Income

3 Strategies to Get $10,000 in Annual Dividend Income

IAt a time when inflation is making it harder to make ends meet, many people are looking to earn dividends from their investments to help cover their costs. This adds a different type of risk, as dividends are never guaranteed payments. Still, everyone must balance the risks with the potential rewards when it comes to their money.

With that in mind, three experienced investors share how they would consider building a portfolio to generate $10,000 in annual dividend income. One chose to be a yield freak by looking for high yield products at low prices like Digital Real Estate Trust (NYSE: DLR). Another chose the fast food titan McDonald’s (NYSE:MCD). The third suggested buying a basket of companies with a decent track record of rising dividends throughout the Vanguard Dividend Appreciation Index Fund (NYSEMKT:VIG). Read on to find out why and decide for yourself if any of them deserve a place in your portfolio.

Image source: Getty Images.

Be a yield freak

Eric Volkman (buy cheap high yield products): Growth and technology stocks have really taken a beating lately. And while these sectors aren’t teeming with dividend-paying stocks, there’s enough to choose from if you know where to look.

So I would suggest combing through these names to find the handle that both reliably pays dividends and has traded lower in the current bearish environment. After all, when the price of a dividend-paying stock goes down, its yield goes up.

A personal favorite that I have had in my own portfolio for some time is Digital Realty Trust. It is a real estate investment trust (REIT) that operates a growing network of data centers, that is, facilities with the necessary hardware to run sprawling computer server operations.

The company’s list of tenants reads like a who’s who of modern American commerce: International Business Machinery and AT&T are two of many tenants. The digital world continues to expand, and the REIT expands with it. The company increases its dividend each year, to the point where, combined with a weakened share price, it now yields a solid 3.7%.

Taiwanese Semiconductor Specialized Service Company ASE Technology Holding (NYSE:ASX) is a similar way to invest in a good niche in the tech industry.

The company’s daily bread is the assembly and testing of semiconductors; with this expansion of the digital space, demand for these services is expected to remain strong. Despite recent supply disruptions, ASE’s revenue has generally seen robust growth over the years, and is reliably profitable. It also satisfies its investors with an annual dividend that yields a very attractive 4.6% these days.

Another tech sold with rising yield is the telecom monster Verizon Communications (NYSE:VZ). Costs are high, but it has a massive, “sticky” customer base, and is aggressively updating its network with 5G technology. Its yield is a mighty 5.2%. Meanwhile, the mainstay of network equipment Cisco Systems and technical glass specialist Corning both offer returns around the 3% mark.

I could go on, but you get the idea. There are plenty of bargains in this bin, and the best ones should continue to put money in shareholders’ pockets for years to come.

McDonald’s steadily increases its dividend

Parkev Tatevosian (McDonald’s): One strategy for creating a robust income stream is to buy a stock that can increase the dividend payout over time. One of my favorite dividend stocks right now is McDonald’s.

Golden Arches rebounded incredibly well in 2021 after the pandemic devastated its business in 2020. Indeed, revenue rose 20% in 2021 after falling 10% in 2020. Investments in its digital channel are fueling the rebound impressive from McDonald’s.

People can now order from the McDonald’s app and have their meals delivered to their doorstep or even to their car in a McDonald’s parking lot. This feature adds convenience to consumers and removes staff pressure from McDonald’s. This undoubtedly helped McDonald’s report its highest earnings per share in the last decade in 2021 of $10.04.

MCD Payout Ratio Chart

MCD Payout Ratio Data by YCharts

Profits are key when considering investing in a dividend-paying stock. Without sufficient revenue, a company will have to dip into savings or borrow funds to pay a dividend. Income investors can take comfort in knowing that McDonald’s dividend payout ratio (the percentage of profits it pays out in dividends) was 56% most recently. This leaves McDonald’s room to pay and increase its dividend payout. From 2012 to 2021, McDonald’s increased its dividend payment from $2.87 per share to $5.25.

Fortunately, new digital capabilities could support McDonald’s strong earnings for several years. Every McDonald’s restaurant can now reach a wider audience on more occasions. Investors looking to generate a large stream of recurring income can benefit from McDonald’s earnings growth and dividend payouts.

Consider a basket of companies with a history of increasing dividends

Chuck Saletta (Vanguard Dividend Appreciation Index Fund): One of the biggest challenges with dividend-focused investing is the fact that dividends are never guaranteed payouts. For these dividends to be paid, there generally must be income behind them. While even strong companies that focus on the essentials can see their profits slashed by the ravages of inflation, can dividend cuts be far behind?

In a world that is much more uncertain than usual, it might be wise to consider a basket dividend-oriented approach to investing. After all, if even the strongest companies can stumble, then what chance do ordinary investors have of picking the right handful of companies whose payouts will survive whatever tough times we may face?

This is where the Vanguard Dividend Appreciation Index Fund comes in. The fund follows the S&P US Dividend Growers Index. This index focuses on companies with at least 10 years of experience increasing their dividends, but excludes the most productive actions that would otherwise qualify. It’s a great combination of factors that could provide the secret sauce to get your wallet through the chaos.

Focusing on companies with at least 10 years of experience increasing their dividends, the fund buys only stocks with a proven track record of rewarding their owners. This is important because sustaining a growing dividend over the long term requires a particular level of structural and operational commitment. Companies with a long track record on this front will likely try to protect their dividends if possible.

Moreover, by excluding best performing stocks that would otherwise qualify, the fund has some protection against yield traps. When a company’s dividend is clearly risky, its shares often fall as investors look to get out before the announcement of the decline. This behavior tends to lead to higher reported returns for cut-risk stocks. Excluding these high-yielding companies may reduce its exposure to this particular risk.

Put it all together, and the Vanguard Dividend Appreciation Index Fund is well worth considering in your quest for $10,000 in annual dividend income.

Different paths to the same goal

Today’s market and economy make investment income an extremely important goal for many investors. Beware and balance the risks of investing for income, and you might find a great way to achieve your goal. Any one of these three approaches – or a combination of them – is worth considering when heading towards a $10,000 annual dividend income.

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Chuck Saletta holds positions at Cisco Systems. Eric Volkman holds positions with Digital Realty Trust. Parkev Tatevosian has no position in the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems, Digital Realty Trust and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Corning and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.