Should I take out a loan of $50,000 to finance a portfolio with dividend-producing equities?

If I take out a $50,000 loan, and buy dividend-focused ETFs and stocks with a return of 4% that pay monthly rather (than quarterly or annually), is it true that I will receive $2,000 every month? The amount I would be paying every month would be much less than $2,000. 

Debt, Asset Allocation, ETFs, Stocks
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February 2018

Dividend-paying stocks are a great part of any investment allocation. Stock returns are comprised of two parts typically: capital appreciation (buying low and selling high) and dividends (a payout to stock owners).

Research has shown that stocks that pay dividends tend to perform better than those that don't pay dividends. Other research has also shown that stocks paying a dividend that increases consistently over time do better than even those dividend stocks that pay out a static (or unchanging) dividend.

There are great services out there that may help you select high-quality dividend-paying stocks. Generally, I prefer to select from a list of stocks that have consistently paid out an increasing dividend for a minimum of twenty years. These are referred to as "Dividend Aristocrats". An even more exclusive list are those companies which have paid out an increasing dividend for at least fifty years. These are referred to as "Dividend Kings".  

Either of these approaches may be accessed through mututal funds or even ETFs if you don't want to bother with indivdual stock selection.

So, I applaud you for thinking of adding dividend stocks to your investment mix.

Unfortunately, though, you are confused about how monthly dividend stocks may work. While the dividend yield may be 4%, that is an annuallized rate. You as an investor will be receiving a payout of the dividend each month. So, you'll only be receiving one-twelth of the annual yield each month not receiving 4% each month. In your example, an investment of $50,000 in a selection of stocks or ETFs paying a yield of 4% will yield $2,000 per year or $167 per month.

Monthly pay-outs are more attractive to investors so that the cash inflow can match cash outflow needs. But in order to generate $2,000 per month in dividends, you'd need to have a portfolio of about $600,000.

And while a dividend oriented portfolio tends to exhibit lower volatility (i.e. risk) over time, it will still be riskier than holding cash to cover your day-to-day or month-to-month fixed overhead expenses. So, you'd likely need to have a total portfolio that was more than $600,000 when including your cash reserves.

February 2018
February 2018
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February 2018