So what dividend investing for passive income? Investing in companies that pays dividend is the simplest form for investors to create passive income. Ever wondered if you can live off from dividends from companies that you’ve invested in? In this post I will cover how to start in dividend investing to build that passive income goal. But, first off let us cover the basics.
What is a dividend?
To better explain I’ll give an example. When you buy shares of a company and the company makes a profit, the company may either use those profit to reinvest back to the company to further grow it, say they bump up their budget on their R&D. Others can choose to give portions of the earning back to their investors, which is you.
Dividends are generally paid in proportion to the shares held by investors. Not all companies pay dividends to investors.
When Are Dividends Paid?
A company’s board of directors determines the dividend payment schedule and amount to pay. Some companies pay investors annually, twice a year or quarterly.
In order to receive dividend payments you need to be holding shares of a company before the ex-dividend date. This is the holding time period to qualify for the dividend payment by the company.
Anyone who purchases shares of a company prior to the ex-dividend date, and holds the shares throughout the ex-dividend date will receive the dividend as announced by the company.
What is A Dividend Yield?
Dividend yield is the percentage figure calculated by dividing the total annual dividend payments, by the current share price of the stock.
For example, if a company’s annual dividend is $1.50 and the current stock price is at $25, the dividend yield is 6% ($1.50 ÷ $25).
So, How do I start in dividend investing for passive income?
Now we know what dividend are and payment schedule. To start, you need a brokerage account. A brokerage account is an investment account that allows you to buy and sell stocks. There numerous online brokerage account where you can apply now.
How To Pick Companies for Dividend Investing for Passive INcome
Dividend yields vary by companies, 2% to 6% is considered a good dividend yield, but a number of factors can influence whether a higher or lower payout suggests a company stock is a good investment.
Investors unsure which stock to pick should stick with the dividend aristocrat. A company will be considered a dividend aristocrat if it raises its dividends consistently for at least the past 25 years. Check this list from Time for latest dividend aristocrat and consider adding them to your investment portfolio.
Best to do a dollar-cost averaging to build up your dividend stock investment portfolio. Dollar-cost averaging is a purchasing strategy in investing that involves periodically investing a set amount of money regardless of the market price of the stock.
Also, consider setting up dividend reinvestment plan (DRIP) if your brokerage account supports it. A DRIP is a program that allows investors to reinvest their dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.
