Consider Dividend Stocks for Passive Income

by Miranda Marquit · 2 comments

It’s true that many people are looking for ways to add income diversity to their households. This makes sense, now that the current climate has made it clear that relying on a day job for all of your income could prove dangerous to your finances. One of the ways that you can increase your income diversity is to build a dividend portfolio.

Dividend paying stocks provide regular income, since a portion of company profits are paid out to shareholders. This payout is an extra infusion of cash to shareholders, and is based on the number of shares held. The more shares you hold, the higher your payout. It’s true that many dividend payouts are fairly small, and made on a quarterly basis. It’s not uncommon to see a quarterly dividend payout of $0.20 a share. So, if you have 50 shares, you end up with $10 each quarter — or $40 a year. That’s not exactly a large amount of income. However, building an income portfolio dividend stocks isn’t about making one purchase.

Building Your Dividend Income Portfolio

One of the problems with investing is that many people have unrealistic expectations about what their returns. Building an income portfolio is the work of years. It can take seven to 10 years — or more — to build up your income portfolio. It’s about planning ahead. Here are two tips that can help you build up your dividend income portfolio:

  1. Consistent investments: Dollar-cost averaging is one of the most effect investing tool for most “regular” folks. Consistently invest in your dividend portfolio, buying shares each month. You can even buy partial shares. Over time, you can build the portfolio up to the point where you have more shares. Over the course of eight or nine years, it is quite possible that you could amass a significant number of shares. And, if the dividends are raised consistently, you could end with a decent payout each quarter.
  2. DRIPs: Another option to help boost your ability to build your portfolio is to make use of DRIPs. Many dividend paying stocks offer these plans, which automatically take your payout and use it to buy more shares. It’s basically like receiving shares for free. These are added to your portfolio, helping you build up faster. During the building phase of your dividend income portfolio, DRIPs can be very helpful.

You do need to be careful, though. Remember that there is always the risk of loss when you invest. You could lose your capital. It’s also important to understand that companies can cut dividends when they wish — or stop paying them altogether. However, companies with a strong history of paying dividends are unlikely to cut or eliminate dividends unless something serious happens in the markets, or to the company.

Dividend paying stocks are not a fast way to riches. Additionally, you might not even build up enough to completely replace your income with dividend income. However, it is possible to add a little to your cash flow, and build up to the point where you can receive passive income from dividend paying stocks.

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{ 2 comments… read them below or add one }

Rico December 13, 2012 at 9:01 am

I think the most important point is that dividend income is not a fast way to a passive income. The road to dividend income is long and needs a lot of patience. On the other hand, it finally pays off if you can lean back and enjoy the passive flow of cash coming to your pocket every month. For me, it is only a small part of financial freedom. The bigger issue is to safe enough cash from the earnings. The more you safe on early age, the earlier you can enjoy the results!

Lifeisdynamic May 30, 2013 at 4:43 am

Saving is absolutely the way to passive income in later life. The more you have from saving, the more you can invest (wisely and carefully) for later life.

The other is to ensure that as get closer to retirement (I think about 10 years out from retirement), one should become more protective of capital and begin to wind-down the amount to invest in any any moderate and high yielding stocks. Forget Futures, Options and other very risky investments. Well ….. perhaps 1% in a couple of well chosen speculative stocks – you never know!

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