000 Business
Services
2.90 Mar - Jun -
Sep - Dec
Click to enlarge

With just nine securities you can build a well diversified portfolio that, on an investment of $100,000 total, pays you a dependable dividend of $326 each month (on average) or $3,915 for the year. Remember that six out of nine companies in the portfolio (ADP, KO, MCD, MMM, CL and T) are Dividend Aristocrats, and have increased their dividend each year since at least 1986; O has paid dividends each month in the last 40 years increasing them 64 times; ERF and BND since 2000 and 2007 respectively with variable payouts. If we assume the portfolio will yield average annual dividend increases of 5%, in the next years you would get:

Year Total Dividends Average Monthly Dividend
2012 $ 3,915 $ 326
2013 $ 4,111 $ 343
2014 $ 4,316 $ 360
2015 $ 4,532 $ 378
2016 $ 4,760 $ 397
2017 $ 5,000 $ 417
2018 $ 5,250 $ 437
2019 $ 5,512 $ 460
2020 $ 5,788 $ 482
2021 $ 6,078 $ 506
2022 $ 6,381 $ 532
2023 $ 6,700 $ 558
2024 $ 7,035 $ 586
2025 $ 7,387 $ 616
Click to enlarge

This may look a little far-fetched, but think about it...if you are now 45 and have as little as $100,000 to invest, this simple portfolio - by the time you are 60 - allows you to retire and live well abroad just on dividend income, without ever touching your principal and without ever adding another dollar to your investment. If you instead reinvest the dividends each year until 2025 (many companies offer a DRIP - Dividend Reinvestment Plan) , you get to a final amount of more than $180,000 in invested capital that nets you almost $1,000 each month, a meaningful sum that helps you live more comfortably even in the U.S.

Disclosure: I am long KO.