Many investors look forward to receiving a dividend payment each quarter from their dividend stocks. But what if you could receive a dividend payment every month instead? Even better, what if this dividend came with a 10% yield? If you like the sound of that, you're in luck, because you can receive $1,000 in dividend income each month by buying shares of Prospect Capital (PSEC 0.37%). Here's how.
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What is Prospect Capital?
While most dividend stocks pay out on a quarterly basis, some stocks pay out on a monthly basis instead. One of these is Prospect Capital, a business development corporation (BDC) that lends to and sometimes makes equity investments in mid-tier private companies -- the types that are generally too small to raise money in the public market but that require more capital than a local bank can provide. Because of the tax structure for BDCs, they pay out a large portion of their earnings in dividends. Prospect Capital has a diverse portfolio with 129 investments in 40 different industries, ranging from software to textiles and even aerospace.
How to receive $1,000 in monthly dividend payouts
Shares of Prospect Capital trade at about $7.25, with a monthly payout of $0.06 a share (which adds up to a $0.72 annual dividend). This equates to a yield of almost 10%, which is nearly six times the market average of about 1.7%. With this large yield and monthly payout schedule, an investor who wants $1,000 in passive income would need to buy 16,667 shares of Prospect Capital, which would cost a bit more than $120,000 at the current share price.
While high dividend yields can sometimes be a red flag that a company is going to struggle to afford its dividend payout, this isn't currently the case with Prospect Capital, whose annualized dividend of $0.72 is well covered by the company's $1.34 in earnings per share.
A word to the wise
One trade-off to note here is that while you will be receiving a handsome dividend payout every month, Prospect Capital and other similar stocks don't offer much in the way of capital appreciation. But that isn't really what these types of stocks are for. It should also be noted that Prospect Capital's gains have lagged the broader market over the last five years and posted a loss over the last decade, but at this lower valuation, the risk-reward profile is more compelling.
An additional word of caution is that while the idea of receiving $1,000 in monthly income from a single stock is indeed appealing, investors shouldn't put all of their eggs into one basket and allocate their entire portfolio toward Prospect Capital just to try to get to $1,000 a month. This would expose you to too much single-stock risk and you would also miss out on the opportunity to invest in many of the other great companies that are out there.
Thus, investors are better served by making Prospect Capital part of a diversified portfolio. I like the idea of buying Prospect Capital along with some dividend growth stocks that may not yield as much but that consistently raise their payouts over a long-term time frame. These stocks, such as Coca-Colaand Texas Instruments, offer more upside in terms of long-term capital appreciation. You can add in a few growth stocks as well to start creating a diversified portfolio.
Start with a single step
| Total Investment | Number of Shares | Monthly Dividend Payment |
|---|---|---|
| $719 | 100 | $6 |
| $3,595 | 500 | $30 |
| $7,190 | 1,000 | $60 |
| $35,950 | 5,000 | $300 |
| $71,900 | 10,000 | $600 |
| $107,850 | 15,000 | $900 |
| $119,833.28 | 16,666.66 | $1,000 |
Data source: Calculations by author.
Investing $120,000 anywhere, let alone into one stock, can understandably sound daunting, especially to investors just starting out. But you don't have to do it all at once -- the journey starts with a single step. You can start out by buying 100 shares of Prospect Capital for $725 right now, and begin receiving $6 in dividend payments every month. It may not sound like much in the beginning, but it gives you a nice return on your investment right away, and gets you started on building out a passive income machine.
You can reinvest these dividends, invest a bit more the next month, and before you know it, you'll be at $100 in dividend payments each month. Keep it up for a few more months, then quarters, and before you know it you'll be well on your way to hitting the $1,000 a month mark.
Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Texas Instruments. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
