Disclaimer: I’m not a financial advisor. This is just my opinion. Consult a financial expert in your area.
Oh how I loathe when people talk about passive income. As if there’s a way you can sit on a beach, sip margaritas and smoke cigars all day without putting in any work ahead of time… Truth is, there are ways to get REAL passive income, none of them involve get rich quick pitches that many financial gurus try to sell you. There are three main ways to attain passive income. You can invest your time, money, or your time and money. Today we’re going to focus on investing your money. Specifically, investing your money in dividend paying stocks.
Before we dive into the meat and potatoes of how to invest in dividend stocks and why I think they’re a good means of passive income, let’s define some terms.
What’s a dividend?
A dividend is a payment from a corporation to its shareholders. When you invest in a company that pays a dividend; that company rewards you by paying out a portion of its earnings. The payment is usually done quarterly, in the form of a “cash dividend”. Some companies distribute “stock dividends” also known as “stock splits”, which is irrelevant for today’s discussion. Stay tuned for my thoughts on that.
How it Works
For example, if you were to invest in Ford Motor Company. Their current stock price is $9.98, with a yield of 6.1%. That means if you were to invest $100 into Ford stock, you would receive a dividend payout of about $6.10 annually. Chump change right? But what if you we’re to invest $1,000,000? Assuming all else is equal, you would receive passive income of about $61,000 annually! Again, it would take a million dollars to do that. It would require sacrifice, hard work, consistency, and patience. It’s not a get rich quick scheme.
Why I Think it’s a Good Idea
So not only can you get good returns on your money if you do your due diligence and research the companies before investing any money. There are also MASSIVE tax advantages. The following is a quote from the Godfather of investing himself, Warren Buffet –
“Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.”
Some people might read that and think that the super rich 1%ers are getting over on the little guy! I read that and think I should invest my money. Just the tax benefits alone are putting cash in your pocket. Thus, giving you in a roundabout way more passive income.
How to Invest in Dividend Stocks
There are two routes. You can invest in individual dividend stocks or dividend ETFs.
1. Individual Dividends
Individual dividends, such as Ford mentioned above, are great if you are interested in the process of learning about and buying stocks. It also gives you the ability to personalize your portfolio how you see fit. Many times you can find stocks with higher dividend yields than in an ETF. The downsides are; you have to be more involved in the process. You have to learn everything you can about potential stocks. This way of investing simply takes more time and effort. But it could pay off… A good resource for researching various stocks is yahoo finance. You could also go to the website of whatever stock you’re interested in and find relevant information. Or you could simply google “Investor relations (insert company name)” this will bring you to the company’s “investor overview” page. It’s a great place to start when researching a company.
Dividend ETFs
Dividend ETFs (Exchange-traded fund), consist of dozens, even hundreds of dividend stocks. This is great for diversification, which mitigates risk on your end. If a few stocks stop paying a dividend, the other stocks in the fund soften the hit. All of this helps to secure your payout, Which should be your top priority. Another huge plus to buying dividend ETFs is that you don’t have to work as hard. Instead of researching and tracking multiple stocks, you simply need to research and track a fund (with a bunch of individual stocks). This cuts down the man hours when trying to find a good deal. The downside of dividend ETFs are the fees, unlike individual stocks, funds have management fees. This is just a cost of doing business, you either pay in time (do more work and go with individual stocks) or money (management fees). There are no free lunches. These fees can cut into your profits, and need to be considered when deciding on which route you’re going to take.
Once you figure out what route you want to take. You need a broker account. What’s a broker account? A broker account is your bifrost to the stock market. You’ll need either an online broker, or a stockbroker. These firms help you place investment orders, and usually take a commission for doing so.
My favorites are TD Ameritrade and Robinhood. TD Ameritrade does charge a fee of $6.95 per trade, but they offer 60 day commission free trades with a qualifying deposit. Robinhood doesn’t charge any fees to the base user. But they don’t have as many research tools when compared to other brokers.
Regardless of what broker you use. Time is of the essence, when it comes to investing. Don’t wait, get after it!