Passive income is a term that is often thrown around in the world of finance. Many financial sites across the internet will tell you how you can earn passive income, but the reality is that a lot of what is touted as passive income isn’t actually passive at all. Take real estate investing, for example. The idea is that once you buy a rental property, your renters will cover your mortgage and then some. However, any honest real estate investor will tell you that being a landlord is hard work, oftentimes requiring a significant time commitment.
If you are looking to generate income that is truly passive, one option to consider is dividend investing. Dividend investing involves investing in companies that regularly distribute a certain amount of money to their shareholders. Brian Bollinger, president of Simply Safe Dividends, explains that the goal for many users of his site, both old and young, is to “generate income without a paycheck.”
Dividends work by companies returning excess profits to their shareholders in the form of regular cash payouts. Some investors use these dividends as a source of income, while others choose to reinvest them to boost their returns. The attractiveness of a dividend is determined by the stock’s yield, which is calculated by dividing the annual payout by the stock’s share price.
Stocks in the S&P 500 index currently yield about 1.5% on aggregate. This means that if you have $1 million invested in a mutual fund or ETF that tracks the index, you could expect annual dividend income of about $15,000.
When it comes to dividend income strategies, there are two main approaches to consider. The first is a higher yield strategy, where investors target stocks or funds that pay a high yield. While high-yield stocks may offer attractive income, they also come with increased risk, as companies that are struggling financially may be forced to cut their dividends.
On the other hand, some investors prefer a dividend growth strategy, where they invest in companies that steadily increase their payouts over time. These companies may offer lower initial yields, but they provide the potential for growing income streams that can help offset the effects of inflation.
One way to identify companies with a history of dividend growth is to look at indices like the S&P Dividend Aristocrats index, which includes companies that have raised their dividends for at least 25 consecutive years. These companies are often established, financially stable firms that can provide a reliable source of passive income.
Overall, dividend investing can be a great way to generate passive income and build wealth over time. By focusing on companies with a history of dividend growth and maintaining a diversified portfolio, investors can create a steady income stream that is less susceptible to market fluctuations. So, if you’re looking to earn passive income without the hassle of being a landlord or constantly monitoring your investments, dividend investing may be worth considering.
