How much does one have to invest in to get a dividend of $500/mth? I hope to have advice from someone with more experience. Also, what is the best to invest in long term for dividends? - Seedly
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Anonymous

Asked on 02 Jun 2020

How much does one have to invest in to get a dividend of $500/mth? I hope to have advice from someone with more experience. Also, what is the best to invest in long term for dividends?

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Hi anon,

This depends on a number of factors, including leverage and the asset class you're investing in.

Let's break it down.

Looking at the numbers, $500/mth would be $6000/yr. On a 6% yield, that would mean a capital of $100000. On a 4% yield, $150000 would be required.

If you leverage, then let's say you put in $60000 and borrow another $60000 at 2% interest. If you invest in a 6% yield asset class, you would get $7200/yr and your interest would be $1200. After paying off the interest, you'll get $6000 nett, which would represent an effectiv yield of 10%. However, I do not recommend leverage if you are new to investing as the wrong movement of the price may lead to margin calls and require you to top up. The rest of my answer assumes no leverage.

Now, let's talk about what various asset classes can achieve based on normal market conditions.

  • REITs are generally higher yielding, at anywhere from 5% till as high as 7%. However as an asset class they are heavily leveraged (the gearing) and you have to also face volatility.

  • Blue chips give anywhere from 3% to 5%. You would want to look for companies with strong fundamentals and good free cash flow, and preferrably an economic moat as well.

  • ETFs aren't known for their dividends, but can achieve around the same payout as blue chips.

  • Unit Trusts can achieve 7% realistically (particularly those in high yield bonds), and many unit trusts deliver 4+% to 5%. There are bond funds, balanced funds and equity funds to consider.

  • Retail bonds aren't really that great as the selection is weak, at least on SGX.

For all those items mentioned above, they are all non-guaranteed. Thus, you must be able to take volatility. For the long run, as long as you are able to manage them, they should be suitable. However, in bad years such as 2020, companies may cut dividends, etc, which will impact your income stream. Also, in retirement years, you may wish to cut back on the exposure to equities and shift more to fixed income, especially if you do not think you want to spend too much of your golden years on managing your portfolio.

For guarantees in your dividend stream, you would have to explore annuities as well as lifetime income plans. Annuities work like CPF, with the caveat that you cannot get your income stream till your chosen retirement age, and the same goes for lifetime income plans, which will require some accumulation period before you see a payout. However, they are both bound by guarantees, so you will at least have some stability in your cash flow.

In the end, the best solution is probably a good mix of all asset classes. How much weight each asset class should take in your portfolio will be dependent on your own preferences, and I'd recommend that you take some time to evaluate. Speak with an advisor if you need a second opinion or input.

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You can consider REITs or annuities. If the quality of cash flow is important to you, you would need to take that into consideration when designing your dividend strategy. A good strategy would be diversifying your streams of income across different asset classes to ensure that the "dividend" risk is lowered. https://www.aaronleow.com/wealth-projection-calculator

You can use the above calculator for annuities and a guide to a projected income per month based on your current income.​​​

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