How to Generate $1,000 in Passive Income With This Stock

Dividends are the investor’s multifunctional pocket tool. You can use them in a variety of ways, including as a source of income to pay your bills, or you can increase your investment returns by reinvesting them in more shares. It takes patience and dedication for a dividend strategy to get the ball rolling, but once it gets going, the results can be impressive.

telecom giant AT&T (T -0.54%) is a great dividend stock. You’ll struggle to find yields higher than the 7% it offers at today’s share price. And it’s not hard to generate $1,000 a year in passive income by investing in it.

As an initial investment

There are several ways to get to this goal. Of course, a larger initial investment would be easiest. AT&T’s current dividend is paid quarterly. If you hold the stock for four quarters, you’ll earn $1.11 per share overall. To generate $1,000 in dividends in the first year, you would have to buy 901 shares.

2022 was broadly brutal for the market, and AT&T took a hit. It’s down more than 25% over the past 12 months to less than $16 a share, its lowest price in more than a decade. But if passive income generation is your primary focus, that could be a good thing. A lower stock price will result in a higher dividend yield because companies will quote the payout amount and the stock price at which you bought your shares will determine how much yield you get. Of course, a company needs to be financially stable enough to consistently pay its dividend. Sometimes yields go up because the market doesn’t think a payout is certain and bids shares down accordingly.

At today’s prices, investing $14,416 will give you enough shares to generate $1,000 in passive income each year. You could also see payout increases from AT&T, although investors should know that the telecom giant won’t impress anyone with its earnings growth. Analysts expect earnings per share to grow at an average of 3% per year for the next three to five years. You’re probably buying the stock for the dividend. Understandably, $14,416 isn’t pocket money, especially if you’re buying AT&T as part of a diversified portfolio (which is the right way to invest). But for retirees or older investors, that amount might be doable.

The snowball method

Don’t assume that dividend investing can’t work for you when you start out with smaller amounts of money, especially when you’re young. It just means you have more time for your investments to experience compound growth and get more work done for you. You can still get that $1,000 a year in passive income if you don’t have $14,000 left over to work that way. It will just take some time and commitment.

For example, let’s say you buy 100 shares of AT&T. That would cost you just under $1,600 at today’s stock price. Expect AT&T’s earnings and dividend payouts to grow at an average annual rate of 3%. If you reinvest all of your dividends but otherwise don’t add another penny to your original investment, your position will grow to one that is yielding $1,000 in annual dividends after 16 years. Too long? Invest another $600 ($50 a month) in AT&T each year and you’ll cut that time down to nine years.

Various factors affect this. A higher share price lowers the dividend yield, which means you get less return on your investment. The point, however, is that a small investment can yield significant results if you give it enough time.

Why You Can Trust This Fabulous Dividend Yield

Making AT&T or other dividend stocks part of a diversified long-term portfolio means you can have confidence in its payouts. For this reason, it’s a good idea to review a company’s dividend payout ratio to see how well it can afford those payouts. In AT&T’s case, dividends eat up 67% of the company’s profits. Management cut the dividend earlier this year as it frees up cash and picks up the Time Warner spinoff.

T-Payout Ratio Chart

T-Payout Ratio data from YCharts

The payout ratio is now more manageable and AT&T’s core business has performed well over the past few quarters, so investors should be confident that dividend checks will keep coming. But if that ratio ever climbs above 80%, investors will have cause for concern. Regardless, buying and holding a bunch of strong dividend payers like AT&T can eventually turn your portfolio into a passive income juggernaut.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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