How To Earn An Entirely Hands-Free Income From The Stock Market Using Dividends
Posted on: 15 August 2019
Did you know that you can earn a passive income by investing in the stock market? It relies on investing in companies with strong dividend programs—with careful investment, you can use these dividends to earn enough passive income to comfortably live on. To learn more about dividends and creating a passive income stock portfolio, read on.
What Are Dividends?
Dividends are potions of a company's earnings that are paid out to shareholders of a company's stock rather than reinvested back into the company. In essence, you're paid money simply for holding a company's stock.
The amount of money you'll receive in dividends is reflected in a stock's dividend yield percentage. If a company has a 4% dividend yield and you own $10,000 worth of shares in that company, you'd receive $400 annually in the form of dividends.
How Can Dividends Be Used?
There are two ways that dividends paid by a company can be used. The first is to use the dividends to purchase more shares in the company as part of an automated dividend reinvestment plan. As the dividends are paid out, a broker uses them to purchase portions of shares. You don't see any of the money personally, but the number of shares you own in that company will slowly increase over time due to the dividends.
The other way is to use dividends as part of a passive investment stock portfolio. Instead of reinvesting them to purchase more shares, the dividends are paid directly to you.
With enough money invested in companies that have high-dividend yields, it's entirely possible to live comfortably purely on the dividends that are paid to you. You don't have to do anything to collect this money other than own shares in the company.
Why Is Passive Income From a Stock Portfolio Better Than Alternative Sources?
A passive investment stock portfolio requires no intervention from you other than investing in companies with a strong history of paying dividends to their shareholders. Alternative forms of passive investment, such as purchasing real estate to rent to tenants, require more personal involvement—even if you were to hire a property management company, you'd still have to continually negotiate fees with them and monitor them to ensure they were performing adequately finding and retaining tenants.
What Risks Are Associated With Investing for Dividends?
A passive investment stock portfolio shares the same risk as any other stock portfolio—a poor earnings forecast from a company or an economic downturn can cause stock prices to slide, which lowers the net value of your investment. Dividend yields are more resilient than stock prices, but you should expect them to decrease slightly during an economic downturn.
Additionally, companies vary widely in their dividend payment schedules. Some pay dividends monthly, whereas others pay them annually. You'll have a steady passive income from year to year, but it is likely to vary month to month. You'll need to budget your finances well in order to account for this difference.
Ultimately, a passive investment stock portfolio that relies on dividends is the most hands-off method of earning a steady passive income. With adequate investment in companies that pay excellent dividends, you can use it to pay for your retirement or even retire early. If you're interested in using dividends as an income source, it's best to speak to a broker that specializes in passive income stock portfolios—they can point you towards the companies with strong dividend programs that you should invest in.
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