In the modern world, having a passive income source is exceedingly important for anyone who wants to make sure their financial future is secure. Unlike active incomes like those that come from a day job, passive sources ask for no prolonged activity or effort once the initial work has been completed. Instead, they are a system that once it was established, continues to bring in money to its owner who does not have to do anything. There are numerous ways how a passive income source can be created and maintained. However, among all of these options, the chance to create passive income with dividend stocks is one of the most effective ones. This option has been bringing in a side income to millions around the world during the previous decades. For anyone who would want to attain some stocks and get their dividends as a passive income source, here is a step by step guide that will be immensely helpful for them.
What are Stock Dividends?
A dividend represents a payment that is made by a particular company to its shareholders as a way of distributing profits. This happens when a company earns a surplus amount of money. At that moment, it can reinvest the same profit into the business or it can pay a part of those profits as dividend to its shareholders. This distribution usually takes place in cash form, where the company makes regular payments to the investor using a bank account. The payments might come annually, every couple of months or through any other predefined time period.
Finding Investment-Worthy Companies
The first step in the process of this type of investment is identifying those companies which are large, pay dividends on a regular basis and also raise them year after year. This might seem like a tall order, but the truth is that there is an abundance of companies like this. In fact, many of these were established in the 1950’s or even a lot earlier, giving them decades of successful business decisions. It is great if the investor knows anything in-depth about these companies, but this is not a necessity. There are many online resources where dividend-worthy companies are listed and anyone can easily create a list of those which they like the best.
At that point, there should be at least 20 companies they labeled as good options for investment. After that, each of these companies should be researched online in the contemporary setting – this means finding out news about what they were doing in a previous couple of years. Any company embroiled in a scandal, controversy, protected lawsuits or anything similar should be avoided and taken out from the list. These might be completely fine in the long run, but dividend stock passive income is all about playing it safe.
Diversifying the Investment
Ideally, the list of companies includes at least two different industries. Also, the list does not include any small company that seems very promising – all of the top ten businesses should be established and household names. Dividend stock portfolio should not take the risk with potentially lucrative companies. Instead, it should focus on attaining dividends of a relatively small financial value but from stocks that are safe against any change in the market fluctuation. This is especially important when it comes to daily changes in price. These fluctuations are completely irrelevant to those who are building a passive income source.
Setting a Budget and Buying Stocks
With the list finalized, the investor will be able to buy stocks. The easiest and most effective way to do this is to use a stockbroker firm and go through them. They will do everything else and for a small fee, complete the process from the moment money is sent to the moment the person officially owns stocks in a particular company. Another important fact that many overlook is the necessity of having a bank account that would be connected to the same stock portfolio. This is how the majority of companies pay their dividends and having one before the actual money comes is a good idea.
Usually, any regular bank account will do. However, it is prudent to make sure this is the case for each of those companies. With all this in place, the investors should define their budget. A rule of thumb is that the same sum should be something they can easily spare or even see the same money as completely lost to them. It is important to have this mental image about the investment so that the investor is not tempted to cash out – this will completely stop any passive income source they built with these stocks.
The Long Game
With the investment in the stocks that are dividend-growing, the same investor basically completed their passive income source. All of these will begin paying out money in the form of dividends and the investor is free to do whatever they like with it. However, there is a winning strategy for spending the same money and it is the so-called 50-50 rule. This means that the investor takes half of their individual dividend from any one stock and uses it as their income. The other half is invested back into the same stock which allows the initial investment and the basis for dividends to grow. This way, every subsequent dividend payout will be a bit bigger than the previous one and the stock ownership will also always grow bigger and bigger. It does not matter if the actual payout is small because this process of passive income is one that is always growing.
Patience Wins the Race
Anyone who is interested in the process that allows them to create passive income with dividend stocks has to be patient. Dividend stocks only really come into their own after a couple of years and it will take at least a decade to provide a substantial passive income. Naturally, this might not be for everyone, but those who do have the right mindset will be able to create one of the best means of earning money with no effort. The option is so effective that, after two decades, the same investor could earn hundreds of US dollars or more each month without excreting any effort whatsoever.
