My Passive Income Journal

Beginner Passive Income From Dividends

Dividend Stocks for Passive Income

In my personal opinion, dividend bearing stocks are the simplest way to create passive income. Passive income from dividends is the ultimate passive income experience.

As public companies (companies publicly traded on the stock exchange) make profits, a percentage of their earnings are set aside specifically to give back to investors as dividends.

As an investor, you can decide to keep the cash, spend the cash or reinvest the cash back into the company – or even a different company.

It is important to note that dividend payouts can be quite different from one company to the next, and they can also increase and decrease from year to year too.

Since the dividend income we get from these companies isn’t due to any of our personal activity (other than initially buying the stocks), owning dividend income stocks can be one of the most passive forms of income. The money will simply be deposited in your brokerage account with no further effort on your behalf.

Now that’s pure passive income.

How Dividends Work for Passive Income

When a company earns money and makes a profit, it has two basic ways to deal with that cash profit: reinvest it back into the business, or, pay a cash dividend to shareholders.

If the company chooses to pay a cash dividend to shareholders, each shareholder receives a dividend payment based directly on how many shares of that company they own.

Here is a simple example – The company issues a cash dividend of $1 per share. In that case, a shareholder with 100 shares would receive a $100 dividend payment.

Obviously, the more shares we hold the bigger the payment each time a dividend is paid.  Some companies pay their dividends yearly, others pay twice a year, quarterly or even monthly. Normally, dividends are paid twice a year.

Finding The Best Dividend Stocks For Passive Income

If you are unclear about which dividend bearing stocks to choose, then start by studying the dividend aristocrat companies. In the US, a dividend aristocrat company simply means that the company has at least a 25-year history of paying out dividends.

It is worth pointing out that just because a company is massive and profitable doesn’t mean it’s an ideal passive income investment. The company specifically needs to pay dividends regularly to its shareholders.

There are many free websites that can be consulted to show which companies pay out dividends regularly and how much those dividends are.

You could also check the SEC (U.S. Securities and Exchange Commission) for records of dividends paid in the past.

Normally (but there are exceptions), a company that has paid its shareholders dividends regularly for several years will often continue to do so. The key is to find profitable companies that pay regular dividends.

Importantly, we want our companies to grow and expand. This means we do not want our chosen company to pay us all their profits – we want them to keep enough of their profits to grow and remain robust and healthy. A company that pays every last dime of its profits to us as dividends sounds wonderful, but it’s actually not a wise practice for a company to have a profit payout ratio of 100%.

Preferably, a company that makes steady reliable dividend payments of no more than 50-60% of its earnings is potentially a strong investment.

Additionally, a company with too much debt can be a risk despite how profitable it is. Too much debt can easily scuttle a business in troublesome economic times. Nevertheless, some debt is always a good way for a company to grow and expand its market share or to diversify, providing the debt is fully manageable under periods of increased inflationary pressure.

My Passive Income Journal

Snowball Dividends Payments To Increase Passive Income

Reinvesting your dividend payments is a very efficient hands-off way to increase your passive income.

Instead of spending or saving your dividends, you can use them to automatically purchase additional shares. By increasing your shareholdings in the companies you’ve chosen, you will earn more passive income from dividends than previously. Reinvesting your dividends for many years (ideally, until you need to live off them) can easily double your passive income flow. Of course, every investment comes with risk (even cash has risk), so be fully educated on the risks and get professional advice if and when you need to.

Even if your investments are initially small and producing only a little flow of dividend income, the stock price should increase over time as should the dividend payout amount (if you have done your research correctly). This will insure both your capital value and the income from your investments increase steadily over time. This helps you keep abreast of inflation.

Additionally, because the price you paid for your stock is a fixed cost that occurred in the past, you actually benefit the more time passes. The longer you hold a stock, the more dividend payments you will accrue over time.

For you to make passive income from dividends, a profitable company’s stock price growth doesn’t need to shoot out the stars. It only needs to keep passing along a percentage of its profits via regular dividend payments to its shareholders over the long term.

Cheers

Hugh Walker