A key aspect of conquering financial freedom is creating and building steady income streams that do not require you to sit in a cubicle all day long or listen to people ramble on in meetings. You will want to build passive income streams that “require” you to sit on a beach if you want to or work on projects that are of personal interest to you. There are many types of passive income machines: rental properties, pensions, distributions from a personal 401k or investment account, social security, etc. In this post we focus in on dividends.
Dividends are regular payouts that a company sends to you for owning their stock. You are paid a certain percentage of the companies profits in relation to the number of shares you own. So each share becomes a little money-making machine, spinning income off while you walk on the beach. The percentage of income you receive per share is called the yield. One big thing I like about dividends is that it makes me care less about the stock price fluctuating. I am still earning something off the investment and if the share price goes down you are still typically earning a dividend.
Another reason I like dividend stocks is simple, most people can very easily purchase dividend producing stocks in small increments at a time. Also, in my opinion there is less concern about the normal up and down fluctuations of the stock market, as long as the dividend is steady or increasing. One can have the dividends initially reinvested, therefore buying more dividend producing stocks. I do this with a Real Estate Investment Trust called Realty Income, ticker symbol “O”, which actually pays monthly. One of their slogans is “The Monthly Dividend Company”. At some point you may have enough of these assets to produce significant income each year without touching the principal. Caution though, it does take quite a few shares to generate substantial income, but this can be one aspect of your battle plan to conquer financial freedom. Put this together with other sources of income to support your life. But again, one nice thing about dividend producing stocks is that almost anyone can start building a portfolio today and add to it over time. Other kinds of passive income machines, for example rental properties, take quite a bit of capital, time, luck and management to put in place, whereas dividend stocks can be built in small increments over time starting now.
A good analogy for dividend stocks is planting a fruit tree. You plant the tree and feed it over time. At some point it just continues to produce fruit for you to consume without cutting down the tree. In fact, this is a great metaphor for any passive income machine you may set up. One thing I like about building a portfolio of dividend stocks is seeing the immediate progress each month. It satisfies that need for instant gratification as you add more shares and see the dividend come in each quarter.
For many years I have had $50/month taken directly out of my paycheck every two weeks and placed in a dividend producing stock. I have also had the dividend income reinvested by purchasing more stock. A general rule of thumb is that if you invested $30,000 in a dividend stock that produces a 3% yield, then you will earn $1,000/year in income. I haven’t reached this milestone yet, but by regularly investing in a Dividend Reinvestment Plan (DRIP), in a few years you can amass a sizable amount in income producing dividend stocks. During our working years it may be best to have the dividends reinvested in order to acquire a larger number of shares. Therefore, when one approaches retirement perhaps they have $60,000 in dividend producing stock that provides $2,000/year in income. That could cover a good portion of your yearly grocery bill!
Dividend stock investing can be a powerful force over time. If the dividends are reinvested and combined with the magic of compounding, one can build some substantial wealth. In fact, 91% of Warren Buffett’s portfolio is invested in dividend paying stocks. Here are some of Mr. Buffett’s dividend producing stocks:
General Motors – 4.08% dividend yield
Kraft Heinz – 2.61% yield
General Electric – 3.16% yield (This is currently a very “beaten down” stock price, some would say it’s on sale at the moment)
Apple Inc. – 1.4%
Coca Cola – 3.33%
Some other stocks that offer a dividend:
Pfizer – 3.7%
Johnson & Johnson – 2.4%
Realty Income O – 5.1%
Amgen – 2.6% (Biotech)
Verizon – 4.6%
Qualcomm – 3.8%
This is in no way an endorsement of any particular stock. No one knows what stocks will go up or down over time. This is just one of many strategies one can deploy. Perhaps you already own these types of stocks as part of a low-cost index fund (probably the best way to invest in the market), therefore you are already sharing in the profits as the index fund spins off a dividend reinvestment. I checked some of my index funds and discovered in the history the regular reinvestment distribution of the dividends. One last thing I like about dividend stocks, I worry less about the stock value going down. In fact, when it goes down, the dividends buy more shares of that particular stock. I’m buying more and headed to the beach!