How to Invest for a Monthly Income

How to Invest for a Monthly Income
Senior couple reviewing documents with an investment advisor

Step 1

Determine how much monthly income you need to generate from your investments. Add up all your sources of income, including pensions, Social Security and other guaranteed payments. Then compare that figure to the amount of money you need to live comfortably.

Step 2

Calculate the percentage you need to generate from your portfolio to reach your monthly income goals. For instance, if you have a portfolio of $100,000 and you need to generate $200 a month, you would need an annual return of 2.4 percent to meet that goal. To calculate the interest rate you need, first annualize the $200 a month figure by multiplying it by 12 to get $2,400. Then divide the $2,400 by $100,000. That gives you a figure of 0.024. Multiply that figure by 100 to put it in percentage terms. That gives you a figure of 2.4.

Step 3

Contact your bank and ask about the CD rates it has available. Certificates of deposit are excellent vehicles for generating monthly income, since they are insured by the FDIC up to $250,000. That means there is no risk to your principal, and you can collect the interest on a monthly basis if you wish.

Step 4

Look for mutual funds made up of dividend-paying stocks if you need to generate more income than CDs will provide. Stocks do carry more risk, but sticking to blue chip companies and using a quality mutual fund can reduce the risk somewhat. A mutual fund holds many different stocks, in this case all stocks that pay dividends. The dividends generated by the fund are passed on to the account holders in the form of monthly payments.

Contact several mutual fund companies and ask for a prospectus on their dividend stock funds. Review the prospectus carefully, noting the performance of the fund, the current dividend yield and the costs associated with the fund. The prospectus lists important information about the fund, including the dividend yield (the amount the fund generates) as well as the total return it has achieved. The total return reflects both the dividend yield and any appreciation in the price of the stocks in the fund.

Step 5

Contact those same mutual fund companies and get prospectuses for their bond funds as well. Bond funds can produce a monthly income, but the exact yield will fluctuate. The value of the shares themselves can fluctuate as well, especially when interest rates rise or fall. It is important to look at the average maturity of any bond fund you are considering. The shorter the average maturity, the less risk to your principal if interest rates rise. The average maturity is derived by adding up the maturities of each bond in the fund and dividing it by the number of bonds the fund holds. Each bond has its own maturity, e.g, two years, five years, 10 years.