A wealth coaching client recently asked “How much do I need to invest to make $10,000 a month in income?” So, we explored several options based on her net worth and chosen level of risk.
To see how much you need to invest to make $10,000 in monthly income, or any other amount, simply multiply the desired monthly income by 12, and then divide the result by the expected investment yield.
For example, $10,000 monthly income is $120,000 income a year. If the expected yield is 6%, you need to invest $2,000,000 to make $10,000 a month in investment income.
As you can see, the amount you need to invest to generate a desired amount of income depends on one major variable: investment yield.
This means the more you increase investment yield the less you need to save to retire.
Call me a nerd, but I’m excited to write this post because this is the core principle at Retire Certain at a time when investors feel victim to years of low interest rates, low stock yields and possibly not having saved enough money for retirement.
In this post, we’ll explore different ways to invest to make $10,000 a month from investment income, first with stocks and bonds, and then with alternative income sources.
I’ve invested in every strategy listed here. While I have an AFC credential, I write mostly from the school of hard knocks at Retire Certain after almost 40 years of investing both DIY and with financial advisors.
(You can also scroll down to watch my video on how much you need to invest to make $10,000 a month.)
Income Investing and Risk
Since it’s easy to get caught up in the lure of high investment income, I’ll begin with this important caveat.
Every investment is risky. When you invest in anything, there is a chance the value of that investment will decrease.
When it feels like investments are less risky due to years of rising stocks, it’s more important than ever to lower risk.
This is why investing should always begin with clarifying how much risk you’re willing to take. Then make investments from that decision.
While the focus of this post is on investment income, it’s important to remember the asset you’re using to generate income is almost always subject to declining, often substantially, in value.
The good news is that investors that choose to not sell at a loss (wait out the declines) won’t have a realized loss.
But this leads to a drop in net worth until the investments eventually increase back to their earlier value, assuming they will.
Investment Income Continues
Before you think I’ve taken all the fun out of getting that $10,000 a month income from investing, here’s a positive point.
The great thing about income investing is that the income usually keeps coming even if the investment generating it decreases in value.
For investors with a primary goal of income, it may not matter to them if the assets generating the income drop in value.
But I feel I must begin with this “risk reality” in order to be a responsible financial writer.
Again, always have an overall wealth plan defining your investment goals and acceptable loss based on your age and other risk factors before investing in anything.
After you have clarified how much risk you want to accept, keep reading to see how much you need to invest to make $10,000 a month income.
Investment Income Vs Investment Returns
Many investors confuse investment income with capital gains and total investment returns. Before we explore how much to invest for $10,000 income, let’s get really clear about exactly what investment income is.
Investment income comes in the form of dividends, interest and other payouts you get when you own investments. Examples are stock dividends, real estate rent, income from covered calls, and MLP and REIT distributions.
Capital gains happen when an investment increases in value after you buy it.
For example if you buy an investment for $5,000 and it increases to $10,000 you have a $ 5,000 capital gain.
Click here to read my post How Much Money Do You Need to Live Off Investments where I explain this more.
The third term commonly used for measuring investment performance is “investment return” or ROI, return on investment,
Investment returns include any amount an investment has increased (or decreased) in value plus dividends plus compounding of both dividends and capital gains when they are reinvested.
INVESTMENT RETURN = GAIN + DIVIDENDS + COMPOUNDING
To clarify, in this post, we are looking at ways to get income from investments of $10,000 a month. This does not include capital gains from investing.
Note that taxes and fees are not factored into the numbers in this post since they vary greatly but they will likely offset investment income and should be considered in your income planning.
Click here to read How Much Money Do You Need to Retire where I address how to handle extraordinary expenses such as taxes.
Now that we have clarified investment income vs capital gains vs investment return, and addressed investment risk, let’s look more at how much investors need to invest to make $10,000 a month in income alone.
How Much Do You Need to Invest to Make $10,000 a Month in Income?
Let’s take the example from the first of this post and look at the 2 main elements
- How much you need to invest to make $10,000 a month
- How much yield you need to earn on your investments
We saw that by investing $ 2,000,000 in investments that pay 6% income a month, you will make $10,000 a month in income.
And the amount you need to save is derived from the yield.
This means that simply by increasing the investment yield you will need less money saved to generate $10,000 a month income.
So, let’s look at investments with higher yields.
High Dividend Stocks
If you’re invested in stocks, a 2% yield is probably about what you are getting in yield unless you are invested in stocks specifically with a higher dividend focus.
In this case, while some services provide stock selection yielding around 9%, dividend yield more commonly ranges between 2.50% to 4% dividend yield, for most dividend focused funds.
So let’s see how much you need to invest to make $10,000 a month if your investments are optimistically yielding 3.5% in “high income funds” or stocks.
$10,000 x 12 months = $120,000 income a year
$120,000/.035 = $3,428,571
Holy Moly! What a difference the yield makes for how much money you need to retire. We went from $6,000,000 to $2,000,000 needed to make $10,000 a month just by changing the yield from 6% to 3.5%.
The key then is to increase the yield without increasing risk to an unacceptable number.
This equation is all too familiar to me: It’s the same math I did in the mid-2000s which led us to begin investing in alternative investments and creating multiple income streams from real estate, oil, and stocks.
Plus, we started a few very small online businesses because they have little risk and provide great diversified income. We didn’t know that they would work but since there was almost zero risk we went for it.
After 15 years of learning and doing, I wrote an ebook with our top 9 strategies to help others think beyond just the S&P 500 dividend yield of only around 2%. Click here to get it.
Next, let’s look at some alternative investments with higher yields than the S&P 500 or stock income funds.
How Much You Need to Invest to Make $10,000 a Month from Alternative Investments
There are several ways to increase investment yield from what I call “slightly alternative investments”. These securities are all highly regulated and are bought and sold just like stocks.
Higher Dividend Stocks
A diversified portfolio of dividend paying stocks in the 5% range is very doable these days, as addressed earlier. Most stock income funds yield in the 3.5% range, but higher yields from decent quality stocks can be found.
But how do you invest in high dividend stocks without spending hours of analysis finding them?
There are many services that provide analysis and recommendations for high yielding stocks. There are also wealth managers and financial advisors who specialize in high dividend stocks.
Again, income focused stock mutual funds and ETF’s (Exchange Traded Funds) also exist. But most of them have lower dividend yields much lower than 5%.
Yet funds provide instant diversification.
Since stocks with high dividends can be riskier than most blue chip stocks, diversification is an excellent way to lower risk.
Just be cautious of fees and taxes eating into the yield. This means that dividend investing through funds has both a lower yield and also fees that will run more than most high income stock recommendation subscriptions.
Closed End Funds
There is a less known class of funds called closed end funds. These funds usually have higher payouts than more common “open end” mutual funds.
Closed end funds often pay out income in the 9% range.
Several negatives that many people don’t realize is that closed end funds often:
- Pay out capital gains, not just dividends
- Have high fees
- Sell at a premium (or discount) to the value of the stocks (or other securities) in the fund
- Pay out investor’s capital when they don’t have the dividends or capital gains to make the expected yield
This isn’t to say all closed end funds are bad. I invest in closed end funds from time to time after doing the research.
In fact, it warms my heart to say that my dad taught me these things about CEF’s (closed end funds) in the early 1990’s.
Just do your research. The items listed above are all easy to confirm.
Buy Stocks After Bear Markets
Buying stocks after bear markets is more of a strategy than an alternative investment but it’s important to mention because it is a great, yet often overlooked way to increase income from quality stocks.
As addressed earlier, the S&P 500 was paying 3.6% after the last bear market in March 2009. This is 82% higher than the S&P 500 dividend yield is as of this writing.
Here’s a video on How Much You Need to Invest to Make $10,000 a Month
The S&P 500 yield is an average for all the stocks that make up the index. This means that some stocks in the S&P 500 were paying much less and other stocks were paying much more than the 3.6% average yield.
We can assume high dividend stocks similar to those paying 5% today would have been paying more than that in March 2009 assuming the same increase from the S&P yield to the currently available yield of higher dividend stocks calculated as follows:
3.6% March 2009 yield – 2% approximate current yield = 1.6% (Increase in S&P yield March 2009 vs approximate yield average recent past 10 years)
This is an 80% increase in yield over March 2009. It seems very reasonable that yields for stocks that are comparable to those paying in the 5% range today, dividends could increase to 7% after a bear market since an 80% increase over 5% is 9%.
Let’s be conservative and assume you will be able to get an 7% yield (instead of 9%) from decent quality high dividend stocks after the next bear market.
All this to demonstrate that simply buying high yield quality stocks after a bear market will probably result in a significantly higher yield.
One of the keys to investing in stocks after a bear market is having the cash to invest. Click here to read my post What Percentage of Cash Should Be in My Portfolio for more about this.
While it feels scary to invest in stocks after a bear market it is actually less risky since you’re getting the same companies that cost a lot more before a bear market. This is logical.
And math can confirm that logic since you can look at PE ratio and other factors to evaluate stock investments (funds or individual stocks) before buying them.
Of course, bear markets and recessions tend to happen around the same time so a lot of companies experience lower profits and need to cut dividends or worse. Investors have to be especially cautious, but then, I think this is always the case.
Remember, since the yield equation is based on investment cost, investors naturally get a higher yield when quality securities are bought for lower valuations, which occur after bear markets.
Dividend Aristocrats for Income from Stocks
A lot of dividend investors are excited about the Dividend Aristocrats. As of this writing, 17 of these stocks have dividend yields of less than 1%.
NOBL, the ETF which represents the Dividend Aristocrats yields only a little around 1.5% as of this writing. This is in line with inflation and the S&P 500 dividend yield. (1.)
While the name implies the focus of the Dividend Aristocrats is income, these stocks are considered high quality because they are known for their growth as evidenced by increasing their dividend payouts to investors.
Preferred Stocks for $10,000 of Monthly Income
Preferred stocks are another popular income investment among financial advisors and more proactive investors.
Preferred stocks are like a combo of stocks and bonds. They are like stocks because they can increase in value. But they are like bonds because they pay out fixed dividends.
One good thing about preferred stocks is that they are a little less risky in the event of a company needing to cut it’s dividend because the common shareholders get cut first.
Plus, in the event of liquidation, preferred shareholders get their equity out before common stock investors but after bond holders.
The preferred stock funds yield between 5 and 6% as of this writing. This may have changed by the time you read this but you can see how preferred stocks pay relative to the much lower S&P 500 stocks.
Bonds to Generate $10,000 Monthly Income
There are many different kinds of bonds. The amount of income investors make from bonds depends on the type of bond.
Riskier high yield bonds pay much more than U. S. Treasury bonds. And long term bonds pay more than shorter term bonds, for example.
Intermediate 10 year Treasury notes as of this writing pay only about 2% interest, for example, similar to an S%P 500 index fund.
This means it would take a lot of investment capital to make $10,000 in monthly income.
Covered Calls for Monthly Income
Selling covered calls on stocks you own is another way to significantly increase stock yields.
Covered calls are a bull market strategy.
But this simple conservative option income strategy can make a lot of sense for an investor who owns stocks already anyway and wants income from stocks.
Covered calls can work very well for stock investors who want income more than so than capital gains since they already have stock market risk anyway.
Covered calls capitalize on the time decay that naturally occurs after the call option is sold by stock investors.
The first month I sold covered calls I got a 7% return (call income and capital gains) because I was selling covered calls in a strong bull market on high growth stocks with high option premiums. I was hooked.
Many covered call strategies still yield over 3% a month.
But now I like to use a more conservative estimate of 1 to 1.5% a month covered call income with a lower risk strategy and less work. This equates to 12% to 18% return a year.
Covered calls can be structured so they generate more income than capital gains, or vise versa.
For our estimate, let’s use 15% yield a year to see how much you need to invest to make $10,000 a month from a covered call income strategy.
$120,000/.15= $800,000 investment capital
This is so important that I want to repeat it again because covered call courses often don’t teach this: simple covered call strategies work best in sideways or bull markets.
This is because with covered calls, you must own the stocks you sell the call options against. And those stocks are subject to stock market (and other) risk.
But here’s the thing: covered calls are no riskier than simply owning the stock. In fact, they are slightly less risky since your stock cost is reduced each time you sell a call against the stock.
And covered calls can generate very good “mostly” passive income. Click here to read my related post Is Passive Income Real?
Covered Calls on Dividend Stocks and ETFs
You can sell covered calls on dividend paying stocks and ETF’s.
This allows you to use the same capital to increase investment income twice.
Estimating annual covered call income of 15% plus another 4% dividend income the total annual income from the same investment could be 19%. As you’ll see below, dividend income from MLP ETFs can be much higher, in the 9% range.
But, for example, AT&T yields over 6% as of this writing and is even in the quality Dividend Aristocrats.
And higher yielding stocks tend to have higher option premiums since they are perceived as higher risk. This means that the covered call income will be higher on high dividend stocks since you are keeping the call option premium.
So, 19% seems like a reasonable income estimate based on the math adding the covered call income of 15% to the 4% dividend yield.
Let’s see how much capital you need to invest to make $10,000 a month with covered calls on dividend stocks.
$120,000/.19 = $631,579
Wow. If you sell covered calls (in bull and sideways markets) on your dividend stocks the amount you need to invest to make $10,000 a month is only $631,579.
You may notice that not everything works all the time. This is why I love diversification.
While diversified income streams are more work, there is a great probability that something will always be working.
And there is a great probability that everything will not always work.
This is why we have diversified income sources from stocks, real estate, and online businesses now.
Monthly Income from MLPs
Master Limited Partnerships are in the oil service industry.
There has been a lot of change in the MLP sector over the past couple of years for several reasons.
First, oil prices sank to low prices (relative to historical prices) and many oil companies struggled to stay in business. Others cut dividends.
And many MLP’s changed their tax structure which led to consolidations and mergers of MLP’s and a related company.
Plus, since the U.S. has been exporting more oil than importing oil for the first time ever, MLP’s with storage facilities are struggling to maintain profits.
Low prices, changes and consolidation usually bring some form of opportunities along with increased risk.
Many transportation MLPs yield in the 5% to 10% range. Some MLP ETF’s yield in the 10% range as of this writing providing instant diversification.
As with dividend stocks, MLPs will fluctuate in value. But if the goal is income and not capital gains, MLPs could be worth another look for income investors.
I have also sold covered calls on several MLPs and MLP ETF’s over the past year. The Plan B was to get the dividend income even if the stock drops after the initial covered call investment.
For investments yielding 9%, you’d need to invest $1,333,333 to get $10,000 a month income. The income yield equation could be as follows:
It is important to note that I am not suggesting that an investor with a net worth of $1,333,333 (or anyone else!) would invest all of their money into MLP’s. I demonstrating how different yields affect the amount needed to invest to make $10,000 a month income.
Note that due to the transition of many MLP’s to a different structure, funds with MLP’s have a smaller base to hold in their funds. This had a big negative impact on MLP funds.
I don’t know how this will play out, nor anything else here. I just do my research using probabilities, estimates and facts, and then invest within the goals and risk tolerance as defined in our overall wealth plan.
REITs for Investment Income of $10,000 a Month
Through REITs (Real Estate Investment Trust) investors can invest in commercial real estate. Much like MLPs, REITs have gone through a transition.
The increase in remote workers and the online sales explosion has significantly hurt much of this sector.
A well researched, decent quality REIT portfolio yields in the 6% range nowadays. A more conservative REIT portfolio yields 4%, and a riskier REIT portfolio yields 10% or more.
There are also REIT ETFs and mutual funds.
And covered calls can be sold on many REIT ETFs.
By now, you know how to calculate the amount you need to invest for $10,000 a month income.
Summary – Investing for $10,000 a Month Income
Don’t get caught up in the lure of high investment income. Begin with a personal wealth plan that defines your acceptable risk and investment goals to make wise decisions that will keep your money safe.
Next, check the overall market valuations based in comparison to history before investing anything, anywhere, ever.
Then do your research among the various ways to make $10,000 a month investment income. or any other amount you’re seeking.
Feel free to share this post on social media with anyone you think will enjoy it.
Hover over the image to the left and click the red P to share on Pinterest.