Why Stock Dividends Are the Perfect Passive Income Stream

What is a dividend?

Dividends are perhaps the most effective and effortless way to make a passive income large enough to support your lifestyle and build a diversified financial portfolio, all while not having to put in any work at all.

That’s the key part: dividends require no active work and can generate more money than a full time job.

A dividend is a sum of money paid by a company to all of its respective shareholders (shareholders being all people that have paid for a small part of that company) from it’s profits. Let’s say, for example, a person pays for a share of Apple. Apple would then pay this shareholder a percentage (this percentage depending on the size of the share bought) of all of their profits at regular time intervals, perhaps monthly/yearly, and that shareholder would not need to do a thing after having paid the initial share costs. It’s a simple concept that is often overcomplicated, but that’s the general idea.

It is important to remember, though, that in paying to become part of a company you are taking on responsibilities. You may need to vote on key decisions at annual meetings, however as a small shareholder your responsibilities will likely not be very demanding.

Dividend income combined with other passive income sources can, with time, generate enough money to replace active income sources. As soon as your passive income (dividend income, interest income etc.) value exceeds your expenses, active income becomes optional and you become financially free. If you are generating enough money to pay for expenses through passive income alone, an active income stream/full time job becomes an extra and no longer a necessity.

Is Dividend Income Reliable?

While on the surface the idea of paying money to make money may seem unreliable, dividend income can, in many cases, be more reliable than employment income.

Employment income and reliable income are often used synonymously – and this is a mistake. Covering all of your expenses with one income stream is not a stable way of living, as if that income stream were to falter then an individual would have no other way of earning. Many families struggle financially when a primary earner faces losing there job and this simply does not need to happen. Establishing multiple passive revenue streams avoids this problem entirely as if one stream fails then there are multiple others to fall back on.

When you combine multiple passive and active income streams, you can really stabilise your financial position. For more information on how to establish passive streams of income, click here.

How?

Buying shares may sound all well and good as a way to earn money on the side, but you’re probably wondering how exactly can I use them?

The first step to earning money through dividend investments is searching for companies that are likely to increase their dividend payouts each year. In searching for companies that increase their payouts over time you maximise your long-term profit. Over a span of around 20-40 years, a dividend investor could earn upwards of hundreds of thousands of dollar per year, easily tripling most salaries and opening doors to financial freedom.

Buying into some companies may cost as little as 1 cent, even less, while others could cost upwards of $100. Buying companies of low price does not always guarantee better value, though. Once you’ve found a handful of companies, calculating their price-to-earnings ratio is the next step – this compares the price of the company share to the profits it makes. Sometimes very low priced companies are involved in unstable industries so it is important to research carefully before purchasing cheaper shares.

It is possible to apply for a company’s shares during its early days on the stock market, however shares are typically bought through a stockbroker. Shares can be bought by filling in online forms, as well as over the phone. Using a stockbroker/financial firm is the safest option for an investor as they’re easy to use and allow you to pay how you wish.

Things to Consider

  • Deciding on which stockbroker to use can seem daunting at first. Buying shares can come with risks and, if you cannot afford to lose money, it’s not a good idea to purchase expensive shares. If you’re going to need your money to pay for necessities (food, bills etc.) then you should be very careful when purchasing shares as profit is not guaranteed in all cases. Larger and more stable companies are generally very low-risk, but may be more highly priced. It is important to do your research before casting aside your life-savings.
  • Reading a companies annual reports and addressing any concerns with your broker is very important if you wish to make profitable investments. It is wise to spread your starting cost amongst a variety of companies as, if one loses value then there are others to fall back on. Furthermore, keeping a steady active income stream as well as other passive streams will ensure a steady and stable financial flow which cover any risks.
  • It may also seem wise to pull out of companies when they dip, however this is not always a smart ideas as companies often peak soon after dips. A smarter idea may be to make regular investments to minimise the impact of any peaks and troughs.
  • Brokers may charge monthly fees to use their services to it is important to consider how this could impact your profits. Furthermore, brokers may charge fees if a minimum number of trades within a set period is not met.
  • Lastly, you’ll need to consider the difference between the company’s dividend payouts and the cost of its shares to decide whether or not the investment is worth your while.

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